View: Federal finance must globalise, with states allowed a bigger share of investments

As the world continues to globalise - accommodating new geopolitical alignments, technological paradigm shifts and climate imperatives - role of governments in their national economies is rising, both through policy and expenditure. In India, of the total gov expenditure of 30% of GDP, two-thirds is carried out by state governments, including some spending financed by the Centre. To hobble state finances, in this context, is to express a strong death wish.

Indeed, FPIs in government debt can invest in state government debt. But they do not. They have utilised hardly 2.6% of the permissible limit for state government securities. Why, then, is the Centre chary of letting state governments aggressively market a part of the debt they are eligible to raise abroad, particularly to migrants from their states?

India is the world's biggest recipient of migrant remittances - $125 billion in 2023. Mexico, the second-highest, got about half as much. NRI deposits have been the mainstay of emergency foreign borrowings for India, time and again. Remember Resurgent India Bonds (RIBs) to tide over India's post-nuclear test isolation of 1998? India Millennium Deposits (IMDs) of 2000? And the foreign currency non-resident special deposits to tide over the taper tantrum of 2013?

Migrant workers have a calculus that is a little more generous than that of FPIs, when it comes to investing in their home states. Why prevent state governments from tapping into this fount of generosity?

Kerala's Calicut International Airport faced a peculiar problem. Built as it is on top of a hill, to extend the runway to accommodate large aircraft, enormous amounts of earth had to be piled literally hill-high, along the cliff-edge, to create additional land on which to extend the runway. This would not have passed anyone's test of commercial viability.

But the migrant workers from Kozhikode's hinterland, who wanted international flights to take off and land as close to home as possible, to ferry them to their places of work in the Gulf and back, were willing to spend the money needed to build an earth mound as big as the hill on which the original airstrip had been built.

Those who hail Vinod Khosla's endowment of his alma mater, IIT-Delhi, should not frown when smaller-scale migrant successes are offered an opportunity to help their hometown, district or state acquire vital bits of new infrastructure. Kerala sold masala bonds to raise money for infrastructure projects in Kerala, including a low-cost, statewide broadband network. This has come in for severe strictures from GoI. This reflects a closed-economy mindset.

Every state has its own credit rating, and the yields on state government debt vary, depending on the issuer's creditworthiness. True, off-budget borrowing via financing vehicles raises contingent liability. But that is precisely how the Centre has been financing its successful highway construction. Why assume the Centre has some special fiscal virtue that the states lack?

Gone is the time when the Centre outspent states. The states, together, spend more than the Centre does. Their debt is some 25% of GDP, while the general government debt is some 80% of GDP. This means that the Centre's debt, at 55% of GDP, is almost 69% of general government debt.

States drive growth, luring investment offering infrastructure, incentives and favourable policy. Why impair their ability to perform this task by curtailing their resource mobilisation efforts via borrowing from expats willing to bear the currency risk on such borrowing?

As per the Finance Commission norm currently in force, 41% of personal and corporate I-T collections belong to states. But they have zero say on fixing the rates of these taxes, or doling out concessions on these taxes. Even as the Centre has slashed rates of tax on corporate profits, it has replaced a large slice of the excise duty on petro-fuels, which is shareable with states, with cesses, which are not shared with states. The Centre, in other words, has been dipping into the states' pocket to finance its own largesse.

Finance Commission, too, has been remiss, when it comes to appreciating the globalised dimension of federal finance. It takes developed manpower to remit large amounts back home. Kerala has traditionally devoted large chunks of its budgetary outlay to education and healthcare, and followed a socio-political culture that spares migrant workers, regardless of gender, any stigma for toiling far from home.

Remittances they send back home not only boost spending in the state but also contribute to macroeconomic stability, by reducing India's current account deficit and stabilising the rupee. In the horizontal distribution of taxes among states, the Finance Commission could give some weight to this contribution, but it does not.

Take the hit that Punjab takes on its finances by subsidising power and irrigation for its farmers to produce grain that has a ready export market. Do these export earnings, benefiting the nation as a whole, find any reflection in Finance Commission's reckoning? The 15th Commission is as insular as the first had been to the global dimensions of the Indian economy, and their implications for federal finance.

Indians celebrate the will to thrive, not any death wish.