18/09/2019 7:26 AM IST

National Security Is Modi Govt's Excuse To Take State Funds: Kerala FM Thomas Isaac

The economist on why the centre should spend its own money on defence and how India can overcome the current economic slowdown.

Dr TM Thomas Isaac/Facebook

NEW DELHI —Only a fiscal stimulus jointly implemented by the Narendra Modi government and all state governments will help India overcome its ongoing economic slowdown, believes Kerala Finance Minister Dr. T. M. Thomas Isaac. 

He is concerned that “all sorts of solutions are put forward other than a fiscal stimulus by the government” to address the current economic slowdown. The veteran Communist Party of India (Marxist) leader, who is also a trained economist, said a fiscal stimulus was “something India successfully did in 2010 and got out of recession.”

Union Finance Minister Nirmala Sitharaman’s response to the slowdown shows she “underestimates the seriousness of the downturn,” said Isaac

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Isaac was in Delhi recently for a seminar he had organised on the controversial additional terms of reference given to the Fifteen Finance Commission, which recommends a formula to the Central government for sharing tax revenues with the state governments.  

Modi government’s proposal to set up a national defence and internal security fund by from the share of the states has riled up state governments and Kerala government has been leading the charge.  

“Defence is made as an excuse to make an attack on state allocations. Because nobody will be able to criticise,” Dr Isaac said. “We are saying, “spend on defence but from your resources. If you don’t have money, cut down your expenditure on centrally sponsored schemes. And leave the states their own resources. They will do,” he said.

Edited excerpts from the interview:

What is your understanding about the reasons for the economic slowdown and what measures can the central government implement to address it?

It’s a classic case of a decline in aggregate demand. It is so evident. You find sales of consumer goods from auto cars to biscuits are coming down, inventories are going up and factories are getting closed off. Simply, consumers are not purchasing. 

You find the worst hit has been the capital goods segment. Minus 7% for the month of July. Which shows now the investors are very skeptical about the immediate future and are holding back investment. So both consumption and investment are coming down. If this is not to adversely affect the national income then the third component of the demand side—government expenditure— expenditure should go up. That’s a very simple truism. 

But all sorts of solutions are put forward other than a fiscal stimulus by the government; something India successfully did in 2010 and got out of recession. 

So you think that should be repeated at this point?

Yes, precisely. Indian government should talk with the states, and the states and centre together should implement a stimulus package because more than centre’s expenditure, combined expenditure of states would come and therefore it has to be a combined exercise of centre and state together. It is of utmost importance that we have a higher fiscal deficit and we spend more. It can be three targets: one is allow the MGNREG, raise the number of days to 150 in a year, expand it to the urban areas, increase the wages by Rs 50 which should double the outlay of employment guarantee, bring money into the hands of people immediately. 

Two, for consumer durables you allow the credit, if necessary provide interest subvention for a fixed period—three months or six months, so that people can make the purchase and these industries are able to sell their goods. And three, expand infrastructure expenditure. 

These three interventions can definitely get India out of the present slowdown. 

In response to demands for increasing government expenditure, the common refrain from the government or a section of economists is that fiscal deficit may increase and that won’t be good for the economy. How do you respond to this assertion?

When you have so many un-utilised resources lying around, one way is that you raise your fiscal deficit. Our fiscal deficit 3% can be tweaked to 4%. Last time during recession it was 6% but we need not go to 6% and so on, but increasing fiscal space little more is not going to hurt anybody. 

Along with the fiscal stimulus, you undertake a number of measures which would ease the problem of doing business, increase exports, increase efficiency and so on. I am not against that. But this alone will not cure the present slowdown. These are long term measures. 

Since you suggested that both the states as well as the central government need to work together to overcome the slowdown, what would be the Kerala government’s role here?  

See now, because of financial crunch, state resources are squeezed.But states also should be allowed to borrow more. The fiscal deficit ceiling should be relaxed so that we can spend. 

The centre just cut Rs 6000 crores from Kerala’s annual borrowing limit. How has that affected the state?

Now, today, no state government can use its budget to have an expansive fiscal stance because it has got FRBM restrictions. Therefore, if any state knows how to make higher investment, it has to be outside the budget. Kerala is facing a very serious problem. Our return migration is increasing and there is a regional recession taking place in Kerala, and we cannot wait for the Centre’s fiscal stimulus. It is a regional problem. 

What are the factors that caused this problem?

Factors are essentially, one, fall in the prices of commercial crops and second is the return migration. And therefore, we have extra budgetary para status which borrows, makes infrastructure investment, and that we are doing in a large way. We have a financial institution to promote investment, Kerala Infrastructure Investment Fund Board which has been largely borrowing from outside. We just had a successful Masala bond issue. And we are expanding our infrastructure investment. 

The economic impact of the floods is widely known to be substantial. What kind of support did you receive from the Centre?

Rs 30, 000 crore is the money required for reconstruction as per the UNDP study. Now the central government has allowed us to borrow Rs 7, 000 crore but they are saying accommodate it in your normal borrowing. So to take that money, you have to cut domestic borrowing which puts many of our programs in a problem. So it’s very unfair to squeeze the states in this manner. States which face problems like natural disasters should automatically be permitted to borrow more. Because there is no other way for a state government to address the situation. 

Coming back to our discussion about the economic slowdown, what do you make of the measures announced by Finance Minister Nirmala Sitharaman to address the slowdown?

She is doing the elaborations on the same theme. Ease of Doing Business, how exports can be improved, how turnaround time can be reduced and so and so forth. 

I think she (Nirmala Sitharaman) underestimates the seriousness of the downturn. She does not provide any fiscal stimulus and seems to believe this is a structural problem which she is trying to resolve through various long run structural changes. Well, it will not help us resolve the crisis we are facing today.

Will they help address the economic slowdown?

I think she underestimates the seriousness of the downturn. She does not provide any fiscal stimulus and seems to believe this is a structural problem which she is trying to resolve through various long run structural changes. Well, it will not help us resolve the crisis we are facing today. To resolve it, as I have said earlier, a fiscal stimulus is required. 

About the idea of implementing a fiscal stimulus jointly by the states and central government, has the Kerala government or you communicated it to the Central government formally?

Yes, in our pre-budget discussions, Kerala strongly put forward that the only solution is fiscal stimulus. 

What was the response?


There was no response?

No response. And the budget ignored it. It was not an expansionary budget. 

Yes. And you consider this to be dangerous.

Yes, the more we delay more serious problem we are going to face. 

Recently, former Prime Minister Manmohan Singh suggested certain solutions for the Central government to address the economic slowdown. What do you make of them?

He has to come out with details before a response can be made. But it’s unfortunate that he does not refer to what he did in 2009. 

So you think he should have spoken about the financial stimulus that was given at the time of recession?


What is your opinion about the rate cut proposals for various sectors that the GST council is likely to take up when it meets in Goa on September 20? 

I am against any rate cut of GST. Already it is not revenue neutral. Further cuts will jeopardise the revenues of states. So some people say now that you will be compensated for that. But a rate cut cannot be restored. We are looking for a period when compensation will end in another two years. Therefore, my proposal would be, if they are very insistent on cutting rates, cut the compensation cess. Effective rate will come down. But then, perhaps, if the central government  were to borrow to give compensation, they can continue to give compensation cess beyond five years. 

Defence is made an excuse to make an attack on state allocations. Because nobody will be able to criticise.

You also pointed out in a press conference that the Fitment Committee had advised against rate reduction to the GST Council. So why do you think is the central government still considering reduction of rates?

Before any rate reduction is made by the GST Council, its revenue implications have to be discussed by a committee of officials called Fitment Committee. And that committee, after going through everything has said they are not in favour of reducing the rates for two reasons. One, they think price elasticity is low. Two, they think GST rates are much lower than the pre-GST rates. Three, the revenue loss would be something like Rs. 50, 000 crores. Already the rates in GST are not revenue neutral. States and Centre cannot afford to have this kind of slashing of revenue. So that’s the report. 

The government wants to do something, or appear to do something, and the easiest way to do that, they think, is to reduce the rates. There is even a preposterous suggestion to reduce the rates on consumer durables so that the demand may pick up. But you increase the rate on the 5% slab which is of necessities. This is obscene in the sense that you are putting a burden on the poor and allowing the richer people to consumer the consumer durables to get away. It is not acceptable. It goes against the canons of equity.   

Let’s come to the issue of the additional Terms of Reference of the Fifteenth Finance Commission issued by the Centre to explore the potential of setting up a national defence and internal security fund, a decision you and some other states criticised. Help our readers understand, how is this consequential to the lives of ordinary citizens?

It has to be understood in the context of the attempts within the original ToR itself asking the commission to review the award of the fourteenth finance commission, which gave 42% of the taxes to states. Now because of the resistance and criticism, now it has become politically inexpedient. Therefore, this (additional terms of reference to explore potential of setting a national defence and internal security fund) is another way of pressuring to reduce the states’ share. Now constitutionally, it is illegal to have a special reduction from the divisible pool for funding defence. Constitution does not permit it. 

If it is after devolution, it does not require any recommendation from the Finance Commission, the Central government can do it. So they are trying to pressurise the Finance Commission to reduce the share of the states. That is the motive of this ToR. We are trying to tell the other states that this is going to happen. 

How does this affect citizens? Will it affect spending by states on development programs, for example?

Yes. Their money, resources for development programs for the next five years will be reduced. 

So you are saying this will directly affect citizens?

This will directly affect the states. 

Because the argument being made is that defence and internal security need to be well funded as well. 

It’s very, very important. Nobody denies that. Therefore, the central government should provide more funds from its budget and then only use them for discretionary spending. 

In your opening remarks at the national seminar, you said that the Central government’s attacks on federalism, on states, are qualitatively different from the ones which happened before. Could you explain what you meant by that?

If you take the post-independence history, there have been steady inroads into the state subjects like shifting to concurrent list many of the state subjects. Dismiss state governments under Article 365 and so on. That has been the trend. But now it is part of a total strategy of creating a nation, stamping out every diversity. 

You find, for example, all the laws that were passed in parliament like Motor Vehicles Act, abrogation of Article 370, NIA amendment—take any of them. A common denominator is abridging state power. A number of them are in the pipeline like Fisheries Act, among others. They now want to shift health also in the concurrent list. So this is a whole strategy of stamping out diversity in India. This is the qualitatively new thing. There is a set of rulers who want to challenge the basic tenets of federalism itself. And the decision to give additional terms of reference to the Fifteenth Finance Commission is also part of this larger process. 

We have always had criticisms against the ToRs of the Finance Commissions. But they were nothing in comparison to this. As Haseeb Drabu said, “This is the most retrograde Terms of Reference” ever given to a Finance Commission. 

One of the points also made throughout the day at the seminar was that national security and defence are being used as a tool for increasing centralisation.

Under Modi, the expenditure on defence has declined from 2% of the GDP to 1.4% last year. Why has it happened? Central government has preferred to have Centrally Sponsored Schemes in the domain of state governments. Health, education and so forth.  Instead of using the resources for their listed duties. Like, for example, the expenditure on state list subjects, the expenditure has increased from 14% to 20%. And concurrent list also has similar phenomenon. This is the data of the Fourteenth Finance Commission. So wrong priorities on the expenditure side that is responsible for reduction in defence. What we would say is, “You do your duty. Allow the states to do their duties. And don’t tamper with the allocation to states. So we have to have a real relook at the expenditure side, not on the resource side. And now defence is made as an excuse to make an attack on state allocations. Because nobody will be able to criticise. 

We are saying, “spend on defence but from your resources. If you don’t have money, cut down your expenditure on centrally sponsored schemes. And leave the states their own resources.They will do.” For example the state of Kerala, even before the central government began to think about education and so on, we have been liberally spending on education, healthcare—we have the best system. So states which want will do that.