Columbia University professor Arvind Panagaria was recently appointed as the head of the 16th Finance Commission. His job is to give suggestions on the way the financial relations between the central and state governments will work in future. The Wire reports (2024),
Arvind Panagariya has been recently appointed as the head of the 16th Finance Commission, a constitutional body appointed by the President of India, to give suggestions on Centre-state financial relations.
At a time when the federal faith in Centre-state relations is at its weakest link and remains deeply politicised, it would be interesting to see how Panagariya and his team at the Finance Commission go ahead with the difficult work cut out for them.
To make the difficult work of Dr. Panagaria easy, I am going to suggest a few things that he can tell the central and state governments to do.
First, ask them to cut their expenditures drastically across the board without any exceptions. As recently warned by the IMF (2024), the Indian government’s fiscal condition is worsening day by day.
The International Monetary Fund (IMF) has warned that India’s general government debt may exceed 100% of gross domestic product (GDP) in the medium term.
Modi government is printing and spending rupees as if there is no tomorrow. All his expenditures are primarily aimed at winning political power for himself and cornering the country’s wealth for his crony friends in the business world. As he spends money at a breakneck speed on the one side, on the other side his mindless economic policies are destroying the economy at a breakneck speed too. The result of these actions is a higher and higher debt-GDP ratio over time. The day will soon come when this debt will have to be repaid to creditors. A continuously weakening economy means the government will soon run out of resources to repay its debtors. Indian government’s bond rating is already very bad at a lower medium grade, and looking at the way the Modi government is spending money it will soon reach a speculative level. A debt default in future cannot be ruled out, especially if Modi is reelected to power. A situation worse than the 1990s fiscal crisis is looming large over India.
There is only one way in which this looming danger can be averted: drastically reducing central and state government expenditures. Any effort to fill the widening fiscal gap by creating more money via RBI rupee printers will only create a bigger danger of hyperinflation. India is also not the USA in that it can export its currency inflation to other countries. Foreign countries buy American debt using dollars which helps the US government offset its debt by printing dollars. India’s inflation will remain in India as no other country is going to buy its debt in rupees. Modi government recently tried using rupees to buy Russian oil. This policy has resulted in a disaster as the Russian government has stopped selling its oil to India in rupees as no other country is ready to accept Russia’s rupee stock in exchange for other goods. The rupee is one of the worst performing currencies in Asia and it has no standing whatsoever in the international payment market.
This is the reason why Dr. Panagaria must sternly tell the Modi government to tighten its belt and drastically reduce expenditures. With that, he should also tell the government to drastically reduce the rates of income tax and abolish GST as well as other types of indirect taxes like customs and excise duties. Drastically lowering these taxes will put more money in the hands of the taxpayers. A big chunk of this money will be saved and invested in the economy to start new capital and consumer projects. This increased investment will boost future economic growth, which will raise the standard of living of people. In one of his recent statements from the Lakshwadeep islands prime minister Modi said,
In addition to the scenic beauty, Lakshadweep’s tranquility is also mesmerising. It gave me an opportunity to reflect on how to work even harder for the welfare of 140 crore Indians.
By reducing direct and indirect taxes drastically prime minister Modi can fulfill the dreams of billions of Indians to visit the Lakshwadeep islands and snorkel like him. Cutting taxes will put more money in the hands of Indians, which will make it possible for them to dress nicely like prime minister Modi does daily. Like him, billions of people in India can also fly to 40-50 different countries for their summer or Diwali vacations. Cutting taxes drastically will boost investment and economic growth which will help Indians realize their dream of buying a nice house and a car for themselves too. Cutting taxes is the single most important thing that prime minister Modi can do in his lifetime to better the lives of 140 crore (1.4 billion) Indians. This is his golden chance, and Dr. Panagaria is in a position to give him this chance.
Whether the Modi government will listen to his suggestions is a different thing, but at least we can say that they were warned and given a chance to do better. In this way, in the future Modi cannot blame Congress or someone else for a debt debacle of his own making.
Second, Dr. Panagaria should also cut the share of the state’s income that goes to the center. As the above cited the Wire article discusses, Modi government is using finance commissions to punish and harass non-BJP states like Kerala and Tamil Nadu by not allocating enough funds to them while taking more from them. His government is using the fiscal policy to destroy the federal structure of India to centralize all powers in his own hands. He is creating a totalitarian state. Dr. Panagaria can reverse this centralization of power by cutting the amount of money going into the Modi government’s coffers. Cutting income tax, and abolishing GST, customs and excise duties will do this job. Dr. Panagaria should put more money in the hands of individual states so they can frame their independent policies without any interference from the central government. Giving more autonomy to states is the most important way in which we can fuel political competition between states in India. Increased competition between states will ensure that the quality of life in various states improves. Those states that will have overall lower taxes and fewer regulations will attract more businesses and people to stay there. Facing stiff political competition from such low-tax states, all other states will be forced to lower their taxes and regulations too. This will drastically improve the standard of living of Indians.
Dr. Panagaria has a chance of his lifetime one more time with his appointment as the head of the 16th Finance Commission to do something good for the Indians. If he suggests the above mentioned changes to the Modi government then he will go down in history books as a man who told the Indian government to do the right thing at the right time. If the Modi government implements his suggestions then the resulting prosperity in India will put prime minister Modi in the history books as the Lee Kuan Yew of India. India’s fiscal problems combined with the 16th Finance Commission, prime minister Modi holds a golden chance in his hands to fulfil his Mann ki Baat of doing welfare of 140 crore (1.4 billion) Indians.