New Delhi, India – Instantly after changing into the prime minister in 2014, Narendra Modi held backdoor negotiations with the Finance Fee of India to considerably lower funds allotted to the nation’s states.

Nevertheless, the top of the fee, an impartial constitutional physique deciding states’ shares from central taxes, resisted, and Modi needed to again off, new revelations present.

The Finance Fee’s agency stance compelled the Modi authorities to swiftly redo its maiden full finances in 48 hours and slash funding throughout welfare programmes since its assumption of retaining a higher portion of the central taxes didn’t pan out.

On the similar time, Modi falsely claimed in Parliament that he welcomed the Finance Fee’s suggestions on the tax parts to be allotted to the states.

These revelations of economic haggling and behind-the-scenes manoeuvring within the making of the federal finances got here from BVR Subrahmanyam, the CEO of the federal government think-tank NITI Aayog. As a joint secretary within the prime minister’s workplace, he was the liaison within the backdoor negotiations between Modi and the chairman of the Finance Fee, YV Reddy.

That is arguably the primary time a prime authorities official within the present Indian authorities has admitted publicly that the prime minister and his group had tried from the begin to squeeze the states’ funds, a priority now repeatedly raised by the states.

Subrahmanyam shared the data whereas talking as a panelist at a seminar on monetary reporting in India, which had been organised final yr by the non-governmental think-tank the Centre for Social and Financial Progress (CSEP).

In his remarks – one other first by a authorities official – he revealed how the federal budgets are “lined in layers and layers of try to cowl the reality”. He added that he was “certain you’ll have a Hindenburg who will open up the (Indian authorities’s) accounts if they’re clear”.

He meant, if the accounts had been clear, the reality of the federal government’s fiscal situation would grow to be evident, much like how the Adani Group’s questionable accounting practices had been highlighted by US-based brief vendor Hindenburg Analysis final yr.

These allegations of accounting fraud and different points by one in all India’s largest enterprise conglomerates led to a $132bn market rout within the group’s valuation and have become a political sizzling potato because the airports-to-cooking oil conglomerate is perceived as being near the Modi authorities.

The Reporters’ Collective independently verified Subrahmanyam’s claims in opposition to finances and different paperwork going again a decade.

At one level, Subrahmanyam even divulged particulars of economic embezzlement and fraud in a government-funded infrastructure undertaking, referring to it as a “humorous case”.

Regardless of his headline-grabbing revelations, the seminar’s YouTube livestream has garnered little greater than 500 views. Hours after The Reporters’ Collective despatched detailed queries to the Prime Minister’s Workplace (PMO), public entry to the video of the seminar was lower off on the CSEP YouTube channel.

Subrahmanyam, the Ministry of Finance and the PMO didn’t reply to The Reporters’ Collective’s detailed queries.

The Finance Fee scandal

Per India’s Structure, an impartial Finance Fee, made up of economists and public finance consultants, decides what share of cash the federal authorities ought to share with the states from its tax collections, excluding these it labels as “cess” or “surcharges”.

The 14th Finance Fee was arrange in 2013. Across the similar time, Narendra Modi, because the chief minister of the state of Gujarat, was campaigning for the publish of prime minister and made information for asking the fee to offer states a 50 p.c share of central taxes.

In its report that it submitted in December 2014, the fee really helpful that states ought to get 42 p.c of the share of central taxes, up from the 32 p.c they’d been receiving till then. However Modi, now the prime minister, and his Ministry of Finance, needed to maintain the states’ share of taxes down at 33 p.c and a bigger portion for the federal authorities.

Below the constitutional provisions, the federal government has solely two choices: settle for the Finance Fee’s suggestions or reject them and set up a brand new fee. It can not argue, debate or negotiate with it formally or informally.

However the prime minister tried off-record parleys to get the chairman of the Finance Fee, YV Reddy, who was earlier the governor of the Reserve Financial institution of India, to pare down his suggestions on the income share. In his feedback on the panel, Subrahmanyam mentioned he was the one different particular person in that dialog.

This was in breach of constitutional propriety. If the federal government had succeeded, it could be capable to scale back the states’ earnings whereas passing the blame onto the constitutional physique, the fee.

Subrahmanyam mentioned {that a} “tripartite dialogue between Dr Reddy, me and the prime minister” concerning the determine happened.

“No Finance Ministry (official or minister),” he pressured, was concerned. “Ought to it’s 42 (p.c) or 32 (p.c) or some quantity in between? The earlier quantity was 32,” he mentioned, referring to the share share of taxes really helpful by the thirteenth Finance Fee.

The dialog lasted two hours, Sabrahmanyam mentioned, however Reddy was unyielding. Subrahmanyam recalled Reddy, telling him in “good south Indian English: ‘Appa (Brother), go and inform your boss (the prime minister) that he has no alternative’.”

The federal government needed to settle for the Finance Fee’s suggestions of 42 p.c.

The Reporters’ Collective verified from an official who was a part of the 14th Finance Fee that there had been a delay in accepting the report and conversations about doubtlessly altering it. We corroborated it with one other economist who, at the moment, was working for the federal government and within the know concerning the occasions.

“It was conveyed that the federal government had the facility to reject the report however not ask for it to be altered. Solely as soon as previously, the federal authorities has rejected the principle report of a Finance Fee and even then it went with the dissenting notice that was a part of the report. It didn’t proffer its personal devolution numbers,” mentioned the economist, who declined to be named because the discussions concerned the prime minister’s workplace.

However in Parliament, Modi hid his authorities’s failed try to cut back the states’ share of revenues. He advised Parliament on February 27, 2015: “To strengthen the nation, we have now to strengthen the states… There’s a dispute amongst Finance Fee members. We might have taken benefit of that. We didn’t. However it’s our dedication that states must be enriched, must be strengthened. We gave them 42 p.c devolution.”

He added, “Some states wouldn’t have treasuries sufficiently big to maintain all this cash,” as members of Modi’s ruling Bharatiya Janata Occasion (BJP) laughed and applauded.

However with a smaller portion of the tax income, the federal government needed to rehash all the finances and ended up slashing allocations for a number of welfare schemes.

“The finances was written in two days that yr. Two days as a result of this advice is accepted so late, so late and every thing was written at the moment … in a convention room in NITI Aayog. 4 of us sat and really recast all the finances,” Subrahmanyam recounted.

“I nonetheless keep in mind after we had been chopping off … girls and baby – state topic – 36,000, make it 18,000 crores,” he mentioned in his speech, recounting how he and three different unnamed officers halved the allocation from 360 billion rupees ($5.8bn) to 180 billion rupees ($2.9bn) for the central Ministry of Girls and Baby Growth, which runs welfare schemes like delivering sizzling cooked meals to youngsters, pregnant girls and lactating moms.

Whereas the numbers he rattled off weren’t exact, the federal government did considerably lower allocations by practically half from 211 billion rupees ($3.4bn) within the finances for the monetary yr ending March 2015 to 102 billion rupees ($1.6bn) the following yr after it needed to settle for the upper proportion of cost to the states.

The finances additionally noticed an 18.4 p.c lower in allocation for college schooling from the earlier yr.

‘Try to cowl the reality’

Subrahmanyam’s candid remarks stand out all of the extra as a result of it’s fairly uncommon for presidency officers, significantly within the Modi administration, to be so forthcoming.

Talking on the panel on fiscal transparency – how actually the federal government lays out its revenues and liabilities – Subrahmanyam mentioned it could take a “Hindenburg” to delve into the nation’s accounts. A chuckle of acknowledgement rippled throughout the convention room.

The federal finances is “lined in layers and layers of try to cowl the reality”, he mentioned. Evaluation of budgets by the likes of JPMorgan and Citibank “truly unveils the reality in what the actual scenario is”, he mentioned, referring to how international banks and traders are extra sincere than home gamers of their analyses of the Indian authorities’s accounts.

Subrahmanyam added that the budgets of the states and federal authorities had been untrustworthy as governments at each ranges had been utilizing accounting tips and generally plain fraud to keep away from revealing the degrees of debt.

One of many key issues of home and worldwide traders is the extent of fiscal deficit the federal government carries at any given time – how a lot it’s spending in extra of what it earns from taxes and different revenues, by means of borrowings. In different phrases, dwelling past its means. Unhealthy ranges of fiscal deficit scare away traders and may result in a detrimental cascading impact on the financial system.

Governments, subsequently, strive accounting tips to satisfy their bills from borrowings that may be stored out of finances paperwork, higher often called “off-budget borrowing”.

Indian governments of all hues have been criticised previously for doing this. These, merely put, are loans, often taken by the likes of government-owned firms, which aren’t mirrored in authorities accounts, though, finally, it’s the authorities that has to repay these loans.

In its fiscal yr 2019-20 finances, the federal authorities introduced that going ahead, it could disclose all such off-budget borrowings. This got here on the heels of criticism from the fifteenth Finance Fee in opposition to the rise in such borrowings.

It did disclose higher than it had up to now, however as Subrahmanyam admitted, it was not sufficient.

“It’s disclosing just one half,” he identified in his speech, referring to the federal government’s assertion on extra-budgetary sources. “What’s the time of the borrowing, quantity of borrowing, timeline of the borrowing, rate of interest? Nothing is thought.”

A report on the federal authorities’s funds by the nation’s comptroller and auditor common, uncovered a few of these deficiencies in 2022. It, for example, didn’t disclose the greater than 1.69 trillion rupees ($21.9bn) raised by totally different government-owned our bodies, which ought to have been a part of the finances assertion on extra-budgetary sources.

In his feedback, Subrahmanyam additionally delved right into a case of economic misconduct in a government-funded infrastructure undertaking within the erstwhile state of Jammu and Kashmir when it was beneath the direct management of the federal BJP authorities.

“We had a humorous case,” he mentioned and narrated how the Jammu and Kashmir administration, on the time beneath the direct management of the federal BJP authorities, submitted a “pretend UC”. This referred to utilisation certificates, the official doc certifying that funds have been used for the aim for which they had been disbursed.

The federal authorities sends funds to states for infrastructure initiatives in tranches. The cash for every subsequent tranche is launched after the state sends a certificates that it has used the earlier tranche for the best functions.

“The second instalment got here in. The contractor who has taken the primary instalment, no person knew methods to pay him. As a result of the primary instalment technically is consumed and the second has come up,” he added.

In different phrases, primarily based on the pretend utilisation certificates that had been submitted, the federal authorities despatched the second tranche of funds. However now, the Jammu and Kashmir administration was caught with it. It had misused the primary instalment of funds and it couldn’t afford to pay the contractor partially.

The Reporters’ Collective didn’t obtain a response from Subrahmanyam and the Finance Ministry on detailed queries relating to the legality of this observe.

Cesspool of surcharges

As soon as the Modi authorities discovered it couldn’t scale back the state’s share of taxes by getting the Finance Fee to alter its report, it exploited an outdated accounting manoeuvre that persists to today. The federal authorities steadily elevated the gathering of a category of taxes referred to as cess and surcharges. States are usually not entitled to any portion of this.

“There’s an growing use of cesses and surcharges to fund or to boost revenues,” Subrahmanyam mentioned in his speech.

The quantity of cess and surcharges collected by the federal authorities beneath Narendra Modi has grown since 2015, information reveals.

The share of cesses and surcharges stood at 10.4 p.c of whole taxes collected in 2011-12 by the Congress-led federal authorities. Between 2017-18 and 2021-22, the whole cess and surcharge collected by the federal authorities greater than doubled, from 2.66 trillion rupees ($33.7bn) to 4.99 trillion rupees ($64.8bn). Throughout that interval, cesses and surcharges rose from 13.9 p.c to 18.4 p.c as a share of gross tax income.

Malini Chakravarti of the impartial think-tank Centre for Funds and Governance Accountability writes concerning the tips the BJP authorities deployed to up its share of monies at the price of the states: “Within the 2017-18 finances whereas the Centre lowered the tax charge of incomes as much as Rs 500,000 ($7,400) from 10 p.c to five p.c, it levied a surcharge on incomes above Rs 5 million ($74,600) to counter the resultant income loss. Equally, within the 2018–19 finances even whereas excise responsibility on petrol was lowered by Rs 9 ($0.12) per litre, the highway cess was elevated by an equal quantity.”

Referring to the rise in cesses and surcharges, Subrahmanyam mentioned: “So, if that’s the case and these are a part of the non-divisible pool, then states could be cautious of ceding increasingly more of their autonomy in taxation.”

One such manner the Modi authorities eroded the state’s tax sources was by means of a nationwide items and providers tax (GST), which was launched in July 2017 after years of political haggling. It was imagined to create a single market, changing a plethora of native taxes with nationwide ones. However “states are being more and more choked for income,” Subrahmanyam mentioned, echoing a priority that has beforehand been voiced by opposition-ruled state governments.

Analysis papers within the current previous have proven that state tax revenues post-GST have declined compared with the pre-GST interval.

A January 2023 paper by researchers on the Nationwide Institute of Public Finance and Coverage analysed state revenues and located that in 17 out of 18 states they reviewed, the income that states generated by means of state-level taxes declined within the post-GST interval in contrast with the pre-GST interval when seen as a share of the gross state home product (GSDP).

The federal authorities’s continued makes an attempt to limit states’ monetary independence additionally confirmed up when it arrange the fifteenth Finance Fee in 2017 and tasked it with recommending fiscal sticks and carrots to persuade states to keep away from “populist measures”.

In the identical vein, Modi, since mid-2022, has been accusing opposition-governed states of indulging in a “revdi tradition” referring to conventional sweetmeats and disparagingly likening welfare schemes to distributing sweets or freebies to folks.

In his feedback on the panel, Subrahmanyam differed together with his boss on the matter.

“The query is these are social selections. Any individual can say that Medicare and Medicaid within the US are freebies. Are you able to go and scrap them?” he requested. “I feel these are societal selections, these are usually not financial selections. Economics will solely resolve whether or not you possibly can pay for it and do it or not. It can not say it’s proper or improper. It’s a political determination.”

Shreegireesh Jalihal and Nitin Sethi are members of The Reporters’ Collective, a not-for-profit investigative journalism outfit.