Economist and former Reserve Bank of India Governor Raghuram Rajan on Wednesday said that the Centre has not been sharing its rising revenue with the states, NDTV reported.

“State government finances are in a pretty bad way,” Rajan said in an interview to NDTV. “The Centre has, sort of, swallowed up a significant part of the revenues through central cesses.”

He added that India was too large to be run exclusively by the Centre and that decisions pertaining to the financial situation of the country were being delayed.

“This is suggesting that the government is overwhelmed,” he said. “Too many people are looking to the Centre for guidance and not getting it. As a result, we get paralysis.”

Rajan said that the government, despite its rising revenue, was holding back on spending probably to maintain credit ratings. “And yet, credit rating agencies themselves recommend spending in areas necessary,” he added.

Sovereign credit ratings represent the ability of a government to meet its debt obligations. A credit rating of AAA is the highest, while BBB-, the credit rating assigned to India, is the lowest.

Skewed economic growth

Rajan said that India’s 20.1% Gross Domestic Product growth in the first quarter (April-May) of the 2021-’22 financial year happened due to a surge in manufacturing and consumer spending.

The manufacturing growth rate in the first quarter was 49.6%, while construction grew by 69.3%.

However, he observed that the “reasonable recovery” was confined to the industrial sector.

“It differentiates between the goods that are targeted at the richer, upper-middle-class versus goods that are targeted at poorer people,” he said.

The larger firms, Rajan said, have more profit growth.

“This is one reason why the stock market is doing so well,” he said. “It is also why tax collections are increasing – GST collections jumped 30% annually to Rs 1.12 lakh crore in August.”

The Goods and Services Tax collection for the month of August fell to Rs 1,12,020 crore from Rs 1.16 lakh crore in July. Despite the dip in collection, the finance ministry said it indicated that the economy was recovering from the impacts of the coronavirus pandemic. GST collections had slipped below the Rs 1 lakh crore mark for the first time in eight months in June.

Rajan said the government needs to support the small and medium business in a better way if it seeks to formalise the economy. Formalisation entails bringing firms under the regulatory regime of the government, including income tax.

Cash transfers

Rajan pointed out that Indians were increasingly taking loans against gold.

Since March 2020, when the coronavirus pandemic struck, gold loan outstanding with banks has risen by 86.4%, or Rs 33,308 crore, The Indian Express had reported, citing data from the RBI.

Rajan said Indians resort to selling their family gold only when they are in “dire straits”. To improve their condition, he suggested cash transfers.

For those who come to cities in search for work, he said a scheme on the lines of Mahatma Gandhi National Rural Employment Guarantee Act could help.

The scheme aims at providing 100 days of wage employment to every household in rural areas provided the adult members volunteer to do unskilled manual work.

“One of the consequences of not supporting them [urban people hit by the downturn] is that they go back to their villages,” Rajan said. “And then when you want to start up again you have a shortage of labour. And it is very hard to persuade that they will be well supported in the city.”

Also read: Infosys row: Would you call Centre anti-national for vaccine rollout flaws, asks Raghuram Rajan