Focus on ‘general government’ to attract global investment: former finance commission chairman NK Singh

Former Finance Commission Chairman N.K. Singh's emphasis on India's 'general government' fiscal health as a critical factor for attracting global investment is a nuanced yet profoundly important recommendation for India's economic future. To truly grasp its significance, we must delve into the underlying concepts and their implications.

**Background Context and The Recommendation:**

India, with its vast potential and demographic dividend, is a major destination for global capital. However, attracting and sustaining this investment requires more than just high growth rates; it demands robust macroeconomic stability and fiscal prudence. N.K. Singh, who chaired the 15th Finance Commission (2017-2020) – a constitutional body established under Article 280 to recommend the distribution of tax revenues between the Union and states, and among states – has long been an advocate for fiscal discipline. His recent statement underscores a crucial aspect often overlooked: the consolidated fiscal position of the 'general government.'

What exactly is the 'general government'? It refers to the combined fiscal position of the Union (Central) government and all the State governments. Traditionally, economic analyses, especially by international rating agencies and investors, often focus on the Union government's fiscal deficit and debt. However, N.K. Singh argues that a holistic view, encompassing both Centre and States, provides a more accurate and comprehensive picture of the nation's overall fiscal health and its ability to service debt. His recommendation is to focus on this consolidated metric to signal greater stability and creditworthiness to international investors.

**Key Stakeholders Involved:**

Several crucial stakeholders are directly impacted by and responsible for the 'general government's' fiscal health:

* **Central Government:** As the primary policymaker, it sets broad fiscal targets, manages its own budget, and influences state finances through transfers and borrowing limits (as per Article 293(3)).

* **State Governments:** Each state manages its own budget, incurs debt (Article 293), and plays a vital role in public expenditure, particularly in social sectors like health and education. Their collective fiscal performance significantly impacts the general government's position.

* **Finance Commission:** This body, chaired by N.K. Singh in its 15th iteration, is central to fiscal federalism. Its recommendations on tax devolution and grants-in-aid (Article 275) directly influence the fiscal space of both the Centre and states.

* **Reserve Bank of India (RBI):** The central bank plays a critical role in public debt management, monetary policy, and maintaining financial stability, all of which are intertwined with fiscal health.

* **International Investors and Rating Agencies:** These entities are the primary audience for signals of fiscal health. Their assessment determines the flow of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) and influences India's sovereign credit rating, which in turn affects borrowing costs for the government and Indian corporations.

**Significance for India and Historical Context:**

This focus on 'general government' fiscal health holds immense significance for India. A strong consolidated fiscal position translates into:

* **Enhanced Investor Confidence:** Global investors seek stability and predictability. A transparent and disciplined approach to overall public finances reduces perceived risk, making India a more attractive investment destination.

* **Improved Credit Ratings:** International credit rating agencies (like S&P, Moody's, Fitch) closely scrutinize both central and state finances. A better 'general government' fiscal position can lead to upgrades in India's sovereign credit rating, lowering the cost of borrowing for the government and Indian businesses on international markets.

* **Fiscal Sustainability:** Unchecked borrowing by either the Centre or states can lead to a debt trap. A consolidated view helps in identifying systemic risks and promotes long-term fiscal sustainability, ensuring resources for future development and inter-generational equity. India has had its share of fiscal challenges, notably the 1991 economic crisis, which underscored the importance of fiscal reforms. The subsequent enactment of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003 for the Union government, and similar Acts by states, was a significant step towards fiscal discipline. However, the N.K. Singh committee itself recommended a review of the FRBM framework, suggesting a debt-to-GDP ratio target of 38.7% for the Centre and 20% for the states by 2024-25, bringing the general government debt to 60% of GDP.

**Future Implications and Broader Themes:**

Moving forward, adopting a 'general government' perspective could lead to several positive outcomes. It would necessitate greater fiscal coordination and dialogue between the Centre and states, potentially through institutional mechanisms akin to the GST Council (Article 279A) for tax matters. This could involve joint strategies for debt management, expenditure rationalization, and revenue enhancement. The 15th Finance Commission, in its report, had already highlighted the issue of general government debt and recommended measures for fiscal consolidation, including a clear roadmap for both the Union and states.

However, challenges remain, primarily in achieving consensus among states with diverse fiscal capacities and political priorities. The recommendation aligns with broader themes of good governance, macroeconomic stability, and effective fiscal federalism. It underscores that India's economic destiny is a shared responsibility, requiring synchronized efforts from all levels of government to attract the capital needed to realize its ambitious growth targets and improve the living standards of its citizens.

In essence, N.K. Singh's advice is a call for greater transparency, accountability, and coordinated action in managing India's public finances, positioning the nation more strongly on the global economic stage.