Another institution weakened

FOR THE FIRST time in its history the statutory finance commission has overturned the substance of its own recommendations. The manner in which the Eleventh Finance Commission (EFC) has partially revised its earlier recommendations in order to placate a lobby of powerful States undermines the very basis of its earlier two-year effort to suggest a division of financial resources between the Centre and the States over the five-year-period, 2000-05. Moreover, the recommendations contained in the second report of the EFC make the States more and not less dependent on the Centre, which is the exact opposite of a non-discretionary system of a transfer of resources that the finance commission is supposed to devise. All in all, the EFC, which was chaired by Prof. A. M. Khusro, has probably ushered in an era that will see future finance commissions becoming the site of intense bargaining between the Centre and the States and, worse, among the States themselves. The winners will inevitably be the more powerful entities. In essence, yet another institution has been weakened by the powerful.

The EFC had completed almost all its work last June when it had made its recommendations on the vertical and horizontal shares of Central tax revenue between the Centre and the States and also, as mandated by Article 275(1) of the Constitution, the total amount of Non-Plan revenue grants and which States are entitled to these grants in 2000-05. All that remained was for the EFC to suggest ``a monitorable fiscal reforms programme'' for the States that would link the provision of the financial grants to progress in implementing the programme. However, the EFC's main award was subjected to intense criticism by a group of relatively better- off States in the Union, led by Mr. Chandrababu Naidu of Andhra Pradesh, on the ground that the EFC had discriminated against the ``performing States''. That was a specious argument for few of the complainants were ``performers'', and what the EFC had originally done was to devise a formula for horizontal transfers that by providing more for the poorer States was meant to facilitate a narrowing of inter-State disparities. But the attack on the EFC was so intense that it has caved in. What the EFC has now done is to recommend ``withholding'' of 15 per cent of the Rs. 35,359 crores that it had earlier decided upon as Non-Plan grants for 15 States over the next five years. This Rs. 5,304 crores supplemented by an equal amount from the Centre will form a new Rs. 10,608-crore ``Incentive Fund'' to which all 28 States will be eligible if they implement fiscal reforms. The Government of India will decide on the exact criteria, it will constitute the implementing agency and it will administer the Fund.

There was a certain underlying approach to the identification in the first EFC award of the 15 States that would be eligible to an estimated Rs. 35,359 crores as grants. By juggling with this amount and setting aside only 85 per cent for the 15 States the EFC is in effect now saying that there was no real basis for its earlier exercise to identify the States and estimate the assessed deficits. (Incidentally, the States which will now lose are mainly the weak ones in the Northeast.) Similarly, by creating a new pool of funds and making all States eligible for these funds the EFC has undermined the value of its earlier ``holistic'' approach that delineated trends in expenditure and revenue for each State. Finally, by placing the new Fund entirely in the hands of the Centre the EFC has introduced yet another discretionary form of resource transfer. The finance commission is not a perfect institution. There always have been heated debates about the terms of reference as well as the awards of successive commissions. But what has happened this time is not an exercise to make the working of the finance commission more transparent and genuinely reflective of economic federalism. It has instead been an exercise in which the complainants and the EFC have participated in the hollowing out of the institution.

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Section  : Opinion
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