Financial designs

Print edition : July 03, 1999

The Planning Commission's recent letter to State governments on the introduction of new criteria for the release of Central Plan assistance points to dubious tactics on the part of the BJP-led government.

THE issue of Centre-State fiscal relations, already under a shadow on account of pressure from the International Monetary Fund (IMF), the World Bank, the Bank of International Settlements (BIS), and the Group of Eight (G-8) countries for more rapid economic reforms in the interest of transnational corporations, has suddenly become a non-issue in the wake of the 'Cola hype' on World Cup cricket, and Kargil. Kargil, of course, is a pressing and important issue; but then in all other matters, life must go on, as the Cola hype on World Cup cricket testifies. Yet, one must note that in the process the focus of attention is no longer on matters that really affect the lives and interests of the bulk of the people of this country. How else does one explain the total reticence of not only the English-language media but even serious commentators on economic issues? The latest instance was the news broken by The Hindu (June 11, 1999) about a strange, in fact absurd, letter from the Secretary of the Planning Commission to the Chief Secretaries of all State governments forewarning them that from July 1, Central Plan assistance to States - already agreed to and approved - would be released on a monthly basis, strictly on the recommendations of the State Plan Adviser concerned (in the Planning Commission), on the basis of certain new criteria now laid down (and intimated in the letter). These criteria leave wide room for discretion and judgment to be exercised by the recommending authority.

Several issues arise here. First, one must note that the general elections are some three and a half months away (as on the date of writing) and were some four months away when the Planning Commission letter was issued. More important, this fiat was issued by what is supposed to be an interim government, not a government which enjoys the confidence of an elected Parliament. This is an important point to be borne in mind.

Secondly - and today, in retrospect, this point becomes important - when Yashwant Sinha's Finance Bill for 1999-2000 was passed by the Lok Sabha after the outgoing Bharatiya Janata Party-led government made it a "take it as a whole or leave it" issue (the entire government machinery would have been paralysed in the absence of a new Finance Act for the year), the Government, at the highest level, must have known of the serious Pakistani intrusions into the Kargil area. Today, one has only to look at the dates. Indian pickets attempting to return to their summer bases near the Line of Control (LoC) in April were repulsed, not once but twice, and there was no failure of intelligence. The Border Security Force (BSF) had sounded warnings about the serious incursions into Indian territory; the Government simply did not heed these warnings. In this background, insofar as the Finance Bill was concerned, its passing on an "as is" basis implies that at the highest level the Government did not (in May) foresee a long and expensive intervention by the armed forces in Kargil, along the 150-odd-km-long LoC in that sector. In short, the Government was either incompetent or, worse, guilty of chicanery to the extent that it kept Parliament in the dark. This is a serious matter; and if this point is made at this juncture - when there is an obvious need for national solidarity on the issue of Kargil - it is because of the dubious tactics of those in power, as is evident from the Planning Commission letter to State governments.

This brings up the third important point to be noted. The Finance Bill for 1999-2000 envisages a "soft" tax option; indeed, this point had been vigorously made by many commentators when the Budget was presented. Indeed, the Budget gave many concessions to large industries - certain well-known business houses known to be friendly to the ruling party. Even at that time it was fairly clear that the general elections were not far off. The only question was: when? True, when the Budget was presented, the extent of the Kargil problem was not known; yet, here is the million-dollar question: when the Finance Bill was passed the facts regarding Kargil must have been known at the highest level; then why did the BJP leadership shy away from taking Parliament into confidence? Why did it not think of new taxation to ensure that we are not caught napping? The only possible explanation is that the ruling party wanted to eat the cake and have it too. After all, higher taxes are always unpopular; why should it incur that odium? Let Kargil become an obsession; and then, well after the elections, the new government - whichever party comes to power - will find it easy to levy new taxes. Let sleeping dogs lie for the present - that appears to have been the rationale of the policy stance taken then, and verily it is this partisan approach that has been dogging the Government thereafter, for the interim government is simply unable to raise new resources. There is no Parliament even to consider such a proposal.

This is the crunch today. The Kargil operations, it is now clear even to the layman, will be long-drawn and expensive. As it is, July-September is not the best period for revenue collections. The Kargil operations can be financed today only through open-ended deficit financing. An inflationary spiral cannot be ruled out; in fact, it is on the cards. The Fifth Pay Commission has already ensured large, regular dollops to the civil service; there is little money likely to be left for developmental expenditure anyway. That, of course, is in tune with the theory of "market-led" development. But now, Kargil poses an unexpected problem. Since there can be no supplementary budget until the new Lok Sabha is constituted and a duly elected government is installed, what does the interim government do?

Somebody has a brainwave. Why not kill two birds with one stone? Why not starve a few selected States of Central Plan assistance?

There do exist different categories of States. Some are governed by the BJP or its allies (such as the Shiv Sena and the Shiromani Akali Dal). Some are ruled by friendly parties (the Telugu Desam Party and the Dravida Munnetra Kazhagam, as of now, are obvious examples). For the rest, the deeper they are in financial distress, the better, for people in those States must somehow be made to feel that a change of government would be in the interest of the people. What better way to achieve this than to break them financially? That would, inter alia, save precious resources, at least for some time, for a beleaguered government.

This modest objective can easily be achieved! Planning Commission Advisers - bureaucrats chosen and appointed by the Government - can be made easily pliable, especially when they are anxious to hang on to their positions in the national capital. And this procedure is so easily justified. After all, the bureaucracy is supposed to be "independent", neutral. After all, the decision to recommend that Plan assistance be held back from a few States - and that too on the basis of certain criteria laid down - is being left to a supposedly independent bureaucracy. We cannot be expected to countenance the wasteful expenditure of development assistance. And voila, we have really achieved the near-impossible. We have, at one stroke, reduced Central Government outgo - and therefore the extent of deficit financing and possible inflation - and we have also starved out inimical governments (headed by the Left parties, the Rashtriya Janata Dal, the Janata Dal, the Congress(I)), and thereby made them vulnerable to popular ire through their (enforced) neglect of projects that are in the pipeline and of normal services such as education and health. There are also journalists who are over-eager to point up any deficiency in these States. What a brilliant idea, even if this measure has to be given up after three or four months!

The above pattern reveals a rare combination of political savvy and financial chicanery. But we must not forget that even the votaries of "planning" would welcome stricter "monitoring" of the use of resources; indeed, that is precisely what planning is about. The present "exercise" pretends to achieve precisely more "focussed" use of resources. As for the votaries of market-led development, they should rejoice; any cut in Plan expenditure, by definition, is a step forward. For Yashwant Sinha, beleaguered by the sudden increase in defence expenditure, all means, fair or foul, are welcome. The blame, if any, falls on the Planning Commission and/or the expendable bureaucracy. All is fair in love, in war and in politics.

THE Planning Commission's letter to the State governments does not appear to have received the attention it deserves in the media. The third paragraph states, as a sort of Preamble, that the "Planning Commission has been supplementing the resources of the States by providing Central support under various heads to the State governments even though this is not constitutionally mandated"(emphasis as in the original). Would the Planning Commission note that planning, which effectively puts under Central control and direction many subjects that constitutionally are the prerogatives of the States, is not constitutionally mandated? And that planning of any kind implies that plans have to be financed?

Let us now proceed to the more basic issues involved. The entire issue of planning, of devolution of funds, of the need to decentralise, has been thoroughly discussed in the National Development Council, which is a body above the Planning Commission and its minions. (Let us leave out the 73rd Amendment to the Constitution which remains a dream except in very few States.)

In paragraph 4 of the letter, the Commission states:

"... we propose to take action as follows:

"(i) A fund is proposed to be set up with effect from April 2000, the assistance from which will be linked to specific projects and would be allocated to States on the basis of certain laid down criteria and performance parameters. Detailed Memorandum of Understanding (MoU) would be drawn up with the State governments... A separate communication is being sent... on this subject.

"(ii) The release of normal Central assistance (emphasis added) would also be made conditional to fulfilment of certain criteria. Some of the conditions for withholding the release could be as follows:

"(I) inadequate expenditure in the previous months, (II) serious financial irregularities and non-achievement of outlays under earmarked sectors/schemes, (III) inadequate performance in important sectors/core plan, (IV) non-receipt of crucial information like Plan documents, sectoral allocations, expenditure statement, etc., and (V) non-implementation of guidelines issued by the Planning Commission from time to time."

The Commission further states:

"5. The above arrangement (except 4(i)) is proposed to be implemented with effect from July '99. In practical terms... the Ministry of Finance, Government of India would release Plan funds to States only on hearing from the concerned State Plan Adviser of the Planning Commission...

"6. If you have any suggestions regarding the above scheme, the same may be sent to us latest by the middle of June '99."

SEVERAL important points need to be noted in respect of the above communication. Expectedly, many States have protested against the proposals, and the report in The Hindu says that the Planning Secretary, when contacted, merely stated that this was a proposal to be discussed with the States before implementation. Note that the letter is quite categorical; this proposal would be implemented from July. The States have been merely asked to send their suggestions by mid-June; but it is categorically stated that the new "arrangement (except 4(i)) would be enforced from July '99", and that the Finance Ministry would be releasing Plan assistance to States only after hearing from the "State Plan Adviser" concerned in the Planning Commission.

One can easily see that there is enormous room for 'discretion' to be exercised by a bureaucrat - all State Plan Advisers belong to the Indian Administrative Service (IAS) biradari whose mai-baap are essentially the Central Department of Personnel - and the entire exercise relating to releases of Central assistance would be effectively controlled, in terms of the new procedure, by a few chosen bureaucrats. Whether there has been "inadequate performance in important sectors" is essentially a matter of judgment, and opinions could vary sharply. In any case, after the Fifth Pay Commission award, all governments are in financial distress. It is a near-certainty that all State governments will be charged with "inadequate performance" in important areas. The question is: would the performance of the Centre be any better? Who is to judge the performance of the Centre?

Anyhow, for a beleaguered Yashwant Sinha, this "Order" must be like manna from the heavens. There may be howls of protest. A new government may rescind the diktat. Well, if Yashwant Sinha can manage to withhold Central assistance to a few States for three months - say, from July to September - many of his present worries would be over. And verily, the present Government can effectively kill two birds with one stone with this new formula. Just manage to twist a very few arms - there are not that many State Plan Advisers - and you have both avoided financial liabilities and you have managed to bludgeon a few State governments selectively.

That such an important decision can be taken by an interim government, and that too without even the possibility of any intervention by the National Development Council, is really what takes the cake. We talked of Centre-State fiscal relations. Verily, such talk is for the birds. For "They shall have who have the power. And they shall keep who can."

Arun Ghosh has been associated with economic policymaking in India for more than two decades, including as a member of the Planning Commission.

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