Bureaucratic centralisation

Print edition : February 03, 2001

The Eleventh Finance Commission adds a nail to the coffin of federal finance.

THE founding fathers of India's Constitution had, as of 1947, the trauma of India's Partition embedded in their consciousness, which made them opt for a 'Union of States' rather than a Federal entity. They were conscious of the wide diversity - in matter s of resource endowment, levels of living, literacy and education, and indeed even in regard to cultural mores - in the different regions and States, which suggested a Federal Constitution for India. They were obviously also aware of the cardinal fiscal dictum that most tax revenues are best collected centrally but that the delivery of most (state provided) services is best dispensed locally. As a result, the functions and powers (including powers of taxation) were divided into Central and State jurisdi ction (with some Concurrent subjects). There was a pronounced bias in favour of the Centre in regard to taxation authority. The Constitution also mandated the appointment, every quinquennium, of a Finance Commission to recommend the devolution of Central finances to States. Articles 280 to 285 (in Part XII of the Constitution) are explicit on the subject. Indeed, the automatic devolution of a part of Central revenues to meet the 'revenue deficit' of the then Assam (comprising what are now the seve n northeastern States), is explicitly provided under Article 275 of the Constitution and provides for grants "equivalent to... the average excess of expenditure over the revenues during the two years immediately preceding the commencement of this Constit ution..." Indeed it is under this Article that the Centre is obligated to make grants to States, to bridge their 'revenue deficit', as per the recommendations of periodically constituted Finance Commissions.

Dr. A.M. Khusro, Chairman of the Eleventh Finance Commission, presenting the Commission's report to President K.R. Narayanan in New Delhi on July 7, 2000.-KAMAL NARANG

Indeed, a perusal of the debates on the draft Constitution makes it clear that the founding fathers of the Constitution resiled from opting for a Federal Constitution only because Partition made them concerned about the danger of a further dismemberment under a Federal Constitution. Some part of the wide powers of the Centre is obviously the result of that apprehension. This preamble is necessary for us to understand and to review the recommendations of the Eleventh Finance Commission (EFC) in regard to the devolution of part of Central finances to the States for the quinquennium April 2000-March 2005.

THE EFC was set up on July 3, 1998. The Commission submitted its final report covering all aspects of its mandate on July 7, 2000. (It had earlier made an interim recommendation for the devolution of finances during 2000-2001.) However, just 70 da ys prior to the EFC submitting its final report (that is, on April 28, 2000), the Government of India issued an additional mandate to the Commission to "draw a monitorable fiscal reforms programme aimed at reduction of revenue deficit of the States and t o recommend the manner in which the grants to States to cover the assessed deficit in their non-Plan revenue account may be linked to progress in implementing the programme". In retrospect, the fresh mandate (and its precise wording) is questionable. No one would question the wisdom of moderating, in fact eliminating, the non-Plan revenue deficit of government - indeed, the States by and large had a revenue surplus before the start of the programme of 'economic reforms' during the 1990s - but then, that dictum, concerning fiscal responsibility, applies not only to States but also to the Centre. Anyhow, the "linking" of Central grants to States "to progress in implementing the programme" was clearly beyond the intent of the Constitution when it provided for the automatic devolution of a part of Central finances to the States; one has to go back to Article 275 and note that the Constitution specifically provides for the Centre to make grants to (the then) Assam "equivalent to... the average excess of ex penditure over the revenues during the two years immediately preceding the commencement of this Constitution". The founding fathers obviously intended the Central grants to States, as per the recommendations of the Finance Commission, to be automatic and unconditional. (Plan grants and loans from the Centre to the States are different.)

Coming to think of it, the revenue deficit of States is only partly due to action taken by the States (either in the matter of taxation or, more important, in the matter of their current expenditure). To a large extent, the States are not in a pos ition to control their revenue deficits, which may arise because of factors beyond their control; indeed, frequently for reasons of Central government policies. Take, for example, the recommendations of the Fifth Pay Commission, which increased in one year the salaries and allowances of only Central government employees by 1 per cent of the gross domestic product, (as indicated in the Economic Survey); and the impact of this Central government folly on the finances of the States is, theref ore, not owing to any misdirected policies of State governments. Or again, it is not within the powers of State governments to control general inflation; all policies in that context are within the purview of the Centre. And obviously, the revenue expenditure of State governments can be expected to go up pari passu with the inflation rate. A general economic recession (which would affect the revenues of State governments) or swings in export/import prices which again would affect States' r evenues/expenditures through the price effect, would affect the finances of State governments. Or again, take a look at the way the Central government has managed its finances over the decade of the 1990s (under the 'economic reforms' programme). Accordi ng to the Annual Report of the Reserve Bank of India (for 1998-99 and 1999-2000, both taken together) Central tax revenues as a percentage of GDP declined from 10 per cent in 1990-91 to 8.5 per cent in 1998-99. According to the National Accounts Stati stics, 2000, published by the Central Statistical Organisation, India's GDP in 1999-2000 was Rs.1,767,000 crores. Thus, for 1999-2000, at 1998-99 tax rates - and taxes in 1999-2000 have been reduced further, not increased - the Centre's policies have led to a loss of tax revenues (in 1999-2000) of more than Rs.26,500 crores. Also, as we all know, there is no let up in the Centre's penchant for increasing (non-Plan) revenue expenditure. To the extent that the Centre has been urging the States to speed up 'economic reforms' is it not telling the States to 'rationalise' (or reduce) their taxes? Indeed the World Trade Organisation (WTO) has been preaching this, and the World Bank pressing for such reform before making any loans available.

Thus, it would be seen that the Centre is more guilty of fiscal irresponsibility than the States and that in any case, the States are by and large helpless because their 'deficits' can be traced to a large extent to Central policies. It is in this context that it appears to be somewhat absurd that the Centre should either issue the additional 'mandate' that it did (on April 28, 2000) to the EFC, or that it should be armed with powers to deprive some States of their legitimate share of the funds a lready devolved in terms of the final report of the Commission.

Anyhow, the EFC took the 'additional mandate' seriously. Apparently even semi-juridical commissions want to remain on the right side of the powers that be, and the EFC submitted a Supplementary Report on August 30, 2000, with a powerful 'note of dissent' by the economist member, Dr. Amiya Bagchi. On December 19, 2000, the Finance Minister accepted the majority recommendations and issued a memorandum giving publicity to both the recommendations and the action to be taken. To the extent that the Supplemen tary Report partially nullifies (and amends) the Final Report of the EFC, it is somewhat strange that the Supplementary Report has attracted little media attention. The issues are of such importance that they need wider public debate.

As stated above, Dr. Bagchi has submitted a powerful minute of dissent, not only because the 'conditionalities' now imposed - in respect of 15 per cent of the amount earlier recommended as Central devolution to 15 'revenue deficit' States - are violative of the Constitution, but also because in the matter of their revenue deficit, the States are essentially helpless. Perhaps one should add that the latest penchant for carving out new States compounds the problem. Take but two such new States. Tru ncated Bihar (minus Jharkhand) has inherited two-thirds of the earlier Bihar population, and only one-third of its revenues. As it is, the finances of undivided Bihar were in a mess; now the situation is one which is hopeless; and unless Bihar is nursed back to a path of development - which would need more than financial support - it could pose enormous problems for the country.

Or take Uttaranchal: it has 18 sparsely populated districts spread over difficult hilly terrain, a poor populace, and little scope for significant revenue generation (while its developmental problems as well as needs are enormous). Indeed, since the Cent re had known of the fact that these States would be formed by the end of 2000, it is odd that it did not see it fit to extend the term of the Finance Commission to go into the specific problems of the newly created States and to recommend suitable modifi cations to the Final Report.

WHAT precisely are the supplementary recommendations of the EFC? The Commission had earlier recommended that 15 chronic revenue deficit States be given Rs.3,53,519 crores during April 2000-March 2005 to cover their revenue deficit partially. Now 15 per c ent of this amount - or Rs.5,304 crores out of this amount - is to be held back; and this sum plus a matching grant from the Centre would be credited to an 'incentive fund' from which 'fiscal performance based grants' would be distributed among al l 25 States as per the assessment of 'performance' by a monitoring group to be set up .

Secondly, this monitoring group would consist of the representatives of the Planning Commission, the Finance Ministry and each of the 25 States - there being State-specific monitoring groups - with the Additional Secretary of a new Finance Ministry Cell acting as the secretary of the group.

Thirdly, this monitoring group would draw up a 'State-specific monitorable reform programme' (including for those States that do not get a grant to cover the non-Plan revenue deficit). (The monitoring programme would attach equal weights to revenue as we ll as non-Plan expenditure.)

Fourthly - and importantly - this group would authorise annual release, or the withholding of 15 per cent of the grants-in-aid recommended earlier.

Fifthly, since the Commission had, in its Final Report, worked out the Statewise (annual) grant to cover the revenue deficit (for each of the 15 States involved), 15 per cent of the amount for each State would be held back and released only if the monito ring group so recommends; and this amount plus the Central incentive would be released only in the fifth year, and distributed among all 25 States as per the recommendations of the monitoring group. Finally, since (as per the earlier Final Report of the Commission) the total Central devolution to States would be 37.5 per cent of gross Central revenue receipts, the matching grant of 15 per cent (amounting to Rs.5,304 crores) would be accommodated within the overall amount of Central transfe r (that is, 37.5 per cent of Central revenue).

The absurdity of these recommendations is patent. Clearly, it is now possible that a maximum of Rs.10,608 crores would be denied to (some or all) of the chronically revenue deficit States; and this amount could be released only in the fifth year, to be d istributed among all States. That clearly bypasses Article 275. Secondly, and importantly, this decision would rest on a bunch of officials where the Finance Ministry (and Planning Commission) representatives would have the decisive voice. One mus t note that as per the Final Report of the EFC the revenue deficit States had projected a deficit of Rs.1,31,295 crores as the deficit in 2000-2001 only, in respect of which the EFC award gave a total Central tax devolution to the States concerned of only Rs.54,060 crores in 2000-2001, leaving a (perceived) gap of Rs.77,235 crores in just one year (vide, Annexure Tables V.1 and V.2 of the Final Report). And now, the Supplementary Report has effectively reduced the devolution (for 2000-2001 ) by up to Rs.1,523 crores, annually.

THESE recommendations raise a number of issues, the implications of some of which are disturbing. In fact, one must state here that the minute of dissent by Dr. Bagchi makes these points pointedly. The Constitution mandates the devolution of part of Cent ral revenues to States as 'automatic'; indeed, Article 275 of the Constitution mandating devolution of Central resources to Assam to cover its revenue deficit is clear on the subject. Has the situation changed now?

It is difficult to dissociate these highly questionable developments from the increasing penchant for 'centralisation' and for bureaucratic judgment taking precedence over political decision making since the early 1990s. Indeed, the entire 'economic refo rms' programme since 1992 has been driven by 'bureaucrats'; even Dr. Manmohan Singh is essentially an ex-bureaucrat who merely succumbed to World Bank pressure in the matter of the structural adjustment programme. (Indeed, he was able to disregard the In ternational Monetary Fund's stabilisation programme from 1993-94 onwards). The main architects of the structural adjustment programme in India have been diehard bureaucrats and ex-World Bank officials running the Finance Ministry.

The tendency of Central government officials to concentrate power in their hands, their penchant for knowing 'what is good for the country', their contempt for seasoned politicians who are really close to the people (and get elected repeatedly) is well k nown. The media antipathy to Bihar Chief Minister Rabri Devi, who has not had formal education, is part of that culture.

The real dangers of the supplementary recommendations of the EFC need to be summarised. This is not the first time that the Constitution has been breached, the process began in 1959 with the Centre unwarrantedly dismissing the duly elected government in Kerala and imposing President's Rule. More important, the increasing bureaucratisation of even basic policy-making has now been given a boost; increased 'centralisation' has been speeded up; and the increasing dependence of States on Central favours has been accentuated (for essentially, power vests with those who control the purse). And, even while the country is generally in a state of ferment, of popular discontent, economic policy-making in India seems to be increasingly guided by bureaucratic and e litist intellectual judgment, subserving the interests of a small section of society. Incidentally, the latest National Sample Survey (NSS) results of 1999-2000 show an average annual increase in employment by only 0.7 per cent since 1994-95, against a p opulation growth rate of 1.8 per cent; and that problem has to be faced by the State governments, not by the bureaucrats at the Centre.

There has, alas, been no debate in the country, no media attention on the Supplementary Report of the EFC. The general mood of the country is different; the focus of attention is on trivialities, on the Ram Mandir at Ayodhya, on beauty queens, on possibl e match-fixing in cricket, on financial shenanigans in Bollywood, and on the daily gyrations in the Bombay Stock Exchange. In the process, the thrust towards centralisation and the bureaucrat's penchant for "what is good for the country" appears to be on the ascendant.

Arun Ghosh has been associated with economic policy-making in India for more than two decades, including as a member of the Planning Comission.

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