A conclave of eight

The financial devolution formula proposed by the Eleventh Finance Commission creates disquiet among some States, leading to strains in the fabric of federal relations and, in the more immediate context, political strains in the ruling coalition at the Centre.

TO some people, it appeared to be a perfectly reasonable reaction. A responsible politician sees a premium being placed on administrative indiscipline and decides to blow the whistle. However, in the perception of certain others, the putative "revolt of the provinces" led by Andhra Pradesh Chief Minister N. Chandrababu Naidu, looks suspiciously akin to the secession of the successful.

Chandrababu Naidu, the Telugu Desam Party (TDP) supremo, thinks that the financial devolution formula proposed by the Eleventh Finance Commission (EFC) is inattentive to the interests of States that have improved their economic performance in recent time s. What is worse, it actually rewards the State administrations that have, despite the manifest urgency of the task, done little to mobilise resources and augment the provision of social services. The EFC norms, in other words, tended to reward inefficie ncy and perpetuate a culture of dependence.

The ideological twist that Chandrababu Naidu imparted to his plank is of course a matter of debatable merit. But the plain fact is that the EFC recommendations have effected a change in the share of various States in the total pool of resources devolved from the Centre. This has been on account of an alteration in the criteria of devolution. The relative weights assigned to the traditional criteria in judging a State's share - population, area, per capita income, tax effort and infrastructural endowment s - have all been revised to accommodate a new factor, unique to the EFC's terms of reference. And that factor is fiscal discipline. This new criterion is quantified by the degree to which the State has managed to improve its capacity to meet revenue exp enses through its own sources, over, broadly speaking, the past decade. And the EFC obviously sets great store by this criterion, since it is accorded a weightage of 7.5 per cent - marginally below the 10 per cent assigned population - at the very moment of its entry into the devolution calculus.

It is an unintended irony of Chandrababu Naidu's crusade against the EFC recommendations that Andhra Pradesh rates a negative performance index on the fiscal discipline criterion. Far from being penalised for efficiency, Andhra Pradesh suffers for failin g to improve its fiscal parameters over the last decade of economic reform. Certain other factors have also influenced the final outcome of the EFC's recommendations vis-a-vis Andhra Pradesh. Notable among these are the downward revision of the we ight assigned to the population criterion. Again, Andhra Pradesh has been in the league of the high-population-growth States. But by freezing the figures used to estimate devolution at the 1971 Census, successive Finance Commissions have sought to remove any residual incentive that a State may have to disregard the population control imperative.

Finally, Andhra Pradesh has suffered from the reduction of the weight accorded to the tax effort criterion, since at 5.45 per cent its ratio of tax revenue to gross state domestic product (GSDP) is above the national average. But this factor is obviousl y not related to performance and is more likely to be the outcome of historical factors. If compared to the figures returned by the other three southern States, Andhra Pradesh's tax effort would seem rather modest - Karnataka, Kerala and Tamil Nadu all h ave tax-GSDP ratios in excess of 8 per cent.

That Andhra Pradesh's share in the total tax devolution package has fallen is indubitable. But it is not clear whether this has been on account of its efficiency. Rather, the evidence seems to indicate that the decline in its relative share is almost ent irely because it has slipped on the fiscal performance criterion and has done very little of note in terms of tax effort. Chandrababu Naidu's plaint that efficiency is being penalised has an attractive ring about it. But its basis in reality may be rathe r flimsy.

There are certain other curiosities about the final outcome of the EFC recommendations. West Bengal, for instance, clearly loses out by the reduction of the weightage for population and the introduction of the fiscal discipline criterion. But in the net, its share in total tax devolution has gone up from 6.61 per cent under the Tenth Finance Commission to 8.10 per cent under the EFC formula. This could only be on account of relatively poorer infrastructural endowments and low per capita income.

Among the biggest gainers are Uttar Pradesh and Bihar. The former's share in the total tax devolution has gone up from 15.95 per cent to 18.05 per cent, and the latter's from 10.88 per cent to 13.04 per cent. These magnitudes of gain are mirrored by the losses suffered by Maharashtra and Gujarat, and to a lesser degree, by Kerala and Tamil Nadu.

Chandrababu Naidu's job in organising a meeting of aggrieved Chief Ministers was relatively easy in this respect. Representatives were invited from all the States that had suffered a dimunition in their total share in the pool of devolved resources. This included two States ruled by the Bharatiya Janata Party - Gujarat and Himachal Pradesh. While the latter State was indifferent, Gujarat seemed strongly inclined to join the conclave to register its protest at the new devolution norms. Chief Minister Kes hubhai Patel was finally deterred by the prospect of incurring the displeasure of his party's bosses in Delhi. But he did send a bureaucrat to sit in on the meeting and assess the options that were open.

Apart from Andhra Pradesh, the States that were finally represented at the chief ministerial level were Assam, Haryana, Kerala, Manipur and Punjab. Tamil Nadu and Maharashtra sent ministerial representatives.

As he went into his conclave, Chandrababu Naidu was insistent that the meeting was meant purely to discuss economic matters, independent of the diverse political agendas that its participants may have. The memorandum that was drafted and submitted to Pri me Minister A.B. Vajpayee after the meeting urged immediate attention to ten points. Notable among these was the demand that the ceiling imposed on devolution (as both share in taxes and grants) be waived. The figure of 37.5 per cent of total resources should be treated as a minimum rather than a maximum, resolved the conclave of States.

Another problem area was the total statutory transfer of resources from the Centre to the States, which was fixed at 29.5 per cent of available resources by the EFC. The conclave urged that this be enhanced to at least 33.5 per cent.

A large part of the domain of successive Finance Commissions has been what is called the "gap-filling" process. After all the statutory transfers have been effected to the States, it recommends a further series of grants to redress the revenue account de ficit that certain States may suffer. The conclave of eight States in Delhi has now proposed that these revenue-deficit grants be restricted to only the special category States. Where all other States were concerned, the quantum of resources earmarked fo r revenue deficit grants should be absorbed into the shareable pool and divided accordingly.

A crucial suggestion relates to the benchmark year chosen for assessing income disparities between States. The "conclave of eight" proposed that 1991 be utilised as the reference year. This would mean that the highly differentiated response of the variou s States to the fiscal regime that was introduced that year would be kept out of the calculation. States such as Bihar, Orissa and Uttar Pradesh, which have fallen further behind the national average since the policy changes that were effected in 1991, w ould then be compelled to deal with the consequences through their own devices and resources.

CLEARLY, the initiative of the eight States has given rise to some disquiet among the others. Bihar's chief ministerial spouse Laloo Prasad Yadav has been among the most outspoken among them. Fresh from a skirmish with Chandrababu Naidu over what he cons iders the illusory benefits of the information technology sector, Laloo Prasad derided the initiative of the "computer-wallah" Chief Minister and threatened to begin his own rival mobilisation of the backward States.

For now, the tension has been defused by the Prime Minister's assurance that all the grievances placed before him will be given due attention when the EFC submits its second report early in September. Chandrababu Naidu has accepted this as a reasonable e xpression of good faith, though he did assert on the floor of the Andhra Pradesh Legislative Assembly that the matter was far from closed.

Once the inflated claims of efficiency are discounted, the concerns of Chandrababu Naidu and his fellow Chief Ministers would seem more comprehensible. None of the eight States that participated in the conclave can boast of a comfortable fiscal situation . At the same time, the pressure for providing higher levels of fulfilment in the basic social services is mounting. In this context, no State would like to see a reduction in its entitlement of funds devolution.

In this context, the proposal made by Amaresh Bagchi, a distinguished economist and member of the EFC, is especially contentious. In a note appended to the first report, Bagchi has argued that the basic objective of fiscal transfers in a federal polity i s to achieve the equalisation of revenue capacity among the constituent units and, correspondingly, to provide for equal levels of fulfilment of basic social needs across the country. Since statutory transfers had failed to achieve this goal, there was a case, he argued, for reducing "the share of tax devolution in the total statutory transfers" and "to allow more room for the deficit grants or to supplement the revenue deficit grants through equalisation grants to narrow the gaps in the revenue capacit y of the States in providing at least some of the basic public services like elementary education, primary health, water supply and sanitation".

The potential implications of this proposal are that the States that are better served by social infrastructure should either lower their standards or stand still while the States with poorer standards catch up. In other words, there is an argument withi n the EFC that advocates precisely the opposite course of action that the conclave of eight has urged. Reconciling these opposing views is the crux of the problem of achieving equity with efficiency, that the Finance Commission is tasked with. On current reckoning, it is a task that is only likely to engender further strains in the fabric of federal relations.