For a fair share

States aspire for more powers and, in a significant move, present a joint memorandum to the Thirteenth Finance Commission.

in New Delhi

A MILESTONE in the evolution of Indias federal relations passed recently without much media attention. On September 16, all State governments came together to present a joint memorandum to the Thirteenth Finance Commission (TFC) regarding Centre-State financial relations. Asim Dasgupta, West Bengal Finance Minister and Chairman of the Empowered Committee of State Finance Ministers, presented it to the TFC on behalf of the State Finance Ministers.

This is the first time that all States have come together to make common demands to the Centre with a view to correcting the imbalances in the Centre-State financial relations. The convention so far has been for each State to present its memorandum individually to the Commission. This time, however, the States felt that it would be worthwhile for them to discuss the common problems collectively and present their views to the TFC. Thereafter, they agreed to submit their separate memoranda too, focussing on their common as well as special problems.

The Constitution of India is described as federal in form but unitary in character. Centrifugal tendencies in the immediate aftermath of Independence led the Constitution-makers to strengthen uniformity at the cost of diversity and to emphasise the need for a strong Centre. However, the centrifugal tendencies remained even after many years, though in a subdued form, in large parts of the country. Developmental imbalances across the country and feelings of neglect by the Centre contributed to a growing sense of alienation among the units of the federation. This, in turn, led to the realisation that a strong Centre required strong States too as only autonomous States with equal resources and powers could counter divisive forces and strengthen the Union.

Thus, in the history of Centre-State relations since Independence, the Srinagar Conclave in 1983 marked an important phase. It brought together parties such as the Dravida Munnetra Kazhagam (DMK), the Telugu Desam Party (TDP), the Akali Dal, the Republican Party of India, the Assom Jatiyabadi Dal and the Jammu and Kashmir National Conference along with the Left parties to seek greater federal autonomy. The Sarkaria Commission report on Centre-State relations, submitted in 1988, was another milestone.

It is in this context that the common memorandum assumes significance. It is divided into three sections: pre-existing common problems in Centre-State financial relations; the recent aggravation of these problems; and the urgent need for a change. The memorandum said there was gross inadequacy of resources in the States in relation to their development needs as the more important powers of revenue sharing remained with the Centre. These powers pertain to income tax, corporate tax, Union excise duties, customs, service tax, and so on.

Citing the Reserve Bank of Indias data for 2004-05, it explained that the annual developmental expenditure of the States (Rs.3.62 lakh crore) was more than one and a half times that of the Centre (Rs.2.33 lakh crore). On the other hand, the Central government raised 62 per cent of the total revenue collected in 2005-06 and all the States together raised the rest.

The memorandum deplored the fact that there had not been any matching transfer of resources from the Centre to the States in terms of devolution of Central taxes and grants as envisaged in Article 275 of the Constitution and as included in the terms of reference of successive Finance Commissions. It, therefore, urged the TFC to enhance the States share of Central taxes from the present 30.5 per cent to at least 50 per cent, including all gross Central tax revenue and all Central surcharges and cess in the divisible pool.

It also estimated that while in the 1950s the shares of the States and the Centre in the total governmental market borrowings were approximately in the ratio 50:50, the ration was now 20:80. The States demanded that their share of market borrowings be increased from 20 per cent to 33.3 per cent immediately and then steadily to 50 per cent within a period of five years, depending upon their perceived needs. The States should be given the option to access market borrowing, often as the cheapest source of borrowing, and should also be allowed the option to issue tax-free bonds, the memorandum demanded.

Noting that the Centre had appropriated the entire power of levy of service taxation, the States suggested that, in the interest of fairness, they might be given the concurrent powers of taxation of all services.

The States complained that the Centres decision on the recommendations of the Fifth Central Pay Commission regarding pay revision had resulted in a financial crisis. They recalled that at the National Development Council meeting on February 19, 1999, the Chief Ministers and Finance Ministers of all States had unanimously demanded that the Centre should bear at least 50 per cent of the additional financial burden of the States owing to the pay revision. But the Centre did not actually provide any assistance as promised, the memorandum said.

With the Centre deciding to implement the recommendations of the Sixth Central Pay Commission, the States now apprehend that they may be forced to take certain decisions on the pay structure of their employees and this would have serious financial implications.

The TFCs terms of reference mandate it to consider only the States expenditure on the non-salary component of maintenance and upkeep of capital assets, and non-wage related maintenance expenditure on plan schemes. But there is no similar restriction on considering the expenditure of the Central government. Therefore, the States feel that their demand that the Central government should bear at least 50 per cent of their additional burden owing to the pay revision 100 per cent of such burden for special category and north-eastern States is fully justified.

The States appealed to the TFC to rise above the dictated terms of reference and uphold its constitutional position of a neutral arbiter, and justly consider the States total expenditure on civil administration and committed expenditure by taking into account fully the assessed additional burden of pay revision.

The States protested against the debt relief package of the Twelfth Finance Commission as it was tied up with the enactment by the States of the Fiscal Responsibility and Budget Management (FRBM) Act, which requires them to effect annual reduction targets of revenue deficit and fiscal deficit with the total elimination of the revenue deficit by 2008-09.

They observed that achieving mechanically the targets of the FRBM Act might lead to a general curtailment of development expenditure and efforts to decentralise development grants through panchayats and municipalities.

The States are also concerned about the inclusion, for the first time in the history of Finance Commissions, of the Gross Budgetary Support as committed expenditure of the Central government in Terms of Reference 6(ii) of the TFC.

The memorandum noted with concern the proliferation of Centrally sponsored schemes (CSS) in the sphere of State subjects, and said that if at all a CSS was retained, the fund in that scheme should be transferred to the Consolidated Funds of the States and not placed with any other agency bypassing the States.

This common presentation by the States before the TFC comes at a time when the work of the Commission on Centre-State relations, set up by the Centre in April 2007 with former Chief Justice of India M.M. Punchhi as its chairperson, is on. The commission, which is expected to submit its report in April 2009, has sent a detailed questionnaire to all political parties, seeking responses on several aspects of Centre-State relations.

Of these parties, only the Communist Party of India (Marxist) has made its response to the questionnaire public. The party has also brought out an Approach Paper on Restructuring Centre-State Relations, which has been adopted by the partys Central Committee at its October 12-14 meeting in Kolkata. The issues raised by all the States in their joint memorandum to the TFC find their echo in this Approach Paper as well as in the partys response to the commissions questionnaire.

The Approach Paper has a separate section on issues in the administrative and legislative spheres. To prevent the misuse of Articles 356 and 355 of the Constitution, which enable Central intervention in States on the grounds of breakdown of constitutional machinery, the party seeks to amend it. The CPI(M) supports the demand to restrict the use of Articles 355 and 356 to cases where there is a serious threat to national unity or an assault on the secular fabric of the country, apart from external aggression.

The party finds unacceptable the proposal for Central deployment of paramilitary forces in a State in a situation that the Centre considers as internal disturbance, without the States concurrence. The term internal disturbance in Article 355, the party noted, was related to public order, which is the first entry in the State List.

If the post of Governor has to be retained, then the Governor should be appointed by the President from a list of three eminent persons suggested by the Chief Minister, satisfying the criteria mentioned by the Sarkaria Commission, the party observed. It also sought a time limit with regard to the Governors/Presidents assent to Bills passed by the State Assemblies.

The Approach Paper proposed an explicit norm debarring Governors from publicly expressing disagreements or differences with the State government. The party also sought a review of whether Governors should become ex-officio Chancellors of State universities.

The CPI(M) has supported the States demand to place residuary powers of legislation in the State List and suggested a formal institutional structure requiring mandatory consultation between the Centre and the States in areas of legislation under the Concurrent List.

It has suggested the amendment of the Constitution to make legislative sanction mandatory for any international treaty and where treaties have serious implications for the States, especially with respect to State subjects like agriculture, mandatory consultation with the States and concurrence of the Inter-State Council.

The CPI(M) has explained that in the post-liberalisation situation, new issues have come to the fore. Various tax concessions, especially the one on corporate taxes, not only cause enormous revenue loss but also distort the patterns of investment and growth and aggravate regional imbalances, the Approach Paper pointed out.

Making the decisions of the Inter-State Council which will be the supreme body to decide all major Centre-State issues binding on the Centre through a constitutional amendment and granting constitutional status to the National Development Council are other reforms that the Approach Paper has suggested.

As and when the responses of parties other than the CPI(M) to the commissions questionnaire become public, it will be possible to understand whether there is a political consensus on the approach to various issues of Centre-State relations.