The Hindu Business Line : Centre may take Rs 26,000-cr hit on finance panel proposals

THE Centre's finances may take a hit of around Rs 26,000 crore in the ensuing fiscal alone on account of the Union Cabinet's decision to implement in toto the Twelfth Finance Commission's (TFC) recommendations.

According to the Expenditure Secretary, Mr D. Swarup, of the Rs 26,000-crore, Rs 4,000 crore would be due to the move to transfer 30.5 per cent of the net proceeds of the Centre's taxes and duties to State Governments, against the present 29.5 per cent devolution.

The other source of revenue loss would arise from the decision to consolidate all Central loans to States contracted till March 31, 2004, and outstanding on March 31, 2005 (Rs 1,28,795 crore) and reschedule these for a fresh term of 20 years at an interest of 7.5 per cent. This would translate into a loss of about Rs 4,000 crore in interest receipts and Rs 2,500 crore - Rs 3,000 crore in repayments to the Centre.

Over and above this, the Centre would incur an additional expenditure of roughly Rs 15,000 crore as grants-in-aid to States in accordance with the Commission's recommendations. So, all put together, the Centre will have to muster additional resources of Rs 26,000 crore following its decision to accept the recommendations.

But there is a catch here. A major proposal of the TFC relates to the stipulation that any transfer from the Centre to the States henceforth (including Plan assistance) will not take the form of loans. This is against the current arrangement, where 70 per cent of the Plan assistance is given as loans and 30 per cent as grants, with the grant portion being 90 per cent for special category States.

During 2004-05, for instance, the total Central assistance to State Plans and Central & Centrally-sponsored Plan schemes is budgeted at Rs 66,161.59 crore, which includes Rs 27,250.34 crore as loans and Rs 38,911.25 crore of grants. What is being proposed now is that the Central loan component would be done away with and the States mobilise the same amount directly from the market.

To that extent, the Centre's assistance to State Plans and Central & Centrally-sponsored Plan schemes would come down by Rs 27,250.34 crore (Budget estimate for 2004-05), thereby entirely offsetting its Rs 26,000 crore additional burden on account of implementing the proposals.

Mr Swarup, however, clarified that the move to substitute Plan loans from the Centre with market borrowings was only an enabling provision. "Currently, the Centre is making available Plan loans to States at 9 per cent. If States borrow the same amount from the market, they can raise it at 6-7 per cent, depending on their individual creditworthiness. Even if half the States opt for the new scheme, the Centre would be able to reduce its Plan assistance by around Rs 13,000 crore," he said.

Even with regard to borrowings from the World Bank and other multilateral institutions, Mr Swarup said that States can now avail themselves of these funds on the originally contracted terms. This would mean that the monies from multilateral loans would not be first put into a Central pool, from which they are further lent to States in the usual 70:30 loan-grants ratio. Instead, the monies would go straight to the States in the original terms and conditions at which they were contracted.

However, he added that the foreign exchange risk on these loans would have to henceforth be borne by the States and not the Centre, though the latter would continue to provide sovereign guarantee to the institutions. "We have not decided whether to charge any separate guarantee fee," Mr Swarup said.

Central tax devolution: Advantage UP, Bihar

THE southern States, along with those having relatively low population, such as Madhya Pradesh and Orissa, may end up as losers from the Twelfth Finance Commission's recommendations accepted by the Centre.

As per the criteria for devolution of Central taxes among individual States, the Commission has recommended an increase in the relative weightage given to population to 25 per cent from 10 per cent as per the Eleventh Finance Commission's formula. This would straightaway benefit States such as Bihar and Uttar Pradesh, while penalising Kerala, Tamil Nadu, Andhra Pradesh, Orissa and Madhya Pradesh, which have managed to bring down fertility rates or have relatively lower population.

Madhya Pradesh may partially gain because of the simultaneous move to marginally raise the weightage for geographical area from 7.5 per cent to 10 per cent, though even here Uttar Pradesh stands to benefit. The highest weightage has been assigned to poverty (measures in terms of income distance) at 50 per cent, though this is lower than the Eleventh Finance Commission's 62.5 per cent level.

The only consolation for the southern States perhaps is the marginal increase in weightage for tax effort, from 5 per cent to 7.5 per cent, though the same for fiscal discipline has been retained at 7.5 per cent. The earlier index of infrastructure criteria fixed by the Eleventh Finance Commission has, on the other hand, now been dispensed with altogether.

But for States with healthy finances, there is an additional sop. For every rupee reduction in revenue deficit achieved by a State during a particular fiscal, the Centre would write-off its loans by a corresponding amount from the subsequent fiscal.

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