The Hindu Business Line : Economic rationale of Statehood for Pondicherry

File photo of Lt Governor M. M. Lakhera addressing the Pondicherry Assembly... with the Union Home Ministry and the Lt Governor wielding much power within the Union Territory, legislators feel stifled in implementing programmes.

THE Union Territory of Pondicherry (UTP) was liberated from French rule in 1954 (de facto merger) and was annexed with the Indian Union in 1962 (de jure merger). The UTP has four regions — Pondicherry (headquarters), Karaikal, Mahe and Yanam. The UTP is centrally administered by the President of India through an Administrator/Lieutenant Governor (LG) nominated by him. The LG wields more power than a State Governor, and to that extent the powers of the UTP legislature is reduced.

The legislators of the UTP says it is stifling to function in a constrained democratic framework and hence are asking for `Statehood with special status for Pondicherry'.

The UTP, being a centrally administered region, enjoys the benefits of liberal grants-in-aid and loans by the Centre. The people of the UTP believe that the high rate of economic growth and adequate provision of public utilities and infrastructure at low prices are due to liberal financial transfers by the Union, and so are opposed the grant of Statehood.

The independent authority of the Administrator of the Union Territory is the focus of all problems from the point of view of the political class. Since 1971, the Pondicherry Legislative Assembly has unanimously passed resolutions more than a dozen times, seeking the grant of Statehood with special status.

In 1995, the then Congress government in the UTP constituted a two-member committee consisting of a retired IAS officer, Mr R. S. Chari, and an economist, Mr M. Ramadass, to report mainly on the financial viability of Statehood to Pondicherry with special status.

In the report, `An Updated Viability Report on the Grant of Statehood to Pondicherry with Special Category Status', the committee validated the claim on four grounds — political, administrative, social and economic.

One, the report stated, when the Constitution of India has already taken decentralised democratic governance to the people through the 73rd and 74th Constitutional amendments, the mere aid and advisory role of the Chief Minister and his Council of Ministers in the Union Territory Administration contradicts such a rationale of democratic governance. Paradoxically, elections to the third tier of the government — local governments — have not so far been held in the UTP.

Two, as the UTP is a centrally administered region, the Union Home Ministry is directly involved in its financial and general administration and this centralisation delays decision-making and implementation of government programmes.

Three, the UTP could not pass Bills relating to affirmative action and land reforms in the Legislative Assembly because the approval from either the Administrator or the President of India was essential.

Four, the UTP is a mature economy, hence can benefit from financial autonomy if its demand is granted. The Chari-Ramadass report further noted that the UTP legislature could not design and execute economic plans and programmes as deemed fit by it without the approval of the Administrator and the Home Ministry. The report added that the legislature could not pass legislation to initiate affirmative action or design and implement large-scale infrastructure programmes such as the construction of a port, and so on. The report also acknowledged that, "The concentrated efforts of the Central and the State governments have paid rich dividends, reflecting a remarkable transition from a stagnant to a vibrant economy during the last four decades ... This remarkable development experience of Pondicherry has very few parallels in other States of India." The statistical profile of UTP shows that the economic and social development is truly remarkable.

Public finances of the UTP have been intensely deliberated ever since the issue of Statehood came up for debate in the early 1990s. The UTP does not come under the purview of the Finance Commission for allocation of a share in Central taxes and non-Plan grant. But the Home Ministry is committed to filling the entire non-Plan revenue account gap of the UTP's budget; hence, the UTP always has a balanced revenue budget unlike the State governments.

While the Planning Commission uses a pre-set formula to determine grant and loan amounts under the Plan assistance scheme for the States, there is no such agreed formula for the UTP. Since the UTP has no borrowing powers, the entire capital expenditure is funded from central loans. In 2001 a Bill to enable Union Territories to borrow as well as provide the facility of holding a `Ways And Means Account' with the Reserve Bank of India was passed by Parliament. But the Bill is yet to come into effect.

This financial regime has both positive and negative fallouts. The fact that the UTP always enjoys a balanced revenue budget is really enviable when every other State is struggling to balance the revenue budget. But there are several constraints as well. Since the Centre is committed to bridging the non-Plan revenue gap through grants and the capital account gap through loans, the UTP's budget is prepared in consultation with the Centre.

Notwithstanding the financial and administrative constraints, the legislators seem to have had their way. There is lack of research inputs for socio-economic planning in the UTP. Even periodic stock taking of economic growth in the form of economic appraisals and placing them in public domain for perusal are not being done. Hence, inappropriate policies and programmes, and lopsided growth are common in the UTP.

To overcome the problem of meagre revenue potential in the State, the politicians are asking for special status Statehood because the grant and loan components in Plan assistance is 90:10 for special category States compared 30:70 for other States. Thus, the special status would ensure large financial transfers from the Centre to State.

But the UTP administration has not yet made a strong case for conferment of special status Statehood for Pondicherry and the Centre is clear about not granting it. The Lok Sabha passed the Government of Union Territories and the Government of National Capital Territory of Delhi (Amendment) Bill, 2001 on August 27, 2001 that provided borrowing powers to the Union Territory and the National Capital Territory of Delhi. The Minister of State in the Ministry of Home Affairs, Mr Chennamaneni Vidya Sagar Rao, in his reply to the debate on the Bill, said: "So far as Pondicherry is concerned, the Pondicherry Government has already passed a Resolution in their Assembly (for conferment of Statehood). The Resolution asks for a special status.

The Planning Commission has not agreed to the provision for grant of special status for Pondicherry. The Government of Pondicherry was asked to send a special report on this special status, which was sought by the Pondicherry Legislative Assembly. After getting their views a decision would be taken." It seems the UTP administration has not sent any such report. The UTP is neither a hilly terrain with a backward economy nor a strategically important place with internal disturbance to be granted special status Statehood.

However, the UTP deserves special status Statehood for the following reasons:

Its revenue potential is very low in the emerging scenario of harmonisation of sub-central taxation in the Indian Union. Though it has a very high per capita income, much of the State Domestic Product flows from the public sector. The size of the public sector has been shrinking since the 1991. Its high percentage of people living below poverty line and skewed distribution of income leave very little revenue potential to be tapped.

The openness of its economy facilitates tremendous spill-over of benefits of the public expenditure of the UTP on to other States. The four regions of the UTP are closely related to the economies of the States in which each of them is situated. The document, `Pondicherry Vision 2020', prepared by the Madras School of Economics, Chennai, for the UTP administration notes, "The Pondicherry economy can be characterised as an `open' economy with flows of virtually all factors of production including natural resource, labour, capital and technology. Land and water management in Tamil Nadu affect Pondicherry and Karaikal. Karaikal is located in the delta of the Cauvery, and is directly dependent on the flows in the Cauvery. Similarly, both surface and ground water use in the proximity of Pondicherry would affect availability. Agriculture and land use cannot be conceived in isolation from the adjoining areas of Tamil Nadu, Kerala and Andhra Pradesh. A very mobile factor of production is labour which moves freely between the adjoining States and the administrative units of the Union Territory depending on the availability of employment, both seasonal and permanent."

The high enrolment in schools and colleges and the crowded hospitals in the UTP show that there is a substantial spill-over of benefits of public expenditure on to neighbouring States. If this spill over is large, then it will be neither motivated to nor capable of providing the optimum level of public expenditure.

As such the public expenditure to the UTP should be higher to compensate for the spill over benefits accruing to non-residents of that State. Though this is one of the primary principles of federal transfer, the Finance Commission does not consider the spill over of public expenditure while determining the share of a State in central taxes and for determining the quantum of non-plan grant.

Formulas for determination of Union financial transfers to States use the population figures of 1971 because there is a consensus that States that controlled population after 1971 should not lose out to those that did not.

Fair enough, but the population growth in the UTP is mainly due to migration (birth rate in the UTP is among the lowest in the country and the population growth cannot be entirely attributed to its low death rate).

The four regions of the UTP are not surrounded by developed districts of the southern States and thus the substantial migration.

This necessitates a high proportion of public expenditure on public utilities in these regions. Population is an important measure for the quantum of public expenditure needed in a region; Pondicherry will be affected if the population figure of 1971 is used in the formula for determination of financial transfers.

As the revenue potential of the UTP is low and its expenditure high, there is a need for larger financial transfers to the State; but the agencies of financial transfers such as the Finance Commission and the Planning Commission do not include variables that reflect the true fiscal nature of the State.

Moreover, inclusion of variables like the inverse of per capita income with larger weightage, and variables indicating tax-effort (tax-SDP ratio) and fiscal efficiency (tax-expenditure ratio) in the formula of the determination of financial transfers would largely reduce the quantum of financial transfer to the UTP.

Therefore, to overcome the problem of fiscal imbalance in Pondicherry, it should be classified as a `special category State' in order to ensure larger financial transfers.

Of course, the usual caveats apply. The aggravating fiscal stress in all States, including special category States, is a reminder to the rulers of Pondicherry that prudent fiscal management is essential. Civil society participation in budget making and public administration will enhance transparency in public administration and promote balanced regional development.

(The authors are with Government Arts College, Villupuram, and the Institute for Development Alternatives, Chennai, respectively. Feedback may be sent to sri_ni@vsnl.net.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Ploughing ahead at the WTO

Afghanistan — Project Rebuilding

Economic rationale of Statehood for Pondicherry

Alternative medicine

Avoidance of double taxation can't do away with taxation altogether

Cash transaction tax — the world view

Priority for the small entrepreneur

US arms sale