The Hindu Business Line : `Fiscal transfers to local govts not healthy'

Even as the coalition experiment in governance is a decade-old one in India with the demise of a single-party government in the mid-1990s, the fiscal federalism remains under siege with conflicting developments in inter-governmental transfers of resources between the Centre and the States coming to the fore that cry for early resolution.

This is the point of a half-day workshop on "Federalism in a Globalising Environment", organised here by the National Institute of Public Finance and Policy (NIPFP) in collaboration with the Forum of Federations.

A presentation by Mr Ehtisham Ahmad of the International Monetary Fund (IMF) dealt with issues of globalisation and its impact on inter-governmental fiscal relations in relation to the African countries of Ghana and Ethiopia. Dr M. Govinda Rao, Director, NIPFP, and Member, Economic Advisory Council to the Prime Minister, made a presentation concerning the impact of globalisation on Indian fiscal federalism.

In his presentation, Dr Rao regretted that the record of fiscal transfers from the State to local governments is anything but healthy.

Even as each State is required to appoint the State Finance Commission (SFC) every five years to make the requisite recommendations on the transfers to be made to urban and rural local bodies, some States are yet to constitute an SFC even after a decade of giving constitutional recognition to local bodies.

In some States, SFCs are yet to submit reports, and in many where it has been submitted, the State governments have not accepted the recommendations. Dr Rao said that "very little has been done to assign productive revenue sources and build capacity to raise revenues".

Inter-state inequalities

Dr Rao added that while in the aftermath of economic reforms there has been a significant acceleration in economic growth, there has been significant increase in inter-State inequalities too.

Equally marked, he said, are the resource distortions caused by restrictions placed on the free movement of goods and factors. Hence, ensuring a nationwide common market is an important aim of fiscal federalism and with transition to market from centralised planning, this is an important reform that has to be set off, he said.

Referring to globalisation and fiscal federalism, he contended that liberalisation of international trade and flow of global capital impact adversely on the fiscal system of the States, warranting a host of initiatives.

Public-pvt partnerships

Given the predominance of States in providing social services and co-equal role in providing physical infrastructure, setting a level-playing filed in terms of competitiveness to domestic manufacturers demands huge investments.

He said that as the extant fiscal situation constrains this, the only feasible alternative is to forge private-public partnerships which requires significant changes in not only policies but also in setting up entire edifice of regulatory system.

As the levy of goods and services tax at the central level with separate Central and State components worked out does not seem feasible in the medium-term, Dr Rao unveiled a feasible solution: to allow for dual value-added tax (VAT) — the central VAT on goods and services up to the manufacturing stage and the State VAT up to the retail stage.

This would also call for reassigning the taxation of services — to enable the States to levy the destination-based retail VAT on goods and services. Though there are problems of assigning services with inter-State scope to States, solution for this has to be found, as also to the issue of phasing out the taxes on inter-State sale without which VAT cannot acquire the character of destination-based.

According to Dr Rao, ultimately if cooperative federalism is to thrive, institutions such as the National Development Council (NDC) and the Inter-State Council should be rendered more effective to ensure greater cooperation among governmental units.

This is more important, Dr Rao felt, as the issue of resolving inter-State conflicts will intensify with the phasing out of the inter-State sales tax and the advent of the system to relieve the tax paid at the State of origin as goods are taken to the destination State.

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