The Hindu Business Line : Thirteenth Finance Commission

The task of devising a harmonious framework of Centre-State financial relations is bound to lead to overlap and duplication. It is essential that the Thirteenth Finance Commission, the Second Commission on Centre-State Relations and the Sixth Central Pay Commission , being simultaneously at work, have joint sittings to iron out divergences, if any, says

Perhaps for the first time since Independence, the country is facing the novel situation of three Central Commissions — the Thirteenth Finance Commission (TFC), the Second Commission on Centre-State Relations (CCSR) and the Sixth Central Pay Commission (CPC) — being simultaneously at work.

There has obviously been lack of coordination among the respective Ministries in framing the terms of reference of the Commissions. The CCSR has been asked to take account of the impact of the recommendations made by as many as five (8th to 12th) Finance Commissions on the fiscal relations between the Centre and the States, in the disturbing context of increasingly greater dependence of the States on devolution of funds from the Centre. It is also required to go into the need and relevance of separate taxes on the production and sales of goods and services subsequent to the introduction of Value-Added Tax regime.

The task of devising a harmonious framework of Centre-State financial relations on the above lines is bound to lead to overlap and duplication, if not the possibility of mutually contradictory stand being taken by the TFC and CCSR. Likewise, the CPC, which would be under severe pressure from vociferous unions/associations of employees, may, if past experience is any guide, take the line of least resistance and, in the process, undercut the assumptions and estimates of both TFC and CCSR.

Monitoring mechanism

For this reason, it is essential that the TFC, CCSR and CPC have joint sittings at the concluding stages of their deliberations to iron out divergences, if any. Even so, their recommendations will need to be subjected to a close and careful three-tier scrutiny, first, by an Empowered Committee of Secretaries for removing any anomalies, next by a Group of Ministers from the larger perspectives of prudent management of the nation’s finances without creating regional and sectoral imbalances, and finally by the Cabinet before it puts its seal of approval.

The past practice of such Commissions has been to consider their duty done once they submitted their report. The Twelfth Finance Commission, under the chairmanship of Dr C. Rangarajan, broke with this passive tradition and urged the setting up of a high-level monitoring mechanism in every State headed by the Chief Secretary and comprising the Finance Secretary and Secretaries/Heads of Departments as Members to lay down at the beginning of each year financial and physical targets with definite time frames to achieve specific milestones for ensuring proper utilisation of the grants. The Commission also stipulated that the committee should meet at least once in every quarter to review the progress and issue directions for mid-course corrections.

It is not enough to keep a watch over the mode of utilisation of grants by States. The entire mindset of the parties and alliances ruling the States needs to be attuned to the spirit of mutually cooperative and supportive fiscal federalism. States should check their tendency to squander away thousands of crores of rupees of precious resources on freebies and seek to plug the gap by unconscionably heavy borrowings in the hope of being bailed out by the Centre. The States must realise that they bear an equal, if not greater, responsibility to augment their revenues and avoid infructuous expenditure. The axe should mercilessly fall on unjustifiably high expenditures incurred by the State Governments and their agencies on salaries and perks of employees without establishing correlation with norms of performance.

Economy in expenditure

The Twelfth Finance Commission could only be said to have let off the Centre lightly, without insisting on any monitoring and review mechanism and without binding the Government to any parameters of revenue mobilisation or expenditure control. This is strange because, actually, it is the Centre that should be called upon to set an example in whatever it preaches to State governments. Far from living up to that obligation, it has been giving an impression of adopting a business-as-usual attitude.

For one thing, the people are in the dark about the concrete steps the Centre has taken to effect economy in expenditure, especially in the matter of enforcing norms of productivity for the government and public sector staff and implementing the recommendations of the K. P. Geethakrishnan Commission for rightsizing the departments.

For another, the Centre has been putting off making an appraisal of the justification for, and quantum of, subsidies and has not so far acted in any definitive manner on its commitment to limit them to the poor and vulnerable sections of the population. The Centre must realise that its admonitions and exhortations to the States will not cut ice unless there is demonstrable evidence of its own sense of accountability and fiscal responsibility.

In the absence of a report of action taken on the salient recommendations of the earlier Commissions, the elected representatives as also the people at large have no means of knowing to what extent the Centre has taken its own responsibilities seriously. The result is that many questions arising out of previous reports are without answers. A sampler: How far has the Government moved towards adopting accrual basis of accounting? Has it done anything to standardise the definitions of revenue and fiscal deficits and issue instructions for a uniform classification code down to the object head? What progress has been made in setting up a National Institute of Public Financial Accountants and finalising its charter in consultation with the CAG?

Vitiating factors

Unfortunately, the functioning of the Finance Commissions suffers from two major handicaps. The first is the absence of a permanent secretariat with cells for collection and maintenance of databases and for undertaking research studies on issues coming within the purview of the Commissions. Recommendation to this effect had been made in the reports of one or the other Commission in the past but with no perceptible follow-up other than a 50-page long note written in the Finance Ministry containing an academic discussion of the ramifications and implications.

The Eleventh Finance Commission had earmarked more than Rs 10,000 crore for creation and computerisation of databases at the district, State and central levels on the finances of local bodies and accounts of village and intermediate-level panchayats and the CAG was made responsible for prescribing the necessary formats for the compilation of data. Again, a shadow has fallen between intention and execution.

Yet another vitiating factor is the absence of an independent institutional arrangement for the evaluation of the fiscal performance of the Centre and the States against targets/norms prescribed by the Finance Commissions and for monitoring the implementation of the recommendations, especially those relating to matters other than devolution and grants-in-aid.

Indeed, it can be argued that the nodal ministry/department for dealing with the Finance Commission matters should not be the Ministry of Finance, but the Cabinet secretariat or the Inter-State Council. The States are also strongly of the view that they should be effectively consulted in the drafting of the terms of reference of the Finance Commission. Whether this has been done for the current Commission is not known.

The new Finance and Pay Commissions should make their recommendations conditional upon effective action taken in all the above respects, laying particular emphasis on efficient performance whereby output matches outlays, execution of projects is undertaken and completed without cost and time overruns, surplus staff is phased out, waste and extravagance are eliminated, and commensurate user charges are levied to meet the expenditure on services provided by the Centre and States.

(To be concluded)

B. S. RAGHAVAN.

More Stories on : Policy | Financial Policy

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

Stories in this Section
Coal comfort

Thirteenth Finance Commission — Overcoming operational hurdles

Pakistan: A mandate against dictatorship

Have mercy on politicians

Rail Budget and the aam aadmi

Welcome to the business of cricket

Support to SMEs

Farm issues