The Hindu Business Line : Thirteenth Finance Commission

While the Thirteenth Finance Commission may not break new ground, it has to import a new sense of urgency and earnestness in addressing issues that have a perennial bearing on the management of the nation’s
finances, says B. S. RAGHAVAN.

State Governments and civil society groups concerned with public finance must be gearing themselves up to appear before the Thirteenth Finance Commission (TFC) and submit their proposals and demands. The Uttaranchal Government is off to a flying start with a paper setting out the issues it wants the TFC to address.

Going by views expressed by State Governments in the past, there is bound to be the familiar demand this time also for raising the vertical devolution to 50 per cent, increasing the quantum of grants-in-aid, and transferring Centrally-sponsored schemes to the States.

There are several reasons why the TFC is unlikely to break new ground. Its terms of reference are essentially no different from those of its predecessors, all of which have followed more or less on the same pattern in recommending the distribution of net proceeds of taxes in the divisible pool between Centre and States. The allocation among the States of the respective shares of such proceeds and the principles governing the sums paid as grants-in-aid and assistance to the States have also been along predictable lines.

The broad considerations the TFC is required to bear in mind while going about its task are also similar, except in a few respects. The TFC this time has been asked to take into account the measures needed “to manage ecology, environment and climate change, consistent with sustainable development”.

Reduced to specifics, this may reasonably include investments to be made for urban renewal, clearance of slums, and rehabilitation of slum-dwellers, restoration, deepening and maintenance of water bodies, protection and expansion of areas under forests, heritage conservation, wildlife preservation, pollution control, reduction of greenhouse gases and the like. They may total up to a gargantuan amount, and the TFC may have to invoke all its ingenuity to find the resources.

The Twelfth Finance Commission, headed by Dr C. Rangarajan, had made an innovative departure from the approach of the earlier Commissions by providing for Rs 1,000 crore for maintenance of forests and Rs 625 crore for heritage conservation. There is, thus, already a precedent for the TFC improve upon by bringing within the scope of the catch-all phraseology of ecology, environment and climate change, the activities enumerated earlier.

Net proceeds

The other new areas of concern to be taken note of by the TFC are the operation of the States’ Debt Consolidation and Relief Facility (introduced at the instance of the Rangarajan Commission) and arrangements and allocations for financing of disaster management with reference to the National Calamity Contingency Fund and the Calamity Relief Fund and the funds envisaged in the Disaster Management Act.

On the role they play in maintaining a stable and sustainable fiscal environment consistent with equitable growth the TFC will get plenty of guidance from the Rangarajan Commission’s report.

There are, however, two areas that need a fresh look by the TFC. The first is the likely skewing of the distribution process for want of clarity on the exact mode of computation of net proceeds of taxes and duties.

According to Article 279 of the Constitution, the term means the total collected amount reduced by the cost of collection as certified by the CAG. The Article merely says that net proceeds will be ‘ascertained’ by the CAG for the purpose of certification. It is not clear from whom he will ascertain the net proceeds and what norms, if any, he would apply for determining the cost of collection and satisfying himself that it is not excessive. The first priority of the TFC is to attend to this lacuna.

The problem in regard to distribution of net proceeds of taxes, duties, tolls and fees levied by States among the Panchayats is made worse by the fact of there being no provision corresponding to Article 279 whereby the State Finance Commissions can arrive at the exact net proceeds available for apportionment to local bodies.

This is also an omission which needs to be corrected either by a Constitutional amendment or other means to empower the Accountants-General to perform a role similar to that of the CAG for computing the net proceeds of State revenues to be included in the divisible pool for distribution to Panchayats.

Re-examining weights

The second aspect concerns the method of weightages adopted to obviate regional and sectoral balances in distribution and allocations. The Finance Commissions have had to contend with two contradictory demands from the States. On the one hand are States that are better-off, show better tax effort and manage their finances better; they naturally want to maintain the tempo of development within their States and have the Finance Commissions’ recommendations tailored to that end.

On the other are those, generally in the Hindi heartland, which are weak in all these respects, and are in a state of constant dependence on grants and reliefs recommended by Finance Commissions to make up their revenue gaps. The practice of passing on higher and higher amounts to the financially weaker States to help them catch up with the better-off States has been severely criticised as unfair and inequitable in that it punishes the better governed States and rewards inefficiency and profligacy.

To get round this dilemma, Finance Commissions have customarily taken the route of assigning relative weights, both for determining inter se sharing of taxes and for working out inter se allocation of grants. The schemes of weightages on both these counts are given in the Tables.

The weight given to population has been made meaningless by the stipulation in the terms of reference that the 1971 population should be the criterion. There can be no rationale for adopting figures that are 36 years old. Second, the modality of arriving at the precise estimate of the indices of infrastructure, decentralisation and deprivation should be set out in a transparent manner. Third, high weights should be assigned to tax effort and fiscal discipline, with a clear indication of how they are measured. Last, there should be some way of appraising the quality of governance from the trends in vital statistics, reduction of literacy and increase in per capita income.

Mopping up resources

While the TFC may not break new ground, it has to import a new sense of urgency and earnestness in addressing issues which have a perennial bearing on the management of the nation’s finances. Of these, the foremost in importance is revving up the taxation efforts of Central and State Governments to net in additional resources to improve the tax-GDP/GDSP ratio. With the phenomenal increase in the velocity, variety and volume of economic transactions as well as the number of players and stakeholders, the severe strain that competing demands will impose on Centre and States cannot be borne except by striving to the utmost to mobilise the needed resources.

Agriculture, education, health-care, and physical and social infrastructure are but a few of the obligations of good governance that cannot be neglected without causing social upheavals.

They make it compelling for the TFC to devise frameworks for raising the quality of public expenditure to obtain better outputs and outcomes, generating surpluses for capital investment and ensuring the commercial viability of irrigation projects, power projects, departmental undertakings and public sector enterprises through various means, including levy of user charges and adoption of measures to promote efficiency.

The Finance Commissions have hitherto left it to the States to formulate measures to augment their revenues to supplement the resources of the Panchayats and municipalities on the basis of the recommendations of the State Finance Commissions.

The States and panchayati raj institutions have been making the Finance Commissions their milch cows to make good their lack of effort and efficiency in mopping up resources. The TFC should not fall for this trap but lay down a tangible and viable framework and bind the States to implementing it. The TFC should take firm steps to wean States away from their habit of viewing the Finance Commissions as some kind of a kamadhenu or akshayapatram.

(Concluded)