People's Democracy

THE Eleventh Finance Commission was constituted by a Presidential order on July 3, 1998, to give recommendations on financial devolution from the centre to the states for the period 2000-5. On January 15, 2000, it submitted an interim report for making provisional arrangements for 2000-1. On July 7, 2000, it submitted its final report covering all aspects of its original mandate. Intriguingly, however, on April 28, 2000, there was another Presidential order which suggested some additional terms of reference to the Commission that had already virtually completed its work! And these terms of reference were even more intriguing. The Commission was to "draw a monitorable fiscal reforms programme aimed at reduction of revenue deficit of the state (sic!) and recommend the manner in which grants to states to cover the assessed deficit in their Non-plan Revenue account may be linked to progress in implementing this programme" (emphasis added).

There were two obvious oddities about these additional terms of reference, quite apart from the fact they were issued at all and issued when they were. First, they emphasise the need for a reduction of the revenue deficits only of the states. Implicit in the additional terms of reference in other words is the suggestion that fiscal profligacy and fiscal irresponsibility are features exclusively of the state governments, while the central government is free of these sins. Secondly, in explicitly suggesting a linking of grants to the implementation of a fiscal reforms programme, the Presidential order asked in effect that grants be made "conditional". Now, Article 275 of the constitution, which deals with grants-in-aid, does not provide for such "conditionalities". The Article does refer to grants as "sums" that "parliament may by law provide", which suggests an over-riding role for the parliament, but it is explicit that the provisions have to be made on the basis of the "need of assistance". Parliament laying down "conditionalities" overriding the "need of assistance" criterion is not sanctioned by the constitution. What is more, introducing "conditionalities" in the grant of central assistance to states is quite obviously treating the latter not on an equal footing but as mendicants, exactly the same way that the World Bank and the IMF which lay down "conditionalities" for borrowing third world countries do.

The Presidential order of April 28 suggesting additional terms of reference for the Finance Commission (FC) was thus against the letter and the spirit of the constitution; and it indubitably was against the spirit of federalism. The BJP government, with its inherent authoritarianism, was eroding the federal nature of our polity by laying down these additional terms of reference; and, most unfortunately for the country, President Narayanan in this instance chose to sign on the dotted line.

Even so, damage could have been avoided if the Eleventh Finance Commission had chosen the straight and narrow path of rectitude, had stuck to its constitutional duty, and had refused to go along with this authoritarian attack on the federal nature of our polity. Unfortunately, with the notable, and praiseworthy, exception of Dr Amaresh Bagchi who gave a dissenting note critical of this entire move, the rest of the Commission chose to toe the line. It submitted a report to the President on August 30, 2000, on these additional terms of reference, which amounts to a veritable assault on the federal structure of our polity.

There are five main recommendations made in this report.

First, 15 per cent of the revenue deficit grants recommended by the FC in its original report should be withheld, and its release made conditional, for any particular state, upon the progress achieved by it in the implementation of a fiscal reform programme.

Secondly, this progress should be monitored on the basis of five indicators or performance criteria, which should have weights adding up to 100, so that each state each year gets marks out of 100 for its performance. These criteria are: growth of tax revenue, growth of non-tax revenue, growth of salaries and allowances, growth of interest payments, and progress in the reduction in subsidies (all subsidies, except those given under a programme sponsored or approved by the central government, are supposed to be brought down to zero level in ten years!).

Thirdly, the withheld amount from the states which would come to Rs 5303.86 crore over the five year period, together with a matching grant from the centre, would constitute an Incentive Fund. The centre's contribution would be distributed among states on the twin criteria of population and performance indicators. (For instance if all states satisfied performance criteria, then the distribution would be entirely on the basis of population). If some state has not satisfied its performance criteria after four years, then its withheld amount as well as what it could have got from the central contribution of Rs 5303.86 crore would be distributed among the "performing" states in the fifth year.

Fourthly, for monitoring the prgress of states in fulfilling these performance criteria, a monitoring agency should be "appointed by the government of India, which may include, among others, representatives of Planning Commission, finance ministry of government of India and representatives of the state government for which the programme is being worked out" (emphasis added).

Finally, the next Finance Commission, which should be in position in 2002 should "be entrusted the task to review the monitorable fiscal reforms programme of each state, and the releases of grants-in-aid/incentives made thereunder be made a specific term" (of reference).

These recommendations strike at the very root of our federal structure, ushering in an authoritarian centralism in financial matters; they violate the spirit of our constitution; in addition they are unreasonable, illogical, and unfair and discriminatory. These charges are not mere hyperbole; let us substantiate them seriatim.

Let us take the first charge. A monitorable fiscal reforms programme is to be implemented by the states. But the monitoring agency is to be set up by the government of India! Not by the Inter-State Council, nor the National Development Council, nor some specifically-constituted body like a council of finance ministers of the centre and the states, nor any other body where both the centre and the states are represented.

The monitoring agency is not only to be set up by the centre, but is going to be a completely bilateral affair. There would be a separate agency for Kerala, a separate one for West Bengal, a separate one for Karnataka, and so on. In each of these agencies clearly the central members would dominate; after all it is not the centre's performance that is being evaluated but that of the state, it is not the centre's grant that is being held up but that of the state. The central members in short would be like imperial envoys visiting state capitals (or summoning state representatives to the national capital) to decide how much a particular state should get. Till now the complaint of the states had been that a substantial part of the financial devolution from the centre to the states had been through departmental agencies of the central government like the Finance Ministry and the Planning Commission rather than through a constitutional body like the Finance Commission. Now, for the first time we have this constitutional body itself enlarging the authority of the departmental agencies. They would decide if Kerala can give a subsidy to the poor; they would decide what power tariff West Bengal can charge its peasants; they would decide what salaries Tamilnadu can give its employees, and so on.

But that is not all. Monitoring progress in terms of performance criteria must necessarily entail a degree of discretion. Indeed the report talks repeatedly of the need for "suitable adjustments" to be made in evaluating a state's performance to take account of extenuating circumstances. The exercise of this discretion gives a degree of latitude to the centre for penalising Opposition-ruled states, for offering politically-motivated blandishments, and for resorting to all kinds of wheeling-dealing. Not even Indira Gandhi at the height of her pre-Emergency powers could have dreamt of acquiring the arsenal of weapons which the Finance Commission has handed over on a platter to the central government, which in effect means the BJP government. It is not surprising that the only state that fully endorsed the additional terms of reference and the imposition of "conditionalities" in the release of grants-in-aid was BJP-ruled Gujarat, which unquestionably has the most socially reactionary state government in the country.

Let us now move to the question of constitutional propriety. The un-constitutional nature of the move to introduce "conditionalities" into the release of grants-in-aid has already been commented upon. But there are even deeper issues. Who is the Finance Commission to say whether West Bengal should give a subsidy or not, whether Kerala should make education free or not? No doubt, as a constitutional body adjudicating on the devolution of finances, it cannot be given a fait accompli by the state governments. They cannot just run deficits and then expect the Finance Commission to provide grants-in-aid to cover them. The Finance Commission therefore would be within its jurisdiction to say that if certain kinds of expenditures are undertaken over and above some agreed "norm" then these expenditures would not be counted by it while making its award. Indeed it has already done so in making its award in its main report. But it has absolutely no right to withhold grants-in-aid, arrived at after excluding certain expenditures from the calculation of the deficit to be covered, once again on the argument that these expenditures have been incurred! By doing so it is violating the Constitutional rights of elected state governments.

The illogicality of the Finance Commission's (FC's) recommendations follows from what has just been said. There is a double counting involved in its proposals. For instance departures in the growth of the salary bill of a state from the benchmark figure of 5 per cent (or the inflation rate, whichever is higher) are supposed to attract high or low marks. If a state has a higher growth rate of its salary bill, then this fact would contribute towards the withholding of its grant-in-aid. But in arriving at the grant-in-aid figure itself a 5 per cent ceiling on the growth of the salary bill has already been imposed! Likewise in giving marks to determine whether grant-in-aid should be withheld, one criterion is that the interest bill should not grow at more than 10 per cent. But in arriving at the grant-in-aid figure itself only a 10 per cent growth in the interest bill has been assumed. Such double counting, i.e. penalising the states for the same "offence" twice over, is as illogical as it is invidious.

The unreasonableness of the FC's recommendations is obvious. The growth of tax revenue of a state is not always within its own powers. Likewise the growth of expenditures in a state is not always within its own powers. Kerala's travails in tax revenue mobilisation are obviously linked to the collapse in the prices of cash crops which is a result of the central government's mindless decision to do away with QRs. Likewise the increase in the salary bill in Kerala and elsewhere is obviously linked to the implementation of the Pay Commission report by the central government for its own employees. Surely it is absurd to imagine, and even the FC could not do so, that central government employees should get pay hikes but not state government employees. It follows then that a good deal of what happens to state government finances is outside the control of state governments themselves. To penalise a state exclusively for what happens to its finances therefore is palpably unreasonable. To be sure, the FC has talked, as we saw, of "suitable adjustments", but that is a euphemism for central discretion.

We have here once again a parallel to the theoretical perceptions of the imperialist Bretton Woods institutions. They proceed on the premise that the macroeconomic problems faced by the third world countries which approach them for loans are exclusively a result of their own internal mismanagement, having nothing to do with external developments like world recession or terms of trade movements. The fact that we have the same logic being applied by the FC is no accident. Exactly the same imperial mindset is being replicated.

Finally we come to the unfairness of it all. The FC has already imposed a drastic squeeze on the deficit states. For the year 2000-1 for instance, figures given by Dr Amaresh Bagchi show that the pre-devolution non-Plan revenue deficits of the states, taken together, amounted to Rs 1,31,295 crore according to their own forecasts. The tax-devolution recommended for the year came to Rs 54,060 crore, leaving a non-Plan revenue deficit of Rs 77,235 crore. As against this the revenue deficit grants came to Rs 10,154 crore. There was in other words a massive compression already. Now the FC has suggested a further withholding of even these meagre grants. And what is more, in case some revenue deficit states cannot meet the performance criteria, the withheld amounts would be distributed among all the other states, including the revenue-surplus ones (of which there are 10 out of the total 25) who do not by their own forecasts need these. The FC's award is not just discriminatory between the centre and the states but among the states as well.