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A sound and vibrant system of inter-governmental fiscal transfers is a sine qua non of a flexible and enduring federal polity. Under the Indian Constitution, Finance Commission epitomize the statutory mechanism of effective fiscal federalism.
Since 1951, twelve finance commissions have laboured extensively to fine-tune a rational system of center-state revenue transfers in India. Appointed once in five years by the President, the finance commission makes its recommendations based on a detailed assessment of the financial status of the center and the states and after having wide-ranging consultations with other stakeholders.
The Twelfth Finance Commission (TFC) headed by renowned economist Dr. C. Rangarajan in its report to the President in December 2004, envisaged a greater role for grants in the overall revenue transfers to ensure better targeting of expenditure in crucial areas like education and health. Its pioneering recommendations for 2005-10 beginning April 1 this year include specific grants to states for maintenance of public assets like roads, bridges and public buildings, and managing forest wealth and heritage conservation.
The Commission has made a bold attempt to alleviate the disparities in the revenue capacity of the constituent units of the federation – the states and the local bodies. The focus has obviously been to make these vital units of democracy more competent to deliver basic services to the citizens at a reasonable level.
De-centralisation
In a far-reaching move, the TFC has done away with the present scheme of central assistance for state plans comprising grant and loan components. Henceforth, the center would confine itself to extending plan grants and leaving it to states to decide their own borrowings. Consequently, the states should be able to decide how much they wish to borrow and from whom.
Under the Constitution, the union government is mandated to share a prescribed percentage of the net proceeds of all central taxes with the states within which the relevant taxes are leviable in a particular year. The TFC has recommended an increase in the share of the states to 30.5 per cent from the current level of 29.5 per cent.
The recommendations of the TFC have laid greater emphasis on strengthening and revitalizing the panchayati raj institutions and urban local bodies in keeping with the constitutional mandate for effective and autonomous local self-governance. Recognising that local bodies should be supported by a scheme of revenue transfer that would encourage greater decentralization and local initiative for raising revenues, the government has accepted the TFC recommendation for a total grant of Rs. 25,000 crore for the award period of next five years.
The panchayati raj institutions have been mandated under the TFC award to utilize the grants on water supply and sanitation while the municipal bodies to concentrate on solid waste management. It is incumbent on the state governments to transfer the grants to local bodies within 15 days of their release from the central government.
While the Eleventh Finance Commission did not recommend separate grants for maintenance of roads and public buildings, the TFC has paved the way for separate grants of Rs. 15,000 crore for maintenance of roads and bridges, and Rs. 5,000 crore for maintenance of public buildings.
In addition, the states would get a total grant of Rs. 1,000 crore for maintenance of forests and Rs. 625 crore for preservation and protection of historical monuments, archaeological sites, public libraries, museums and archives.
Fiscal Responsibility
The TFC has provided a new two-part scheme for debt relief to the states. While the first part ensures relief through consolidating and rescheduling the past debt along with interest rate reduction, the second part comprises a debt write-off linked to the reduction in the absolute levels of revenue deficits. Both would be available only when the states enact a fiscal responsibility legislation with a view to totally eliminate their revenue deficit by 2008-09 and to reduce their fiscal deficit in a phased manner.
In a nutshell, the TFC has recommended a scheme of fiscal transfers aimed at equity and efficiency within a framework of fiscal consolidation. It has called upon both the center and the states to raise the levels of revenues and exercise utmost restraint in undertaking populist expenditure commitments.
The devolution scheme prescribed by the TFC endeavours to strengthen the federal roots of Indian democracy while encouraging the states to pursue their developmental goals with fiscal prudence. The Commission also craves for a robust monitoring mechanism in place in every state to oversee proper utilization of grants in the form of a high level committee headed by the Chief Secretary.
As the Finance Minister Shri P. Chidambaram pointed out in his Budget speech, the implementation of the TFC recommendations would place a large burden on central finances through the period 2005-10 and especially in 2005-06, when the changes to the new pattern take place. Notwithstanding, the center would deliver and rightfully expect the states to adhere to the canons of fiscal discipline.
*DPIO, PIB, Chennai
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