Some action not taken

While the government has been quick to accept all the recommendations of the 12th Finance Commission that involved giving more funds/relief to the states, it is a pity it has not shown the same alacrity in accepting the one about a permanent secretariat for the Finance Commission, a longer tenure for the body as well as a research committee with adequate funding to organise studies relevant for fiscal federalism—these suggestions, the government’s Action Taken report says, will be considered in due course.

The reason why this was an important suggestion is that, at the end of the day, all that Finance Commissions do is to come up with their revenue-sharing recommendations (in this case 30.5 per cent of central tax collections) based on the gap between what they think the states can mobilise on their own and what they are projected to spend over the next five years.

And how good or bad a Finance Commission is perceived to be, is based on how this gap is calculated; indeed, this gap is also the area where favouritism can be gently introduced.

But since there is no permanent secretariat doing normative exercises to estimate a state’s genuine needs and its actual resource-raising ability (through hiking user charges, for instance, in the areas of power, irrigation and road transport), and every state almost always presents figures that exaggerate the gap, each Finance Commission calculates these figures afresh, often without enough sufficient expertise or time.

The 12th Finance Commission report admits it was able to fill only 111 of its 141 posts within the time available to it, and complains about the fact that it wasn’t able to attract the best talent owing to low salaries.

A serious shortcoming of the 12th Finance Commission’s report was that while it came up with a progressive debt relief package for states on the grounds that if this problem was not fixed the states could not get their fisc back in shape, it did this without putting safeguards in place.

On the face of it, the debt rescheduling is to be done only if states enact fiscal responsibility legislation, but the Commission put in no provisos to ensure that states actually comply with this.

While accepting the Commission’s recommendations on this, the finance ministry has done well to say the government would request the next Finance Commission to make appropriate adjustments in case the states do not comply with the fiscal responsibility legislation.

The action taken report also says, while accepting the recommendation, that the states would be expected to comply with the obligations of the legislation, thereby creating some scope for monitoring by the finance ministry.

The government has done well to accept the recommendation that will pass on external assistance to states on a back-to-back basis provided that all service costs and exchange rate fluctuations are borne by the state—this has been a major source of patronage in the past as favoured states have found it easier to negotiate World Bank loans.

Restricting the level of grants to states, and saying that these would be linked to the absorbtive capacity of the state, is another good move.