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It’s raining funds for states. Really?
Dr Y V Reddy has become the darling of states. The 14th Finance Commission (FFC) he headed has recommended a near third jump in the share of the states in the devolution of Centre’s tax revenues.

Until 2010 the share was less than 30 per cent. The 13th Finance Commission recommended a modest two per cent increase to 32 per cent. In one big jump the FFC has recommended a 42 per cent devolution paving the way of the massive increase in the share of states in Central revenues.

The statutory finance commissions are appointed once in five years to recommend devolution based on several criteria that include population, fiscal performance, level of backwardness and needs of states. Understandably, there has been demand from states for steep increases in their share of revenues. Past members of the Finance Commission with deep knowledge and experience in handling state finances did endeavour to present strong cases for higher devolution.

 

Right to spend...

Prime Minister Narendra Modi announced cooperative federalism as among the main planks of the policy of his government. The BJP ruled states, notably, Gujarat and Rajasthan and Tamil Nadu have been demanding such a higher devolution as also the freedom and flexibility to spend the resources transferred at their discretion. In the past regimes, the Centre retained a sizeable portion and allotted these as Centrally sponsored schemes for those areas that are in the concurrent list of powers for the Centre and states. Such an arrangement gave an arbitrarily high power to the Centre.

Remember the elaborate meetings held by the Deputy Chairman of the Planning Commission in which chief ministers of states and their senior civil servants presented their cases for higher allocations. This system also restricted the leeway for the states to select and allocate resources for spending on their priorities. In many cases a common yardstick for allocation made it redundant or unnecessary for specific states. For example, energy comes under the concurrent list and allocation made under this for electrification of villages as a common item made little sense for a state like Tamil Nadu which provided  100 per cent electrification decades ago.


It did offend strong state leaders...

There was also a hurt to the ego. Several chief ministers of states are popular leaders who enjoy almost unlimited powers and popularity in their respective states. eg. Jayalalithaa in Tamil Nadu, Mamata Banerjee in West Bengal or Narendra Modi in Gujarat. Their stature and power were often far higher than those of most of the Deputy Chairmen of the Planning Commission who, for most part were political leaders who lost an election or who did not have a strong political base or bureaucrats/technocrats not widely known outside Delhi. Often it did hurt the popular leaders when Yojana Bhavan turned down some of their proposals or suggested drastic cuts.

Narendra Modi was steadfast in his distaste for the Planning Commission. After announcing its abolition in his first Independence Day address, he acted fast and replaced this with NITI Aayog as a think-tank. Thus in one stroke the spectacle of chief ministers visiting Yojana Bhavan in continuous stream during February-March along with a retinue of senior officials. The FFC recommendation completed the nailing of the Planning Commission coffin.

    There were few interesting consequences: first is the higher quantum of funds transferred to the states. Tamil Nadu for instance, is estimated to get around Rs 7500 crore more from Centre’s tax revenues in 2015-16. There is, of course, grumbling from economically developed states like Maharashtra, Gujarat, Tamil Nadu... on the lower share as a proportion in the total transfer for such states: these are decided on the basis of the state’s potential for taxation, population growth and its financial condition. Understandably, there will be the charge that the better administered states get penalised for the prudential fiscal administration and effective population control. But then the Finance Commission has to look into the equity of higher level of transfer to economically backward states to raise them from their present low level.

    It should be pointed out that there is no big increase in total transfer; it will still be around 62 per cent. Higher quantum of transfers will mostly result from growth in GDP and consequent tax receipts; and there will be the discretion to spend.

There will be the potential for state’s spending larger resources on populist schemes, subsidies, etc that may not contribute to higher economic growth. The Dravidian parties have built their popularity and winnability in elections by ever increasing quantum of subsidies and freebies that account for nearly a fourth of revenue receipts of the state.

To administer huge funds allocated under the Centrally sponsored schemes, government departments in the Centre have been employing an army of bureaucrats from the level of secretary to additional, joint and under secretaries and large number of foot soldiers.  These have been well settled in Delhi; naturally they’ll resist attempts to return to their states. Are we then going to witness another example of Parkinsons’ Law on the inexorable expansion of bureaucracy with more recruited by states?

Former Finance Secretary K P Geethakrishnan (KPG) who had been part of the expeditions to Yojana Bhavan to present the case of Tamil Nadu for higher allocations, as also privy to many of the discussions on fiscal issues in Delhi, provided an interesting lightside. He pointed to the early days when charismatic civil servants like T A Verghese used to present the case for Tamil Nadu. Verghese, a brilliant member of the ICS, had the longest tenure of 17 years as the state’s Finance Secretary. KPG mentions the interest on the part of large numbers to witness the presentation by Verghese. The Deputy Chairman used to be awestruck and pass in toto the demands.  Verghese also used ingenious methods to show every pie of the funds allotted as spent before the end of the financial year!

KPG described such annual visits to Yojana Bhavan as the civil servants’ Haj Pilgrimage, met at government’s expense, that also provided relief from the humdrum  routine in the state capital; as also some allowance. He remarked ruefully that this has come to an end!

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