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Even
so, when the appointment of the Thirteenth Finance
Commission evokes so little interest, even among financial
dailies, it can mean only two things. One, the mandate of
the Commission, to determine the sharing of tax revenues
between the Centre and the states and between states, is
seen as a largely settled issue, now that we’ve had
twelve FCs and the broad contours of the sharing process
have been laid down.
Two, buoyant tax revenues, both at the Centre and the
states have taken the edge off what has traditionally been
a highly contentious issue. Add to this the preoccupation
with other issues such as the possible fallout of the
subprime crisis on capital flows, Nandigram, the nuclear
deal and so on and it is no wonder esoteric fiscal issues
involving ‘vertical’ equity (between Centre and
states) and ‘horizontal equity’(between states) have
been relegated to the backburner.
There is, of course, a third, admittedly facile,
explanation. This is the Thirteenth Finance Commission and
in one of those uncanny quirks of fate, was also notified
on 13 November 2007; hence the silence! On a more serious
vein, the Thirteenth Finance Commission has some notable
firsts to its credit.
It is the first time in history that the chairman and all
members, with the exception of B K Chaturvedi, a retired
bureaucrat, are economists (though whether that is a plus
is debatable). It is also the first time that we have a
woman member, Indira Rajaraman, Professor Emeritus at the
capital’s National Institute of Public Finance and
Policy.
But if the Commission is not to go down as just another
‘formula tweaker’ it will have to do more. It will
have to deliver on its ambitious terms of reference (TOR).
Its task has been made more difficult by two developments
that will inexorably shape the fisc during the five years
commencing 2010 — one, the Sixth Pay Commission
recommendations and two, the Goods and Services Tax (GST),
slated to come into effect from April 2010.
The first, the Pay Commission report, is a ‘known
unknown’, in the sense that though there is no doubt it
will hit Centre and state finances hard, the precise
impact is a little harder to work out. This is because its
recommendations usually have a ripple effect and the full
impact will be known only after a while. The second, GST,
however, is an ‘unknown unknown’. It is far from clear
if the country will be ready to implement GST from April
2010 (remember, it was almost two decades before VAT
became a reality).
The impact of GST on central and state revenues is also
unclear. Yes, we know now that GST will have a dual
structure (where tax is levied by the Centre and the
states) but the actual rates are yet to be decided;
consensus is unlikely to be easy but the final model will
need states’ approval.
Consequently,
the Commission will find itself hard-pressed to decide
the sharing pattern, given that its recommendations
have to be submitted by October 2009, well before the
proposed April 2010 deadline for GST. In which case it
may have to suggest two alternatives, one where the
GST does get implemented as scheduled and another
where status quo continues.
Four new clauses have been added to the TOR while the
reference to ‘restructuring of public finances,
restoring budgetary balance’ ‘reducing fiscal
deficit’, an objective of the Eleventh FC, has been
dropped, presumably in recognition of the success
achieved on the fiscal front. One asks the FC to keep
in mind the ‘need to improve the quality of public
expenditure to obtain better outcomes and outputs’,
a reflection of the growing concern regarding
delivery.
The second asks the Commission to consider ‘the need
to manage ecology, environment and climate change
consistent with sustainable development’, a welcome
addition, given the mounting evidence of climate
change. A third asks the Commission to review the
States Debt Consolidation and Relief Facility
introduced on the basis of the recommendations of the
previous commission. The fourth relates to the impact
of GST. Surprisingly, there is no specific reference
to the Sixth Pay Commission, though this is going to
hugely impact (negatively) government finances.
As in the past, the Commission has been asked to
consider ‘the demands on the resources of the Centre
on account of expenditure on civil administration,
defence, internal and border security, debt servicing
and other committed expenditure and liabilities’.
But for the first time, it has also been asked to take
into account the projected gross budgetary support to
the Centre and the state plans.
What this means is that the FC will have to factor in
plan budgetary support, suggesting a subtle tilt in
favour of the Planning Commission, which is really a
central government body. This cannot be regarded a
happy development for fiscal federalism as budgetary
support for state plans has a strong political
element.
Of greater interest are the two clauses that have been
dropped. One relates to sharing non-tax income from
profit petroleum that currently accrues to the Centre
and is not shared with the states. This is
unfortunate, particularly given the Centre’s
unwillingness to increase royalty for minerals
resources. Ideally the issue of royalty should also
have been included in the TOR. An equally telling
omission is the dropping of any reference to
‘privatisation and disinvestment’ of public
enterprises.
The TOR is also silent about widening regional
disparities, an issue we need to address before it
seriously threatens the social fabric and the
continued existence of the country as a single unit.
The omission is presumably because all FCs to date
have tried to ensure some horizontal equity at least
as far as provision of basic public services is
concerned. But is that enough or do we need a wider
debate? Either way the Thirteenth Finance Commission
has its hands full. It is the only protector of the
key to our federal structure, equitable distribution
of finances.
Source
: The Economic Times, India, dated 03/12/2007
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