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KAUTILYA
Naidu's
Wrong
It
is sad to see a dynamic chief minister play partisan politics and forget
India
By
Jairam Ramesh
 In
the past few days, Nara Chandrababu Naidu has created a stir over the
recommendations of the Eleventh Finance Commission (EFC). He claims that
"reforming" and "performing" states have been penalised.
Even though he frequently allows hype to overtake him, Naidu is energetically
trying to redefine politics. But on this issue of the EFC he is wrong.
 The
finance commission is set up once every five years under Article 280 of
the Constitution. It recommends to the Central government how much of
the tax and duty revenues collected by the Centre are to be shared with
the states and how that share is to be distributed among the states based
on a transparent formula. It also recommends how much maintenance and
special grants each state should get. For all states as a whole, these
statutory transfers constitute about 60 per cent of all transfers (that
is, money given by the Centre that does not have to be repaid). But the
importance varies: share of Central taxes provides a fifth of all revenues
in Andhra and a third in Uttar Pradesh.
Thanks to
P. Chidambaram's July 1996 Budget, the EFC has created a single, divisible
pool of taxes and duties and made all transfers transparent. During 2000-05,
Rs 4,34,905 crore will be transferred to the states, of which roughly
87 per cent will be the share of taxes and duties and the balance the
share of grants.
Naidu claims
that some states have "lost". He compares the share of taxes
and duties during 2000-05 with those during 1995-2000. But why take 1995-2000
as sacrosanct? Each commission is different. A look at the accompanying
table shows what happens when a comparison is made over a longer period.
States that "lost" earlier have now "gained" and vice
versa. But all these comparisons are simply notional.
The formula
for determining the share of states worked out by the EFC is based on
population (10 per cent), per capita income (62.5 per cent), area(7.5
per cent), infrastructure (7.5 per cent), tax effort (5 per cent) and
fiscal discipline (7.5 per cent). Per capita income works thus: the average
of Maharashtra, Punjab and Goa, the richest states, is first computed
and then the distance of each state from this average is calculated. Obviously,
the poorer states will gain. But that is precisely the purpose of the
finance commission since richer states are in a better position to attract
private investment, borrow more and mobilise more external aid.
Redistribution
from the rich to the poor is at the very core of federal transfers. Naidu
forgets the crucial role that Central investment has played in the development
of south India, specially Hyderabad and Bangalore. He is silent on how
Kerala with 3 per cent of India's poor has enjoyed 10 per cent of Central
food subsidy. Governance in Uttar Pradesh and Bihar is awful but these
two states--home to one in four Indians--still groan under historical,
cultural and geographical burdens. And Naidu overlooks how in the past
the Central government had eroded the comparative advantage of east India
by making the price of steel the same across the country. Further, if
states are to get more money, the Centre's fiscal position itself must
improve. You cannot oppose subsidy cuts and privatisation, as Naidu has
done, and hope this will come about.
The distinction
between "reforming" and "non-reforming" states is
invidious. Andhra Pradesh is certainly reforming. But Naidu's cohorts--Punjab,
Assam, Kerala and Manipur--are certainly not. Uttar Pradesh, Madhya Pradesh
and Rajasthan--three states not in Naidu's chosen category--are as reforming
as Andhra Pradesh and Karnataka. Maharashtra has turned prosperity into
bankruptcy. And the EFC report itself shows that under Naidu, his state's
reliance on its own resources has declined.
The very
basis of our public finances--the Planning Commission concerned with "plan"
or new investments and the finance commission dealing with "non-plan"
revenue expenditure--needs a complete change. The current system has,
contrary to what Naidu claims, worked to the advantage of the richer and
better endowed states. But setting this aside, the EFC can be criticised:
it is the first finance commission not to have a member of the Planning
Commission. It assumes that the non-plan revenue deficit of states like
Andhra Pradesh, Karnataka and Tamil Nadu will be zero from this year itself.
Lest these states howl, the same assumption is made for states like Bihar
and Madhya Pradesh as well. But it is an apolitical body that does a professional
job under the most trying of circumstances. Its recommendations are always
accepted. This is the first time such high-voltage drama has been enacted.
Buffeted within the state on the power tariff issue--on which he deserves
support-Naidu has embarked on a dangerous course. India will be the loser.
(The
author is with the Congress party. These are his personal views.)
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