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V Shankar Aiyar

AU CONTRAIYAR

Change your tack, Naidugaru

Shri Chandrababu Naidu Chief Minister,
Andhra Pradesh
Hyderabad.

Dear Naidugaru,
Allow me to congratulate you on your initiative to pin down the foibles of the Eleventh Finance Commission (EFC) and mobilise opinion among the states against it. In your letter to the prime minister, you have called the EFC's recommedations as rewarding -financial imprudence-. I suppose you have your reasons for understating the case. The truth is: the EFC's rationale encourages states to bring down the growth rates, increase population, infrastructural infirmities and poverty. In a sense, the EFC has punished, rather penalised, 17 states for their efficiency in resource management.

I am glad that you have been successful in belling the cat, so to speak. The sheer spontaneity of the spectrum of political parties in rising to your call also endorses the emergence of a kind of consensus on reforms. In fact, the timing couldn't have been better---both in terms of the increasing burden of states as also the political compulsions of the Centre.

I am afraid, however, that the approach you seem to have taken would not stand the test of political realities. It would be naïve to expect any government not to pander to the political definition of 'poor states'. It is also imperative that Bihar and siblings of the BIMARU family get a chance to emerge out of the rut. GDP growth of 8 per cent plus will be possible only if the two most populous states Uttar Pradesh and Bihar - find the means to grow.

Your approach is also short term in nature and more importantly endorses the continuity of dependence on the Centre. Given the quasi federal structure states operate under, there is no getting away from the system of sharing Central revenues. Even if the Centre does agree to lift the cap on distribution of revenue, there is no getting away from the annual scrounging. The more optimum approach would be to aim at reducing the dependency on the Centre. Or you need to change tack. Very simply you need to convert this initiative: argue for the right to collect directly.

In fact, the opportunity is just right with the changing face of the economy. For instance, the Centre has just announced the opening up of long-distance telephony to private parties. Presumably, the licence fees that accrue will go directly into the Central kitty. Since the telecom sector has been opened up to the private sector, the case for the Centre to hog the moolah is not substantive enough. Indeed, the case for states to directly collect the licence fees is stronger.

Similarly investments in broadband and cable networks will speed up and propel the use of the net for telephony, pay-per-view entertainment, e-commerce and possibly tele-commerce in the coming days. These form part of the emerging service sector and have not yet found place in the Centre's tax plan. At least, not effectively. You could argue that these services are best monitored and taxed at the state level. It will then be up to the states to decide whether they want to tax these services and how much. These again will reduce your dependency on the Centre for meeting budgetary needs.

Again it is not that the opportunity is in the new economy only. Take the case of oil and gas fields. Currently, no matter where the oil fields are located, the money is pumped into the Central kitty. Over 80 per cent of the earnings of any oil field accrue to the Centre---that is, share of profits to ONGC, central levies and royalty. Whatever for? What possible service is the Centre offering to back its claim on the royalty? Sure, the ONGC can take its share but why should royalty be paid to the Centre? There is a clear case for the states to demand that henceforth, the royalties of new fields---gas and oil---will be pumped into the state's account. After the profits emanate from the the resources of the state.

Of course these are just examples of the opportunities that exist. The idea is to ensure that slowly but steadily, states reduce the dependence on the Centre and curb inequitable cross subsidisation of underperfoming and reckless states. A short trip to China---where the regional governments have perfected the mechanism to determine what percentage of revenue they will pay the Centre---would be instructive as would a study of the US system. These would inspire a road map for a new India not bound by excessive centralisation.

It will not be easy. It is also accepted that this cannot be done overnight. But there is no denying that this is the right approach. It is also the most equitable way. Fortunately, you are well positioned to argue the case---not just in terms of your political clout but also in your ability to articulate regional aspirations.

All you need to do is change your tack. Instead of asking for a share of the funds, demand the right to collect.

Sincerely Yours

(V Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar Aiyar.)

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