Misleading to compare devolution suggestions of 13th and 14th Commissions: M Govinda Rao

Interview with 14th Finance Commission member

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In a significant departure from earlier Finance Commissions, the 14th Finance Commission has removed the Plan and non-Plan expenditure distinction for calculating the quantum of transfer to states. M Govinda Rao, a member of the 14th Finance Commission, speaks to Jayshree P Upadhyay and Ishan Bakshi about the thinking behind key recommendations. Edited excerpts:
 

You have substantially increased the tax devolution to states, by 10 percentage points, while the previous Commissions had suggested only marginal raise of 2-3 percentage points. What prompted this change?

It will be misleading to compare the 32 per cent devolvution to states suggested by the 13th Finance Commission with the 42 per cent recommended by the 14th.  Unlike the 13th Commission, which made its recommendations to meet non-Plan revenue expenditure needs of states, this Commission has taken into account the total requirements in the revenue account, without making a distinction between Plan and non-Plan. This implies the recommendation subsumes the normal Central assistance given by the Planning Commission (the Gadgil formula for grants), other Central assistance for Plan, Special Plan assistance, special Central assistance and grants for items like the backward region grant fund (state and district components) given by the Planning Commission. In addition, the 14th Finance Commission has confined itself to recommending grants for revenue deficit, disaster relief and local bodies and desisted from giving environmental, sectoral and specific-purpose grants.  
 

The 14th Finance Commission has recommended an increase in  states' share of Union tax revenues from 32% to 42%. What impact is this likely to have on the central government's fiscal deficit?

The total transfer to be given to states has to be determined by the Union government. The Commission has recommended only tax devolution, revenue deficit grants, disaster relief and local body grants. To the extent that there is an increase, the government can cut down the outlay on Centrally sponsored schemes. The Commission has reposed faith in state governments to deliver public services required by the people by increasing unconditional transfers. It is for states to live up to the faith reposed in them, by providing public services they are mandated to under the Constitution.
 

The commission has ignored the plan and non-plan distinction. It also expects the Centrally sponsored schemes to come down and be replaced by greater devolution of taxes. This is likely to lead to significant changes in the Budget. what are your views?

The Commission has essentially gone by the terms of reference and that, unlike in the past, does not restrict the Commission to meeting non-Plan revenue expenditure requirements alone. This does not mean the Centre and states cannot or should not make a distinction between Plan and non-Plan. This also does not mean that the Union government is restricted to reduce transfers for Centrally sponsored schemes.  If they want to continue, they have to find additional resources, either by raising more revenues or by reducing expenditure. 

The Commission has also recommended performance-based grants to panchayats and municipalities. What is the rationale behind this move? Will poor states with weak administrative capacity suffer on this count?

We have given a higher volume of grants to local bodies – both urban and rural. In the case of rural local bodies, 90 per cent of the grant is basic and 10 per cent performance-related. In the case of urban local bodies, too, only 20 per cent of the grant is performance linked. The performance grants are linked to simple issues like getting available reliable/accurate data on revenues and expenditure of local bodies duly audited and improvement in own revenues. Surely, it should be possible to perform these. I do not think that poorer states do not have the capacity to undertake these. The attempt is to incentivise everyone, so that we have reliable data in the future.  
 

11 states have been identified for receiving post-devolution deficit grants of close to Rs 2 lakh crore. What were the parameters for the selection of states? 

The figure of Rs 2 lakh crore is for five years. The Commission does not select the states.  It makes a normative assessment of states' revenue capacities and expenditure needs in the revenue account. In doing so, it has set the benchmark for improving revenue as a percentage of gross state domestic product and adopted certain norms while assessing expenditure. The estimated tax devolution to each state is then adjusted to meet the difference between the revenue capacity and the expenditure need. The devolution given according to the formula meets the requirements in the case of most states. The states that are still left with a gap are given grants to fill those gaps.
 

The Commission has recommended that 30 Centrally sponsored schemes be transferred to states. Which according to you are the schemes that should be delinked from the Centre? The Centre has, however, said only eight schemes need to be delinked. Do you agree with government position?

The Commission has not made any recommendation on discontinuation or reduction in the number of Centrally sponsored schemes. It is for the Union government to utilise the fiscal space that the Commission has left for such schemes, in the most productive manner. The Commission has, however, recommended a new institutional arrangement, with participation from states and domain experts, in designing the schemes, to provide greater flexibility to states in implementing the schemes.

You have proposed an independent fiscal council. Is this likely to be modelled on the lines of the Congressional Budget Office in the US? What in your view should be the composition of the entity?

There are 29 countries in the world that today evaluate the realism of macro and budgetary forecasts, monitor fiscal rules and cost the policies and programmes introduced by the governments from time to time, in a scientific manner. These institutions report to Parliament. These are called by various names, such as Congressional Budget Office in the US, Parliamentary Budget Office in Australia and Canada, Office for Budget Responsibility in the UK, Public Finance Council in Portugal, Fiscal Advisory Council in Ireland and Fiscal Councils in most other countries. What is important is that it should be competent, should have financial independence, autonomous reporting to Parliament and its committees, and should have access to data and information. The council’s credibility will depend on the quality of work it does.