Michael Pinto: In defence of tying cesses to schemes

Money collected through a cess must be spent for the purpose for which it was collected

Defending the Government of India is not a task one leaps to lightly. It’s unlikely to earn you any Brownie points. But when commentators (Sunil Jain’s ‘Untying the states’, Business Standard, 8 March, 2010) see virtue in allowing state governments unbridled power over monies that they have not collected and that come from our pockets, it’s time to set the record straight.

The Thirteenth Finance Commission (TFC) is hauled over the coals because their apparent generosity in allowing states a 32 per cent share in Central taxes is shown to be a lot of hoopla. If you add cesses and fiscal commons it turns out that the states get just 24 per cent of all that the Centre collects. I have no problem with the math but the logic that insists that the pool to be shared with the states must include cesses and fiscal commons is certainly faulty. Just take the case of cesses. These are monies collected by the Central Government for specific purposes. The education cess is meant to fund educational schemes, the cess on petrol to build roads. So, if the government collects money by way of cess, it has to be spent for the purpose for which it was collected. Thus, the construction of national highways or the Golden Quadrilateral is financed from the cess on petrol and most of the money collected by way of education cess is spent by the states through different Centrally sponsored schemes framed by the Centre.

 

It is this discipline that the states resent. Cess money does go to the states but with the caveat that they must spend it on schemes that the Government of India wishes to implement. Looked at objectively there is absolutely nothing wrong with this. Governments are elected on the basis of promises and commitments made at the time of election. It is probably true that some at least of the support that the present government got from the rural electorate in the last election was due to the promise of guaranteed employment through the National Rural Employment Guarantee Scheme (NREGS). Having been elected on this basis, what is wrong if the Central government insists that the grants that it gives should be spent for this purpose? How can the states insist that, regardless of the commitments made in its manifesto, the Central government must make over all that it collects to the states, to spend as they will?

The same thing applies to other schemes that the Central government implements through the states. The programme for building village roads under the Pradhan Mantri Gram Sadak Yojana relies on funds from the Government of India. Schemes for minority development, framed by the Ministry of Minority Affairs, are implemented by the states, but the money comes from the Centre. The same thing is true in respect of schemes for handicraft development or social welfare. All Centrally sponsored schemes are implemented by the states, but grants for the purpose are received from the Government of India.

The real grouse is not that grants to states are small, but that the Centre’s blank cheque which allows states to spend as they please is limited to 32 per cent of Central taxes. But if the states wish to spend on schemes of their choice, what prevents them from raising resources through a judicious system of taxation? The price of liquor in Goa, for example, is absurdly low because no government in that state is willing to raise duties on alcohol. Fares in state-owned buses are rarely increased because states lack the political will to do it. They would rather drive their Transport Corporations to bankruptcy. Similarly, State Electricity Boards, with very few exceptions, are deep in the red because states make lavish presents of free power without bothering to make budget provisions to compensate for the loss to the Board. Should Central taxes, collected from all of us, be used to underwrite such profligacy?

It is useful to remember that Centrally sponsored schemes are nearly always implemented by the states. So, if the delivery mechanism falls short, or if there are excessive leakages, the blame must go to the states. In fact, if there is any check to ensure proper implementation of a scheme, it probably comes from the Centre. This is not because the Central government is intrinsically good and honest, but simply because they have little interest in protecting the local official or politician who comes in the way of more efficient delivery mechanisms. As citizens and tax payers, therefore, the probability that our taxes are better utilised should incline us to Centrally sponsored schemes rather than complete transfers to states without any guidelines on how the money is to be spent. And finally, isn’t there a world of difference between foreign aid that mandates that the loan (not grant) should be spent solely for the purchase of that country’s goods (think Westland helicopters from Britain) and Central grants that are tied to the implementation of schemes that have passed the scrutiny of Parliament during the demand for grants?

The author is a former Secretary, Shipping, Government of India