Even this amount is just close to the levels of the recent past, and below that of several years earlier. But the extra 1.5 per cent of tax revenues on offer relates to sales taxes on sugar, tobacco and textiles, and the EFC has made it clear that those States which choose to levy any tax on these items will not be allowed to get any share of this. Since these are among those taxes which do provide high revenues for several States, it is quite likely that they may opt to continue to levy such taxes, in which case they would no longer be eligible for this additional amount.
 
In any case, it was hoped that the EFC would actually increase the allocation of shared taxes to the States, rather than simply continue along the lines of recent experience which has clearly revealed the inadequacy of the current devolution. Instead it has chosen what for it was the softer option, of expecting the States to raise a substantial amount of additional taxation, on the implicit argument that the Central finances need to be protected from further erosion. This leaves unsolved, the critical problem of inadequate resources for the wide range of development and infrastructure expenditure which remains in the domain of State governments.
 
A further issue relates to the inter se distribution of these resources among States. This is the area that has received the most publicity in recent days, with a number of State governments voicing their opposition to the formula that has been presented by the EFC. It is wrong to present the issue as a simple one of more developed versus less developed States, or in regional terms as South versus North.
 
It is true that a number of more developed southern States are negatively affected in terms of a reduced share of even the relatively small pool that is provided to all the States. And some large northern States may get more in proportionate terms, such as Uttar Pradesh and Bihar. But there are various other States that also appear to be "losers" in this respect, despite their lack of development and relative poverty. These include northeastern States like Assam, Manipur, Meghalaya and Tripura. Interestingly, Jammu and Kashmir also comes out as a relatively large loser.
 
The relevant point is not to consider which specific states are gainers or losers but more generally to consider the validity of the principles applied. And this is where the EFC's recommendations certainly do appear to be problematic. The pie diagrams in Chart 10 elaborate on how the EFC's formula differs from the one used by the Tenth Finance Commission.

Chart 10 >> Click to Enlarge
 
There are several important differences. Firstly, the weightage for population has been very sharply reduced, from 20 per cent to only 10 per cent, which does seem to contradict one basic principle of democracy. It is true that the income criterion (which in this case is the distance of the per capita income of a State from the weighted average of the top three States) has been increased, but only marginally from 60 per cent to 62.5 per cent. The weight for area has been increased from 5 per cent to 7.5 per cent, the reasons for which are not entirely obvious. Similarly the weight for infrastructure has also been increased.
 
But the most unjustified change of all comes in the form of the introduction of a new element - that of fiscal discipline. This has been given a weight of as much as 7.5 per cent, and the weight of tax effort has been halved from 10 per cent to 5 per cent accordingly. This is both arbitrary and unfair, because it imposes on all the state governments a certain conception of fiscal viability which is part of the Central Government's current approach, and reduces the reward for tax effort which is a much more transparent and equitable consideration.
 
In any case, the idea of rewarding fiscal discipline is extremely peculiar in the current context, because such discipline can come about even as a result of mismanagement whereby important expenditures necessary for welfare and development are simply not made. The specific way in which fiscal discipline is sought to be measured is in terms of "the improvement in the ratio of own revenue receipts of a State to its total revenue expenditure related to a similar ratio for all States as a criterion for measurement." The base year has been taken as the average of 1990-91 to 1992-93, and the reference period as the average of 1996-97 to 1998-99.
 
Note that the criterion is that of change rather than absolute levels : thus if a state begins with better fiscal balances but deteriorates slightly over this period, it will come off worse than a state with much worse overall balances which has experienced a slight improvement. The average of all States which is taken as reference for comparison also relates to rates of change, so even in terms of applying some notion of fiscal discipline this particular measure appears to be flawed.
 
Note also that higher revenue receipts and lower revenue expenditures are treated on par, which is a poor way of dealing with situations in which States should ideally be given incentives to increase those types of revenue expenditure with clear positive welfare and growth effects. In effect, the EFC seems to be subscribing to the idea, commonplace among those less schooled in the economics of public policy, that the smaller the economic role of government, the better.
 
But the basic critique of using this - or indeed, any notion of fiscal discipline - as a weight in determining allocations to States is more fundamental. This is that it uses an exogenous criterion which reflects only one particular view of economic management, and does not relate to the considerations which should normally work in a democracy. The idea that this approach is "economic" and not political in nature is completely wrong - once again, as in the attitude to expenditure restraint, it reflects a political choice whereby certain groups in society are favoured over others.
 
Quite apart from the fact that it is ironic to observe a Central government showing little or no "fiscal discipline" itself, being given the power to allocate to States according to this criterion, it is wrong to allow factors like this to determine what is really a constitutionally required need to devolve resources to different levels of government. In fact, the very application of the criterion of fiscal discipline goes against the basic tenets of decentralisation, and is therefore in opposition to greater fiscal federalism in itself.
 
It was pointed out at the beginning of this article that greater federalism, and especially economic devolution, is necessary in India today not only because it allows for more democracy and greater accountability to citizens than a more centralised system. It is also urgently required because it may be a necessary condition for the survival of our Union as stable polity able to provide development to the people. That is really why the recommendations of the EFC, which have failed to see the critical need for much more devolution at this juncture, can be a source of discontent.