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Because
India has a federal system of government - and indeed,
because the very survival of our polity probably requires
a more open and pronounced acceptance of such federalism
- it is important that this also be reflected in economic
decision making. Indeed, the Constitution of India recognises
this, which is why there is a such a detailed listing
of the powers and responsibilities of the Central and
State governments respectively, with separate and concurrent
lists.
But this in turn creates further areas of decision,
because of the issue of revenue sharing between Centre
and States which must necessarily evolve as the economic
context itself changes. This is why there are periodic
Finance Commissions which are empowered to suggest guidelines
for such revenue sharing.
The Eleventh Finance Commission, which submitted its
report recently, was widely expected to increase the
devolution of Central revenues to the State governments.
This is not only because the impetus to economic decentralisation
at various levels has become increasingly significant,
but because the need for such devolution has become
even more obvious and urgent in the recent past.
Most starkly, there is a glaring gap between the responsibilities
of State governments, especially in providing physical
and social infrastructure, and their own revenue mobilisation
capacity. This is not simply a matter of being unfair
to State governments : it is, more crucially, a major
factor in determining the provision of such infrastructure
and a range of public goods to the citizenry at large.
When the States do not find the resources to undertake
much needed infrastructure investment, or expenditure
on health and education, or even the provision of public
goods and basic needs, it not only affects current welfare
but also the possibility of future development.
This is why the Report of the Eleventh Finance Commission
(EFC) was awaited with such anticipation, since it comes
in a context in which the need for a major reorganisation
of the structure of fiscal devolution is apparent. In
addition, the Constitutional (Eightieth Amendment) Act
passed in March 2000 changed the earlier terms of devolution,
requiring all Central taxes and duties (except
surcharges and certain sales taxes) to be shared between
Centre and States.
Finance Commissions in the past have typically made
recommendations on the distribution of net proceeds
of taxes between Centre and States and the allocation
of this shared amount between States. However, the terms
of reference of the EFC extended far beyond that, to
cover almost all aspects of fiscal strategy, in what
appears to be an astonishingly large brief.
Thus, the EFC was asked, among other things, to "review
the state of the finances of the Union and the States
and suggest ways and means by which the governments,
collectively and severally, may bring about a restructuring
of the public finances so as to restore budgetary balance
and maintain macroeconomic stability." It was also asked
to "make an assessment of the debt position of the States
... and suggest such corrective measures as are deemed
necessary, keeping in view the long term sustainability
for both the Centre and the States."
These are major issues, on which there need not be only
one "technocratic" opinion. Thus, the idea that there
can be an "independent" Commission which can pronounce
on matters of fiscal strategy which have major redistributive
implications and are therefore reflections of certain
political and social configurations, is itself problematic.
However, the EFC has indeed addressed these issues,
informed by what is essentially a monetarist perspective
on macroeconomics, in which budget deficits are inflationary
and government borrowing crowds out private investment.
Some of the problems it identifies are extremely valid
- such as the decline in the tax-GDP ratio over the
1980s and 1990s and the virtual stagnation in non-tax
revenues. However, in terms of the expenditure, certain
items which have contributed to the deteriorating fiscal
situation are taken for granted as inevitable, while
others are questioned.
Thus, the EFC identifies three reasons for unsustainable
expenditure expansion : periodic upward revision of
government wage bills because of "Pay Commissions";
increasing interest burden because of greater reliance
on market borrowings by government; and growing explicit
and implicit subsidies. It is interesting that the EFC
questions - and even attacks - only the first and third
factors, condemning them as populist and unnecessary,
while accepting the inevitability of the second.
But in fact, the financial liberalisation measures which
have led to the Government reducing its access to cheaper
borrowing from the Reserve Bank of India and relying
more on expensive market borrowing, were by no means
inevitable. Rather, they have reflected the interests
of rentier groups in the economy, who have benefited
at the expense of both taxpayers and all those who have
suffered the effects of cuts in other government expenditure.
It is important to remember that this has been a political
choice, not the outcome of some implacable economic
law. |
