Whether it was an innocent issue of raising the tax-gross domestic product (GDP) ratio or the complex question of striking a balance between equity and efficiency while finalising the Finance Commission award, opinions were divided, quite sharply. Also there was disagreement over the issue of making the term of Planning Commission co-terminus with that of the Finance Commission.
Noted economist Indira Rajaraman, in her presentation, underlined the need for increasing tax-GDP ratio to 16 per cent from about 14 per cent currently. Dr Rajaraman only reiterated what various economists within and outside the government had been talking about for past several years.
This remark, however, did not go well with Dr S Gangopadhyay, an economist with the Confederation of Indian Industry (CII). He argued that it would be wrong to compare Indias tax-GDP ratio with that of other countries in Far East, because agriculture is not taxed here. Increasing tax-GDP ratio will entail imposition of more taxes on industry, he added.
The economists were also divided on the issue of Centres share going down as a percentage of total taxes. For Dr Rajaraman, it was a cause for concern. Others, however, felt that it was a good sign and there was nothing to worry about. Stronger states would strengthen federalism in the country.
For chairman of the 12th Finance Commission Dr C Rangarajan what was more important was the growth of revenue, be it Centre or states.
He said demand for resources has outpaced revenue growth. Dr Rangarajan said that it was good to have more revenue from higher growth but there could be compulsion for higher revenue without commensurate increase in economic growth.
Dr Govinda Rao pleaded for a comprehensive resource transfer policy. He said there should be general purpose transfer and specific purpose transfer to states. He also made a case for streamlining incentive policies which currently were creating moral hazards by rewarding under-performers.
Dr Ammaresh Bagchi, in his presentation, questioned the very methodology of resource transfer and added gap-filling approach was not doing any good. He said that with a multiplicity of agencies dispensing federal funds it has not been possible to take an integrated view of central transfers.
Dr Bagchi suggested integration of transfers by bringing plan and non-plan accounts under the Finance Commission. Dr Govinda Rao too said that Planning Commission should focus on infrastructure development and all issues concerning grants be left to the Finance Commission. He said that noted lawyer K K Venugopal was of the opinion that giving of grants by the Planning Commission was unconstitutional.
Dr Rao further said that Finance Commission should be a permanent body manned by professionals. Dr Rangarajan, however, expressed his reservations on the idea of a permanent Finance Commission. He said the way the Finance Commission gives its award will have to change if the Commission was to become a permanent body.
Dr Rangarajan also did not see merit in the argument in making the term of Planning Commission co-terminus with Finance Commission. He said while the Finance Commission gives its report before the commencement of the five-year period, the Plan is finally approved almost a year after the beginning of the Plan period.
Dr B P R Vithal tried to set at rest the debate on the issues concerning equity and efficiency of transfer of funds, by stressing that states have a right to share irrespective of how they perform. The Finance Commission, as enjoined by the Constitution, gives an award and not a reward.