In a few days, the National Development Council will meet to approve the Eleventh Five Year Plan. This Plan period runs from 2007 to 2012. The government recently also appointed the Thirteenth Finance Commission, under the chairmanship of Vijay Kelkar, a constitutional body which mainly deals with the distribution of revenues between the Centre and states. Its report is due by October 2009, and its recommendations would determine resource distribution from 2010 to 2015. This would impact the last two years of the Eleventh Plan. Not synchronising the Five Year Plans with the Finance Commission is disadvantageous in manifest ways, most importantly the uncertainty of resources for GBS and finances that may be available to the states for a good part of the Plan. Since the Finance Commission is a constitutional body, its appointment and timing is predictable. Five Year Plans still represent the socio-political strategy of the government in office, and are susceptible to electoral cycles. Considering their developmental significance, the modalities for bringing them in sync needs closer consideration.
The Finance Commission has generally been perceived to be fair and rational in its distribution. The focus of each Commission has, however, undergone changes. The Tenth Commission particularly considered modernisation of the administrative apparatus and reviewed the calamity relief fund. The Eleventh Commission dealt with resources to panchayats and local bodies, and for the first time looked ?into the issue of better fiscal management consistent with efficiency and economy in expenditure including incentives for better tax and non-tax realisation?. The Twelvth Commission, while suggesting major debt relief for states, reviewed the working of the fiscal reforms facility, making debt amelioration contingent upon ?corrective measures necessary for macro economic stability and debt sustainability?. This encouraged states to legislate their own Fiscal Responsibility Management Acts, resulting in a significant improvement of their finances. The Thirteenth Finance Commission has, inter alia, the mandate to examine the ?need to improve the quality of public expenditure to obtain better outputs and outcomes?, as well as ?the need to manage ecology environment and climate change consistent with sustainable development?. It is also expected to examine ?the resources of the Central Government on account of the projected Gross Budgetary Support to the Central and State Plan.? This implies a holistic view of resource availability to sustain both planned and non-planned expenditure. It will consider the impact of the proposed implementation of taxes on goods and services w.e.f. April 1, 2010.
The recommendations of the Finance Commission on revenue sharing are in theory advisory, but in practice binding since they are accepted as awards. There are, however, some broader issues that deserve consideration.
First, a common terms of reference for the last three Finance Commissions has been ?to seek the need for ensuring reasonable returns on investments by states in irrigation projects, power projects, state transport undertakings, departmental commercial undertakings and public sector enterprises?. While overall state finances have improved, the application of user charges for public goods has remained a problem. The power sector, in particular, is an unhappy story of many missed opportunities. Financial incentives were strong enough for states to tread the difficult path of accepting revenue and fiscal deficit targets under their FRBMs. I wonder if strong enough incentives can be built to foster power and public utility reforms which can have multiple benefits all around.
Second, over the last few years beginning from 1998, there has been a steady decline in the ratio of funds distributed to states in accordance with the accepted formula. This has only got worse in the proposed distribution of Gross Budgetary Support (GBS) in the Eleventh Plan to be considered by the National Development Council. Foreclosing resources meant for the states on the grounds that centrally sponsored schemes are meant to help them anyway, is untenable. The increase in discretionary influence in devolution of resources undercuts the flexibility and autonomy designed for states.
Third, improving the quality of public expenditure has hardly been attempted. Evaluating expenditure merely in terms of fiscal and financial targets is grossly inadequate. External auditing and sustainability of gains after project completion is never easy. Moreover, letting mammoth populist schemes proliferate, putting enormous pressure on the country?s already strained public delivery systems, is the wrong way to go.
Fourth, the environment and sustainable development need mindset changes. The Centre?s distortionary fuel pricing policy is the worst culprit. Vijay Kelkar and I had worked together to dismantle the administered price regime. The evil crept has back in a more virulent form, and would he now, as chairman of the Finance Commission, undo the damage? Besides, issues of climate change need an integrated energy policy which span the Centre, states and a large number of agencies and organisations. It would require bold and purposive recommendations with built-in incentives and penalties.
The Thirteenth Finance Commission has a daunting mandate. In many ways, Montek Singh Ahluwalia and Vijay Kelkar need to sing the same tune.
?The author is a former top bureaucrat. These are his personal views