EFC working on plan to reward efficient states

Amberish K Diwanji in New Delhi

On the recommendation of the President of India, the
Eleventh Finance Commission, is working on a supplementary report that will "reward efficient states" in terms of fiscal management and restructuring of finances.

The Eleventh Finance Commission chairman, A M Khusro, told rediff.com that the present commission has been given two months to devise a monitoring mechanism to judge states undertaking financial restructuring and for their efficiency in managing their finances. "Such states that restructure and perform well are likely to be given extra grants," said Khusro.

The chairman said that financial condition of all the 25 states of India, along with the Centre, was in a mess when the Eleventh Finance Commission (EFC) was set up, but the situation had improved. "As per the model we have laid out, if the states implement our recommendations, then by the end of the EFC's term (year 2005), most states will have a zero deficit. It is to encourage states to follow prudent fiscal norms that it has been decided to reward those states that do so," he added.

The details regarding the reward and the method of judging the performance will be worked out later, he said.

Regarding the EFC's main report, Khusro pointed out that it had already been submitted to the President, who in turn had forwarded it to the ministry of finance, Government of India. The ministry, after studying it and making some recommendations, had sent the report to Parliament.

"Now the report is the property of Parliament and no one has the right to make any changes except Parliament. There is nothing that we can do about the report," he said.

Thus, despite the anger voiced by the eight states - Andhra Pradesh, Assam, Haryana, Kerala, Maharashtra, Manipur, Punjab, and Tamil Nadu - over the report, little could be done by the EFC at this stage, he added.

However, Khusro took up the issue raised by the eight states saying that while they are complaining about their reduced share of the pie, they had failed to realise that all states had received an increase in the devolution of the finances by way of loans and grants.

"The states have complained that their percentage share of the total pie, as compared to the Tenth Finance Commission, has gone down. But why is the percentage of the Tenth Finance Commission sacrosanct?" asked Khusro.

He pointed out that this time the key measure of poverty was made on the basis of "distance". Translated, it means the gap between the richest states of India on a per capita basis vis-à-vis the poorest states of India.

The highest per capita income state is Goa, but being a small state, the distance was measured from the state with the second highest per capita income - Punjab. "Despite what the others say, we cut down the weightage given to factors such as population for the disbursement of the central revenue," he added.

He said that if some of the poorer states received more money it was because over the past five years, it had been found that the distance between India's richest and poorest states had widened, not narrowed down.

Another criticism from the EFC chairman was that the richer states of India, many of which were part of the complaining group, had received huge amounts by way of investment, both foreign and domestic. "What is worse, even if the money is raised in the poorer states, the investment is made in the richer states. For example, Jammu and Kashmir raised a huge amount from its co-operatives, but all of it was invested in the southern states and Maharashtra. In such a scenario, we had no choice but to ensure that the poorer states received adequate funds from the EFC to help it fight poverty," declared Khusro.

He denied the allegations of the eight states that the EFC was rewarding poverty and punishing performance. "We are doing nothing of that sort, but we must realise that to fight poverty, resources are needed and we are only seeking to make that available to the poorer states of India," said Khusro.

When it was pointed out that the poor states usually failed to implement their anti-poverty agenda effectively, he agreed, but pointed out that such administrative matters lay beyond the Finance Commission's powers and it was for the government to monitor such implementation.

"Nevertheless, by introducing a scheme to reward performance, we are going some way in pushing states towards working effectively to cut down poverty," he said.

The chairman said it was with a view to not rewarding population growth that the EFC had cut the weightage given to population down to 10 percentage points from the previous 20 percentage points of the Tenth Finance Commission.

Khusro concluded by pointing out that the total amount to be devolved to the states this time stood at Rs 4,350 billion, compared to Rs 2,260 billion of the Tenth Finance Commission and Rs 1,060 billion of the Ninth Finance Commission.

SEE ALSO:

Laloo takes 'rich brother' Naidu to task

The Finance Commission: How it works

Money

Business News

Tell us what you think of this report