Role
of the Finance Commission in
Promoting
cooperative fiscal federalism
CM KCR
Speech in the meeting
with 15th Finance Commission
19-02-2019,
Hyderabad
Honorable
Chairman of the Fifteenth Finance Commission, Sri. N.K. Singh Ji, distinguished
members of the Commission, Dr. Anoop Singh, Dr. Ashok Lahiri and Dr. Ramesh
Chand, Secretary and Officials of the Commission, I have great pleasure in
whole heartedly welcoming you to Telangana on behalf of 3.7 crore people and on
my own behalf.
Before
presenting my views, I may briefly recapitulate the crisis like situation
prevailing on all fronts at the time of the formation of the State. There were
acute power shortages, high incidence of farmer suicides and the economy
growing at below the national average. Many opportunities were lost, and
problems accumulated as a result of deliberate neglect of Telangana in the
erstwhile State of Andhra Pradesh. We thought there was no point in brooding
over the past neglect and be deterred by the challenges before us. We did not
want such a serious crisis to go waste and took it as an opportunity to do things
that were not done before to meet the suppressed aspirations of our people. We started the process of reinventing and
reorienting the State to realize the goal of ‘Bangaru Telangana,’ i.e., Golden
Telangana. We took up a number of programmes to alleviate the hardship of
people and to put the Telangana economy on a higher growth trajectory.
We
have submitted a detailed memorandum indicating the first of its kind initiatives
taken by the State Government since its formation in June 2014 and presenting
our views on the terms of reference of the Commission. My officials will be
making presentations on some of these programmes. Therefore, I will restrict
myself to a few important issues relating to the role of the Finance Commission
in promoting cooperative fiscal federalism and making the States fiscally
stronger.
At
the time of the making of the Indian Constitution, the primary concern was
preserving the unity of the country in the aftermath of the partition of the
country and the problems associated with integration of numerous princely and
diverse States. Therefore, by design, the Indian Constitution was adopted with
significant centripetal bias in the distribution of fiscal powers between the
Centre and the States. Added to this, Centre has been increasingly intruding
into State subjects by running numerous Centrally sponsored schemes, shifting
subjects from the State List to the Concurrent List and introducing new schemes
in State subjects without any prior consultation with States.
As
per the assessment made by the Fourteenth Finance Commission, the Centre’s
expenditure on State subjects increased from an average of 14 per cent of its
total expenditure to 20 per cent and on subjects in the Concurrent List from an
average of 13 per cent to 17 per cent between 2002-05 and 2005-11. This is indicative of the excess fiscal space
available with the Centre, a major part of which can easily be shared with
States through higher tax devolution. The Centre’s recourse to levy of cesses
and surcharges on a permanent basis has significantly reduced the divisible
pool of Central taxes, affecting the interests of States. Currently, cesses and
surcharges account for 14.3 per cent of the gross tax revenue of the Centre,
even after some of the cesses are subsumed under GST. What is also a matter of
great concern is that proceeds of Road Cess and Clean Energy Cess are not being
passed on to States fully as repeatedly pointed out by C&AG. Short transfer
of Road Cess amounted to Rs.72,726 crore and that of Clean Energy Cess to Rs.44,505
crore at the end of 2017-18.
With
rich natural resources remaining untapped, people deprived of minimum needs,
agriculture which supports over 50 per cent of the country’s population mired
in distress, the time has come to take a comprehensive view of Union-State
relations and to realign the resources in favour of the States, which are assigned
functions touching on the lives of the people. Now the States are mature enough
to formulate their plans and prioritize their expenditure to suit the needs of
people being closer to them. States are
found to be lot more fiscally prudent than the Centre. The Gujarat and Kerala
models of development were being talked about previously. Now, it is the
Telangana model of development which has taken centre-stage.
The
Cabinet Resolution setting up of the NITI Aayog generated hopes of building
Team India making States equal partners in nation’s development and promoting cooperative
fiscal federalism. The Resolution also stated categorically that the
one-size-fits all approach, inherent in Central planning and schemes have the
potential of creating needless tensions and undermining the harmony needed for
national effort. These hopes remained unfulfilled. The Hon’ble Prime Minister
in his letter to Chief Ministers was categorical in stating that States should
be allowed to chalk out their own programmes and schemes with greater financial
strength and autonomy and expressed his strong conviction that strong States
make a strong India and that the progress of the country depends on the
progress of States. So far, no decisive steps have been initiated in fulfilling
these commitments. I strongly believe that as a Constitutional institution for
resource transfers to States, the Fifteenth Finance Commission has a decisive
role in taking these imperatives forward and paving the way for path breaking
reforms in Indian fiscal federalism in consonance with changing realities.
The
recent Finance Commissions have been assigning higher weightage to equity
parameters like distance of per capita income in their tax devolution formula.
We are not against preferential treatment to backward States. What we are
worried about is that higher weightage to equity parameters has not served its
purpose. Income inequalities across States have been increasing and the
performing States are feeling discriminated. The Finance Commissions’ transfers
are mostly restricted to the revenue account and for kick staring growth
momentum in backward States, what is needed is capital infusion. Therefore,
there is a need for separate institutional mechanism to support the capital needs
of backward States outside the Finance Commission. We, therefore, strongly urge
the Finance Commission to strike a balance between equity and efficiency in
their dispensation so as to ensure that the performing States are not
penalized.
Now,
I will briefly present before you my views on some of the terms of reference
given to the Commission, which are of great concern to us. The Commission has
been asked to take into account the impact of the substantial increase in tax
devolution recommended by the previous Commission coupled with the continuing
imperative of national development agenda including New India-2022. The tax
devolution recommended by the previous Commission has not imposed any
additional fiscal burden on the Union and the fiscal space of the Union
remained the same but only resulted in a compositional shift in favour of tax
devolution. The actual outcomes in the first three years of the award of the
Fourteenth Commission indicate that the total revenue account transfers as
percentage of gross revenue receipts of the Centre more or less remained the
same as in the pre-award period. Taking into account the requirements for New
India-2022 may result in reducing the fiscal transfers to States.
Following the
recommendations of the Fourteenth Finance Commission, the Centre had dispensed
with a number of programmes like BRGF, Model Schools and increased the matching
contribution of States in respect of a number of Centrally sponsored schemes.
Telangana suffered a double whammy with these developments and reduction of its
share in tax devolution. I am confident that the Fifteenth Commission will
adopt a judicious approach while dealing with these considerations and ensure a
higher flow of resources to States taking into account the reality that the
development of the nation lies in the development of States.
One
of the considerations listed out in the ToR relates to the conditions that the
Centre may impose while giving consent to States to raise loans. When the
States are adhering to fiscal responsibility regime and containing their fiscal
deficit at 3 per cent of GSDP and maintaining revenue balance, borrowings are
obviously used for meeting capital expenditure. In such a situation, there does
not seem to be any justification on the part of the Centre to think in terms of
imposing conditions while giving consent to States to borrow.
In
this context, I urge the Finance Commission to recommend continuation of the facility
of additional borrowings over and above
the 3 per cent of GSDP limit to States
which are fiscally prudent and have shown improvement in their own revenue
collections. This will facilitate the States to put their ongoing projects on
fast track and to reduce cost and time overruns. The Commission may consider raising
the additional borrowing facility to 1 per cent of GSDP.
The
Fifteenth Commission has been asked to consider proposing measurable performance-based
incentives to States in a number of areas. I will only touch upon two areas.
The inclusion of implementation of flagship programmes of Government of India
and exclusion of similar programmes of the State Government from the purview of
incentive grants is a matter of serious concerns. The expenditure on flagship
programmes of the Centre in a State is a miniscule of the total expenditure
incurred by a State in a year. I request the Commission to incentivize the
States in the implementation of their own flagship programmes which are much
better designed than the one-size-fits all programmes of the Centre, most of which
are in the State subjects.
Another
performance-based incentive relates to the control or lack of control in
incurring expenditure on populist measures. There are no objective criteria to categorize
schemes into populist and non-populist. India, being so vast and diverse, the
needs differ from State to State and within a State from district to district.
When the Government of Tamil Nadu introduced the Mid-day Meal Scheme, it was
dubbed as populist. Similarly, the Employment Guarantee Scheme launched by the
Government of Maharashtra was criticized. The same schemes were later adopted by the
Government of India. Similarly, the ‘Rythu Bandhu’ scheme launched by Telangana
is being replicated in other States and recently, the Government of India too
launched it covering the entire country, though in a much-diluted manner.
Therefore, the introduction of welfare schemes is better left to the States.
The Fifth Finance Commission expressed difficulties in taking a call on the
propriety of policies of States and regulating grants based on any judgment
regarding particular policies being adopted by individual States. I earnestly
hope that this Commission too adopts a similar approach.
I
would like to flag another important issue for the consideration of this
Finance Commission. In the interests of tax harmonization, States have
compromised their autonomy and extended unstinted support to the Centre in introducing
GST. Sales tax/VAT, the only major source of own tax revenue of States has been
subsumed under GST. Even after the Union excise duties and tax on services are
subsumed under GST, the Centre is still left with buoyant sources of revenue
like income tax, corporation tax and custom duties. While GST has subsumed
around 31 of the gross tax revenue of the Centre, it has subsumed much larger
portion of States’ own tax revenue of around 50 per cent. As the States have
sacrificed their fiscal autonomy, I request the Finance Commission to suitably
compensate the States in the form of higher tax devolution.
The
formula proposed by the State for tax devolution is primarily guided by the
imperative to strike a balance between equity and efficiency. We cannot improve
the lot of the backward States by pulling down the performing States. Taking
into account the dire need to realign resources in favour of States and the
fiscal autonomy foregone by States in the interests of tax harmonization, we
request the Commission to increase tax devolution to 50 per cent of the
divisible pool of Central taxes. This can easily be accommodated by the Centre
by reducing its expenditure on State subjects.
Let
me also briefly highlight the State-specific requirements in a few important
sectors. I will focus mainly on local bodies, Mission Bhagiratha and
maintenance of lift irrigation projects. We have taken decisive steps to
strengthen the local bodies and make them more accountable. We have enacted a
new Panchayat Raj Act and increased the number of gram panchayats from 8,368 to
12,751. Similarly the number of municipalities has gone up from 74 to 142. We
request the Finance Commission to significantly increase grants to rural as
well as urban local bodies. The need for such an increase has been elaborated
in our memorandum.
The
Government has been according utmost priority to provide irrigation facilities
to 1.24 crore acres. In fulfillment of this objective, we have fast tracked a
number of ongoing projects whose implementation remained neglected in the
combined State. We have taken up the prestigious Kaleshwaram lift irrigation
project to provide irrigation facilities to over 18 lakh acres in 13 districts
of the State at an estimated cost of Rs.80,000 crore. Since the State is located
on the upstream of the rivers Godavari and Krishna, there is hardly any scope
for surface irrigation. Invariably, we have to depend on lift irrigation
projects, which are maintenance intensive. The maintenance cost of the lift
irrigation projects during the award period of the Fifteenth Finance Commission
is estimated at Rs.40,169 crore. We request the Commission to support the State
Government by recommending this amount as a maintenance grant.
As the
Commission is aware, another prestigious programme taken up by the State is
'Mission Bhagiratha' to provide treated and piped drinking water to every
household in the State. This will solve the recurring incidence of water borne
diseases once and for all. The Mission is nearing completion in a few months
from now. The maintenance cost of this Mission is estimated at Rs.10,142 crore
in respect of rural component and Rs.2,580 crore for the urban component for
the five-year period 2020-25. We request the Commission to provide a grant
amounting to Rs.12,722 crore. We are making efforts to put in place a system of
levying user charges, but it will take time. Therefore, these grants are needed
only in the initial five years. I am sure that the Finance Commission will
support the State as these are first of its kind projects taken up anywhere in
the country.
I
am very confident that the Fifteenth Finance Commission under the dynamic and
able leadership of Sri. N. K. Singh Ji will herald a new era in Indian fiscal
federalism, making the States fiscally stronger and thereby enabling them to
tap the immense growth potential that the country is bestowed with and make it
stand out as a strong and vibrant nation in the world. We are also confident
that the Commission’s recommendations will pave the way for bringing about realignment
of resources with functional responsibilities.
I
profusely thank the Commission for making it convenient to visit the State. I
hope all of you will have a comfortable stay in this historic and hospitable
city of Hyderabad.
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