Be fair to the Finance Commission

Be fair to the Finance Commission
Yoginder K. Alagh

When I worked in the FAO at Rome at the Terme de Caracacalla two decades ago, I was a stone's throw away from the abode of the Caesars. One could almost feel the Roman legions coming down the famous Roman Appias, in this case the Appia Antica, and saluting their emperor. But the Caesars themselves were guarded by the Praetorian Guards and the Romans still have a saying which, liberally translated, means ``Who will guard the guards?''.

Almost all federal large democracies with written Constitutions give separate responsibilities to the Central or Federal government and the state or provincial governments. Correspondingly, different levels of government have resource-raising powers. But life is not static. For example, who anticipated satellite communication in the fifties? Agriculture no longer gives resources to government. The government itself is changing. In India, it is being sought to be made slimmer. So independent adjustment mechanisms are provided for sharing of resources.

In India, an autonomous Finance Commission is set up every five years. It gives some general prescriptions but its core report is an award, as it were, since by definition neither the Centre nor the states can be expected to be dispassionate about this issue. I was once asked to decide on the sharing of waters in an inter-state river in one season. I was happy to be told that both the states were unhappy at my report. This meant I was irrelevant or, more likely, succeeded in being fair. So it is with finance commissions.

There is a more serious critique. B. P. R. Vittal wrote from his Hyderabad retreat days ago that the resource devolution process was not equalising enough. He was echoing a critique of well-known economists like Amaresh Bagchi, Iqbal Gulati, the late D. T. Lakdawala, and M. G. Govinda Rao. When I was in the Planning Commission, I always sympathised with this view but there was always enough contrary data. Then, in the nineties, there was a definite study on this. Of all the places, it came from the International Monetary Fund.

The IMF worked on resource transfers from the Central government to the state governments for over 30 years and said that at the margin the process was definitely leading to income convergence. The study by Paul Cashin and economist Ratna Sahay was published in the IMF staff papers in 1996 and unfortunately has not received much attention in India. They concluded after 40 pages of analysis ``that there has indeed been convergence in real per capita income across the states of India during the period 1961-1991'' and again ``grants from the Central government to the states did ensure that the dispersion of real per capita incomes was narrower than the dispersion of state real per capita incomes, as relatively more grants were transferred to poor states than to their rich counterparts".

In other words, those who argue that federal transfers in India are not associated with growth are incorrect in terms of the facts of economic development in post-Independence India. The Finance Commission and the Planning Commission did play a role, perhaps an important one in keeping the country together. For confirmation the critics have only to go to the IMF. Touche, Ratna Sahay is incidentally in the news today asking on behalf of the IMF that aid should not go to corrupt countries.

The case of UP and Bihar are interesting. UP was a fast-growing state in the eighties and also fuelled agricultural growth. Then it started worrying about other issues and started declining with governments varying from the extreme right to the left. Bihar was also growing in the eighties and has stood still since then. I made this a matter of concern in the Ninth Plan approach paper, arguing that you can't have two-fifths of the country either stagnant or declining. Three ideas have come up since then. The first is Pant's concept of MoUs of devolution linked with specifics of achievement.

The second is an idea in Delhi to have a demonstration effect with carefully selected visible success stories sponsored as Central projects. This incidentally goes back on the Panchayati Raj but, in these states, may be the only way. The third is to sidestep everybody and work through the banks, producers groups, NGOs coops and so on. It is early hours yet and it may take time for an approach to jell, which may be a combination of all three. The Finance Commission, asked to report on the effectiveness of expenditure. has still to give its findings, having only submitted its targets on fiscal restructuring.

Meanwhile, a radical school is at play. A leading national daily has asked the Indian centre to wither away editorially, although its economic counterpart is playing a responsibly educational role about the needs of a federation, reflecting the business concern at the advantages of a national markets in a liberalising economy being frittered away by lunatic arguments.houghtful Indians serving abroad are sending disturbing reports of `think tanks' talking of the dismemberment of India. It is hard to build institutions, easy to weaken them. Only one newspaper reported that the Chairman of the Finance Commission had made a civilised plea that his report on efficiency should be read before an issue is made of it.