Federal finances : Tight Cap

The recommendation of the Eleventh Finance Commission (EFC) that total fiscal transfers to the states should be subject to a ceiling of 37.5 per cent of the gross revenue receipts of the central government is said to be based on the commission's finding that "the revenue transfers to the states between the period 1997-2000 fluctuated between 37.02 (1997-98) and 39.69 (1990-91 and 1991-92)". The commission also noted that in 1998-99 and 1999-2000, these percentages came down significantly to around 32-34. What the commission overlooks is that the percentage of total fiscal transfer in 1992-93 and 1993-94 was as high as 40.40 and 44 respectively. The average percentage for the five-year period from 1990-91 to 1994-95 works out to 40.51 per cent, with statutory fiscal transfer at 24.38 per cent. Thus while the commission acceded to the centre's suggested 'holistic approach', namely, "to take into account the fiscal transfer to the states from the central government in its entirety", it overlooked that in recent years, between 1990-91 and 1994-95, the percentage of fiscal transfer had ranged between 38.72 and 44.

In suggesting a cap of 37.5 per cent the EFC has clearly opted to reduce the level of central fiscal transfers to the states. The argument is not convincing that in fixing the cap of 37.5 per cent the commission "has been guided by the need to provide adequate funds to meet the centre's requirements on committed expenditure such as interest payments and defence, as also availability of adequate funds for its plan revenue expenditure and other vital areas of expenditure". This is tantamount to saying that the requirement of the states for not only their committed expenditure but also for having reasonably-sized plan revenue expenditure are not deserving of the consideration the states have been pleading for. They have demanded in both the Inter-State Council and National Development Council a cap of no less than 50 per cent for total fiscal transfers from the centre to the states. Worse, from the immediate point of view, the cap on the share of states is thus being fixed at much below the level that was reached in the early 1990s. It cannot be argued that in those years the centre was unable to meet its genuine constitutional obligations, even while its resource mobilisation effort left much to be desired. It is noteworthy that the EFC has at no point thought it necessary to link the cap on fiscal transfers to the level of resource mobilisation by the centre relative to GDP.