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EFC Award: Blinkered View

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The chairman of the Eleventh Finance Commission (EFC) appears to be quite incensed with the eight state governments (let us group them together as G-8), going by the interview published in a newspaper. In the interview he indignantly accuses the chief ministers concerned of “faulty cribbing”, when every state has got more by way of the EFC’s devolution than under the devolution package of the Tenth Finance Commission (TFC). He also rejects the claim of these states of being better performers. The chief ministers of two states, Bihar and Madhya Pradesh, are reported to have charged that the economically better-off states have ganged up against the poorer states. The reaction of these two states is perhaps understandable since their proportionate share in total devolution is significantly higher under the EFC’s award than under that of the TFC and they possibly fear that any revision now by the EFC might affect their share adversely.

It is the observations of the chairman of the EFC that call for careful consideration. When he claims that his commission’s award devolves 91 per cent more than was devolved by the TFC, he evidently ignores the fact that calculations of the EFC are based on nominal GDP growth of 13 per cent and that, as a proportion of GDP, devolution by the EFC makes virtually no advance on the amount devolved by the TFC. Naturally therefore states whose proportionate share is lower stand to lose in real terms. Nor has he any basis for the statement that “the economy of at least half of them [the G-8 states] is in a shambles”. Actually, going by the distance in per capita income from Punjab, five out of the seven G-8 states (excluding Punjab) have reduced their distance and also registered significant rates of growth of per capita SDP during the nineties. Four out of these five states – Andhra Pradesh, Tamil Nadu, Kerala and Maharashtra – registered a substantial step-up in the rate of growth of per capita SDP. Even going by the Improvement Index of Fiscal Self-Reliance constructed by the EFC itself, four out of the eight states are supposed to have achieved fiscal self-reliance. Going by this index, it is higher than hundred for four states and close to hundred for the other three (Maharashtra 99.76 and Andhra Pradesh 95.43 and Haryana 96.4). So is the chairman of the EFC right in charging these states with being fiscally irresponsible?

Some observations seem to be called for also on the composition of G-8. States like Assam and Manipur with per capita income of less than 50 per cent of Punjab and states like Andhra Pradesh, Kerala and even Tamil Nadu with per capita income of 75 per cent or less compared to Punjab cannot be considered as among the better-off states. If they still agreed to be counted among the G-8 it must have been because even they found themselves confronted with a decline in their share of the proposed total devolution. No doubt the relative distance in per capita income of three (Andhra Pradesh, Kerala and Tamil Nadu) of these five states had narrowed during the five-year period (between the late eighties and mid-nineties) but precisely these three states happen to be the ones in whose case the decline in the share of devolution between the two award periods has been substantial (Tamil Nadu by 0.92 per cent, Andhra Pradesh by 0.85 per cent and Kerala by 0.58 per cent). Clearly, when these states joined together in their representation against the award of the EFC, it had to be because instead of being appreciated for raising their per capita income, they stood penalised for having reduced the distance in their per capita income from the state with the highest per capita income.

The way the EFC has gone about formulating its criteria for inter-state distribution, it has clearly overlooked giving credit for the progress made by the poorer states in reducing their per capita income distance. In fact, several of the G-8 states are also the ones which have succeeded at the same time in reducing the proportions of their population below the poverty line. For example, between the eighties and nineties (between 1983-84 and 1993-94) the percentage of the population below the poverty line declined by 16.63 per cent in Tamil Nadu, by 14.99 per cent in Kerala and 6.72 per cent in Andhra Pradesh. Where the EFC has evidently erred is that while raising the weightage for per capita income distance, from 60 per cent to 62.5 per cent, it has omitted to recognise the performance of the states in reducing their per capita income distance and also poverty. The mere fact that some of the poor states like Bihar, Madhya Pradesh, Orissa and UP stand to benefit in terms of their share of the proposed devolution does not establish that equity has been adequately provided for.

 

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