Federal Fiscal Relations : Blow from EAC

While state governments have yet to realise how the Eleventh Finance Commission's recommendation to link the release of a constitutionally mandated grant-in-aid to the performance of a state in implementing the state-specific fiscal reform programme (SSFRP) designed by a monitoring agency set up by the central government will dilute their limited autonomy in fiscal management, yet another bolt has come, this time from the prime minister's economic advisory council (EAC) to extend similar linkage to central plan assistance to fiscal performance of states. In fact, the EAC's recommendation goes farther than what the EFC's linkage proposal implied. While the EFC was satisfied with linking only 15 per cent of the grant fixed to cover a state's non-plan current account deficit, adding up to Rs 5,308 crore over a five-year period, the EAC's proposal aims at linking 50 per cent of central plan assistance, which amounts to Rs 33,340 crore in the single year 2000-01, to fiscal performance by the states. The EAC has justified its recommended linkage on the ground that "even if finance commission transfers which until recently were completely unconditional can include an element linked to performance, there is no reason why central plan assistance cannot be linked to performance of states". In fact the recommendation of the EAC to use the instrumentality of central plan assistance to impose from above on the states a quantitatively worked out fiscal reform plan is very much more ambitious.

The amounts involved in terms of the linked fiscal transfers under the EAC's recommendation are so much larger compared to the amounts involved in the linkage proposed by EFC that there is no doubt that the states will come under considerably greater pressure from above in regard to the manner they would be obliged to manage their finances, be it in the mobilisation of revenues or in expenditure reduction. In any case, the EFC's scheme of linkage has hardly been into operation yet and can hardly be cited as a precedent to be followed.