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Aide-memoire to the 13th Finance Commission on Devolution of Funds

A discussion of important issues on the horizontal and vertical equity in distribution of tax revenues which the 13th Finance Commission must grapple with as it heads towards completing its work. This article also suggests a formula for horizontal distribution of revenue that takes into account a number of appropriate criteria.

Aide-memoire to the 13th Finance Commission on Devolution of Funds

Abhay Pethe

It is a well-known fact in federal finance literature that, whereas the central government has greater access to tax resources, the state governments have to face greater burden of delivery of public goods. This creates an imbalance referred to as vertical imbalance. Admittedly, it is quite difficult to precisely estimate the “rational” quantum of resources that needs to be de-

A discussion of important issues on the horizontal and vertical equity in distribution of tax revenues which the 13th Finance Commission must grapple with as it heads towards completing its work. This article also suggests a formula for horizontal distribution of revenue that takes into account a number of appropriate criteria.

This note largely owes to my experience of working with the memorandum committee of the government of Maharashtra as well as some of the work that I did for the 13th Finance Commission directly or indirectly. It started with the paper on issues before the 13th FC and this note represents, in a sense, the culmination. I record my deep sense of appreciation for the discussions with B N Makhija as well as principal secretaries of the government of Maharashtra, in particular Sunil Soni (Planning) and Vidyadhar Kanade (finance) amongst others. I also thank the FC members, especially the chairman, Vijay Kelkar for his encouragement. None of those referred to above has seen this note, and hence, needless to add, the views and errors and inadequacies are mine.

Abhay Pethe (ampethe is with the Department of Economics, University of Mumbai.

he 13th Finance Commission (FC) is in session. As it moves towards completing its work of giving the award, it is imperative that it keeps in mind a few things at this crucial juncture. This article sets out some of the issues dealing with the horizontal and vertical equity as well as grant principles when it comes to local bodies.1 Any discussion about the Indian economy has to firmly keep in mind the parametric environment that defines the economy and its immediate future. The parametric environment is defined – in the first instance – by the onset of the process of liberalisation, privatisation and globalisation (or LPG for short) in the context of Indian macroeconomy. At second remove, but perhaps more important, is the fact of a fractured polity. This is reflected in coalitional governments, emergence of regional parties and agendas as well as the emergence of strong regional leaders within the national parties. The r ecent growth story has yielded many good fruits to the Indian economy despite its unmistakable exclusionary sub-plot. The latter is decidedly a good thing (not withstanding the current slowdown) and policies to ensure the growth with i nclusion assume centrality in any and all endeavours.

The Core

One of the core duties of the central FC as per the Article 280(3) of the Constitution is to make recommendations for the d istribution of the net proceeds of s hareable taxes between the centre and the states and among the states of the respective shares.2 In public finance literature dealing with fiscal federalism, these are called vertical and horizontal distri butions, respectively. Despite 12 central FCs having deliberated and given awards, these issues are as yet not completely s ettled.3

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volved so that the states may perform their duties properly. We have, however, tried to suggest a variable that may serve as a basis for such an estimate. While historically there has been a consistent demand from the states for greater devolution share of the central taxes, successive FCs have used their own discretion in determination of the share. While much the same is likely to continue, there are some i mportant specific features of the current parametric environment with respect to policymaking frame that we will touch upon briefly. The fiscal position of the states is much better this time around as compared to the earlier time when 12th FC was in session (this is despite the temporary blip due to the current slowdown).

The exercise of working out the overall share to be devolved is akin to solving a problem of constrained optimisation. The constraints bite both ways and the unfortunate tendency is to give in to the omnipresent “force of gravity or inertia”. Here we mention only two pertinent issues. I ndia has been seen as one with federal set-up, but essentially a union with a strong centripetal bias. As already mentioned, in the recent past, however, the political space in India has been characterised by fractured polity. It would not be incorrect to say that the days of coalitional governments (at all levels) are here to stay for at least some time more in the immediate future. The rise of regional parties as well as regional leaders has given a fillip to regional (state-level) aspirations. All this is reflected by the fact that more and more ground has to be yielded to the states in the recent past. Hence, more than ever before, political feasibility in a fractured and heterogeneous domain will present a biting reality. The second point has to do with the fact that for the first time, the FC has been asked to have regard (among other things) to the demands on resources of the central government vide section 3 (ii)

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of the terms of reference (ToR).4 Although it is welcome, even when normatively estimated, this is going to put a downward pressure on devolution-share, thereby, perhaps eroding the authority of the constitutionally mandated central FC. The FC will have to fight hard against this residual role and struggle for territory. It will have to assert itself as a constitutional authority as against the Planning Commission which is the result of only a cabinet decision.

Vertical Distribution

As already noted, the fact of vertical imbalance is well-documented in the literature on fiscal federalism. While there can be no two views on the universallyevidenced general proposition that both the revenue and fiscal deficits have to be reined in. We believe that the macro-caps, as currently enunciated through the Fiscal Responsibility and Budget Management Act (FRBMA) do not go far enough, and i ndeed, come in the way of good fiscal practice. Hence, a more nuanced normative approach to redressing the problem of revenue deficits across states as well as fleshing out of micro-level benchmarks is required. This renders one element of the basis for providing the rationale for e nhancing the overall share to be devolved to a level of 40%. Thanks to FRBMA states’ finance in terms of macro-caps, the issue of revenue deficits (RDs) and gross fiscal deficits (GFDs) are passé and the general position of state finances that confront this FC is much better than in the earlier case (as confronting the 12th FC). Indeed, in case of many states the RD has turned to surplus (albeit marginally).5 Of course, the current meltdown and its impact on India as well as the impact of the Sixth Pay Commission is temporarily going to throw the fiscal discipline to the dogs. In any case and without the temporary shocks, the malaise continues to be reflected in structural symptoms in yet another form. There are issues of debt stock and servicing thereof. Despite efforts at best practices, in expenditure control, the borrowing is just enough to tide over the servicing and many a state continues to be categorised as a debt-distressed state thereby shutting out avenues for borrowing for purposes of capital expenditure. This is akin to e xperiencing a debt trap and needs a s pecial attention from the 13th FC, e specially in the context of Section 26 in its ToR which requires it to suggest m easures for stable and sustainable fiscal position of the states. Much has been achieved through the debt financing f acility put in place by the 12th FC. However, the central government in its treatment of National Small Savings debt takes illegitimate arbitrage profits. The mark-up costs that it charges for management of these funds are reflective of an inefficient process as well as an unfairness not unlike a moneylender of the worst kind. The FC must write off these debts over the term of its awards, especially since these are not an i mportant source of debt in the incremental sense.

As stated earlier, the fact that RDs as well as GFD retard growth finds – as a first cut – almost a universal acceptance. There is a consensus on this even amongst those who believe that the classification based on revenue-capital and planned non-planned need to be seriously revisited and refined. Unfortunately, this has the consequence that not much is left for spending on the crucial social sector, which has b ecome a casualty. Illustratively, in Maha rashtra, for instance, the non-salary spending for education and health has remained stagnant in the recent past even in nominal terms. It is in this typical context that we request an enhancement of the overall devolution share from the current 30.5%.

For providing a basis for our request for enhancement, we suggest that the 13th FC should look at the fiscal space available with the states. In the broadest sense, fiscal space can be defined as the availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government’s financial p osition. Thus, the provision of fiscal space is nothing but providing comfort to the states for carrying out their core function of providing public goods. Thus, while all efforts at “good practices” such as reprioritisation, borrowing less than allowable limit and scrupulously keeping to the targets set by FRBM, the discretionary fiscal space (DFS) of the states have remained low in the recent past. In case of Maharashtra, despite doing all it has been called upon to do, the DFS has significantly eroded in the recent past. It needs to be noted that this space argues for adequacy in provisioning of devolved funds which is an important element of quality of expenditure that the 13th FC has been asked to pay attention to vide Section 3 (vii)7 of its ToR. Here we have defined DFS as:

DFS = {Rev Exp – Interest – Admin – Wages and Salaries}/Rev Rec.8

We have carried out an exercise of computing the space and what additional devolution in terms of share is needed to provide a reasonable space for the resurgent states. Our computations show that if the states have to be provided with 50% of DFS, then the share to be devolved by FC has to go up to 50%. For a provision of around 45% of DFS the devolution share needs to go up to about 40%. Our suggestion, therefore, in keeping with the fact that talk of much higher devolution percentage being in the air, is that the percentage to be devolved to the states should be enhanced to a level of 40%. In reaching its conclusion, we would like the 13th FC to keep in mind the practice of the central government levying surcharges and keeping them outside the divisible pool. Also, we would urge the commission to boldly discard the incremental approach (dictated by an inertial force) and go for a big bang approach instead.

Before moving on to the matter of horizontal distribution, we would briefly touch on the matter of the practice of the central government of levying surcharges outside the divisible pool. We would urge the commission to take this into account before taking a call on the precise proportion to be devolved to the states. Also, given that one of the major sources of flows to the states is by way of Plan grants, the commission has to take into account the additional fiscal stress that the states have to confront by way of maintenance of the a ssets so created and activities so undertaken. While the untied or otherwise nature of such flows as well as the proportion of loan and grant components in these need to be reviewed by the Planning Commission, the FC has to pay some attention to these matters since “committed liabilities” find an explicit mention in the ToR (See 3 (ix))9 of the FC this time around.

Thus, the peculiar circumstances in I ndian federation arising out of diminishing

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discretionary fiscal space for the states, the treatment of debt by the centre and the exclusion of certain revenue sources from the divisible pool, not to mention the encroachment of the Planning Commission, imply a need for enhancing the proportion of the divisible pool to at least 40% (although the empowered state finance ministers are arguing for 50%!). This is r equired also on the basis of the current political scenario, where the states are trying to emerge from the central shadow and assert their identities.

Horizontal Distribution

While in the following, the reference to Maharashtra is made repeatedly, it needs to be understood in the illustrative sense for the sake of concrete arguments, many of the arguments are carried at a more general level to similarly placed (wellperforming) states such as Karmataka and Gujarat. Maharashtra has been at the receiving end of the awards of the successive central commissions of recent vintages. In the earlier memoranda submitted we had shown how Maharashtra’s share in divisible pool had steadily declined over the years. From a high of around 16% in the income tax by the 2nd FC, it had declined to about 6% in the 10th FC. The case of excises was no different. The situation worsened in the 11th FC, following the 80th Constitution Amendment. The share then declined to a horrendously low share of 4.63%! The situation with the 12th FC was not much better with the share pegged around 5%. It must be realised that such a precipitous decline has a serious disincentive effect with the perception that progressive states get a raw deal from the FCS and implicitly encourage laggards.

Over the past, all the commissions have debated the criteria that must go into the determination of horizontal distribution among the states. While an attempt to be fair has no doubt been at the core of the considerations, there has been a perceptible change in the criteria over time and the successive FCS, undoubtedly reflecting the changing ethos and macroeconomic parametric environment and evolving concerns. While there is little reason to detain ourselves in tracing these changes over the years, we must mention that efficiency and incentive compatibility considerations have started making an appearance at least from the 7th FC. Given the current Indian economic ethos and her aspiration to emerge as a potent force in the world order we believe that such considerations must be strengthened further. It naturally follows that this has to be r eflected in the weighting scheme that the current finance commission adopts.

There can be no two views on the merit of having a consensual and stable regimen in place, when it comes to laying down the variables and the corresponding weights that come to bear in horizontal distribution. After all, frequent and drastic changes only help send out confusing signal to the states and are in no one’s interest. We would like to take steps in the direction of bringing just such a convergence. The change then will have to be reacted to only by refinements largely brought about by changing the weighting diagram. Of course, for this the first condition is to have a base criterion firmed up, keeping in view the current economic ethos. Los Angeles „ London „ New Delhi „ Singapore „Washington DC New from SAGE! Global Journal of Emerging Market Economies Editor: Harinder Kohli The Global Journal of Emerging Market Economies provides an international platform for publication of research papers on the emerging global economies. It publishes articles based on the broad themes of financial integration, trade facilitation, cross-border trade and investment, regional integration, financial sector challenges, investments, productivity and competitiveness, and public–private partnerships. The journal aims to make available basic reference material for policy-makers, business executives and researchers interested in issues of fundamental importance to the economic prospects and performance of emerging market economies. Highlights of Volume 1, Issue 1 Will Emerging Markets Remain Resilient to Global Stress? Pete Dattels and Ken Miyajima The Coming of Age of Sovereign Wealth Funds: Perspectives and Policy Issues Within and Beyond Borders Adriana Arreaza, Luis Miguel Castilla and Cristina Fernandez Cross-border Trade and Investment among Emerging Economies: Lesons from Differing Experiences in Africa, Asia and Latin America Claudio M Loser The Conflict in the Caucasus: Causing a New Cold War? Jorge Heine Income Disparity and Growth Vinod Thomas Regional Integration of Capital Markets in ASEAN: Recent Development, Issues, and Strategies (with Special References to Equity Markets) Jaseem Ahmed and V Sundararajan ISSN: 0974-9101 Triannual: January, May, September Annual Rates: Institutional: Rs 1,800 SAARC Rates: Institutional: $ 61

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We find little reason to dwell on the c ontributes over 26% of the state’s income. computed (the 12th FC has followed the
past suggestions and the corresponding Of course, even within Mumbai there are same method as enunciated by the 11th
res ponses (outcomes) by the earlier FCs, pockets of poverty, and indeed, the in- FC) is fundamentally flawed and leads to a
even when some of the things there are come is highly skewed. The per capita in situation of “winner’s curse”. The implica
parti cularly favourable to Maharashtra. come in Mumbai is more than three times tion of this for Maharashtra is in the na-
For example, the collection criteria would of the national average and removing ture of a double whammy. First, because
be very well-suited to the cause of Mahar- Mumbai from Maharashtra causes a huge this is an equity or a need-based criterion,
ashtra, and yet we recognise that it has drop in the per capita income of the state. and Maharashtra is deemed (incorrectly)
been d iscarded since 9th FC, and hence, It is, of course true that, distribution of as a “rich” state, it loses out by definition.
we shall say no more about it. All the rele i ncome is never uniform and this is thus a Second, since the weight attributed to this
vant issues and discussions are very well problem likely to be faced elsewhere too. criterion being very large, the magnitude
documented in the past memoranda that While logically correct, this is not the case of impact is necessarily large. Maharash
we have submitted to the earlier FCs. We because of the peculiar importance in tra is a state with tremendously skewed
shall instead straightaway briefly mention magnitude terms of Mumbai in the con regional pattern of income. If one were to
the criteria and weights applied in the text of Maharashtra. No other metro any compute the coefficient of variation of dis
12th FC award and then go on to making where in India plays as significant a role as trict level incomes for a state, the value for
our suggestions. Mumbai in its state. Thus Mumbai distorts Maharashtra comes out to be 0.61, which
In its wisdom the 12th FC used the the picture of Maharashtra’s gross state is much greater than any other states (the
f ollowing criteria and weights: domestic product (GSDP) in quite a unique value of 0.3 seems to be the median/
manner. Thus, even while acknowledging mode). As noted earlier, whereas a few
No Criterion Weight (%) extremely the skewed distribution of districts have per capita incomes which
1 Population 25.0 i ncome, removing it from relevant consider are multiples of national average, there
2 Income distance 50.0 ation may restore some semblance of real are as many as 17 districts that are lan
3 Area 10.0 ity and credibility to the figures represent guishing below the national average. The
4 Tax effort 7.5 ing Maharashtra’s GSDP. Let us now look at citizens here are in serious need of public
5 Fiscal discipline 7.5 the criteria incorporated in the 12th FC goods provisioning, especially in the so
and critiquing them we will move towards cial sector. However given that the flows
We must say that, whereas at a funda our submission, in this regard, to the from FCs have dramatically fallen, espe
mental level, we have no great dispute 13th FC. The argument is that some cially on count of criterion under discus
with the criteria chosen except to make e lement of dispersion has to be taken into sion, despite good practices and intent,
two comments. First, while the element of account. There is also another (more the state has not been able to do as much
equity is still overwhelmingly dominant, g eneral) element that the criterion if not as it would want. This is because of the
only about 15% are devoted to what could refined properly will lead to encouraging contraction in fiscal space that we referred
be categorised as efficiency consideration. laggards by rewarding inefficiency. to earlier and on latest count had fallen to
As we have argued earlier, the present 23% (and we have not factored in the im-
I ndian economic scenario and ethos war- Population: We continue to believe that pact of Sixth Pay Commission!).
rant greater weight be afforded to “effi problems of states with larger population We discuss/suggest some ways to ap
ciency criteria”. Second, we would suggest are quite different from those faced by proach the problem. One suggestion could
that, the way two of the criteria, viz, in smaller states. The cost of basic public be to compute the distance from the single
come distance and tax effort are goods to be provided, depends on the size highest income and add to it the standard
i ncorporated, is flawed and does not quite of the population (and not all of them are deviation of the GSDPs. The important
address the issues properly, and hence, amenable to economies of scale). This is point of principle is that some dispersion
does not serve the purposes for which they especially true, if considerable proportion disaggregated measure has to be looked
have been incorporated. We elaborate this of its population is below poverty line. at! This means that we look at either some
in the relevant sections that follow. But Mercifully, the 12th FC in contrast to the disaggregated data (say at the district
first we briefly dwell on a familiar theme 11th FC did increase weight assigned to it
of the peculiar regional skewness that we to 25%. While endorsing the criterion, we Style Sheet for Authors
had dealt at length elsewhere. We, of would still request for a marginally in- While preparing their articles for submission,
course, are referring to the exclusion of creased weight to population to the extent contributors are requested to follow EPW’s
Mumbai, while treating Maharashtra to of 30% with a modification (if data per style sheet.
avoid distortion. mits) of working out population pressure The style sheet is posted on EPW’s web site at
It is a well-known fact that Mumbai is a measure (based on some asset-base). Per
major growth driver of national impor haps, the last is overly ambitious as yet! It will help immensely for faster processing and
tance. It is also a major resource centre error-free editing if writers follow the guidelines
from the point of view of state as well as Income Distance: This is a criterion with in style sheet, especially with regard to citation
central treasury. The fact is that it which we have serious issues. The way it is and preparation of references.

june 13, 2009 vol xliv no 24

l evel) or consider some other poverty or backwardness or human development i ndex (HDI)-related indicators.

The problem with the latter (ginicoefficient or backwardness index) is that reliable and consistent data across India is not available. Further, the actual implications of using these data (normalised in some form) in a formulaic manner are unclear (the fact that it will lead to cluttering and complicating the formula contravening the tenet of “keeping it simple” is least of the issues). Most importantly, issues such as poverty and HDI and backwardness are outcomes, and hence, represent a “good” criterion on the face of it. But properly seen they are likely to suffer from lead/lag issues. Also they are likely to fall outside the purview of FC and could be deemed legitimately to belong to the d omain of Planning Commission to be tackled with centrally-sponsored schemes (CSS) and such other planned schemes and strategies. To elaborate, lower levels of HDI (say) could be due to lower assets (e g, hospitals, schools) or they may be due to existing assets not being operational because of bad maintenance. While the outcomes may be the same, the solutions as pointed out earlier may lie with Planning Commission (earlier scenario) or the FC in the latter case. Thus, the underlying reverse functionality is ambiguous. Hence, it would be proper to pursue the suggestion of using the district level data for the income-distance criterion. Indeed, a computation shows that the share under this criterion for Maharashtra is comparable to states like Rajasthan and Orissa. We mention this only to underline the extent of unfairness involved in the historical application of this criterion. Given that standard comparable and official data at district level is as yet unavailable, the other way to tackle this issue is to use the standard deviation (or an appropriate normalised measure of dispersion of the state’s income, which could be proxied/derived from the consumption data from NSS rounds) and “add” it within the distance criterion. There is often the issue raised of the reliability of the point estimates of consumption (among other things) based on NSS type survey. While this is a point well taken, we believe that the confidence on the bands and distribution of the consumption pattern estimates should be quite reliable (under the fairly general assumption of similarity of errors/biases across states). The third or the final alternative would be to reduce the weight of this criterion in the formula.

Area: As far as area is concerned we completely endorse this criterion. In the context of provision of public amenities/ goods, apart from population pressure, area is of considerable importance. The difference is that, whereas added population densities do sometimes allow for economies of scale to be reached (up to the point of congestion whence diseconomies kick in, in case of area, larger areas do pose more than pro rata problems of d elivery). This leads us to believe that not only must this criterion be retained, but perhaps it ought to be retained with even a marginally greater weight of, say, 15% in the formula.

Tax Effort: As far as the “tax effort” criterion is concerned, our point is that, whereas conceptually it is a proactive and an e fficiency criterion, the way it is measured is incorrect. This is because it is computed as the ratio of tax revenue to GSDP, an i ncrease in effort being seen as a desirable thing. This would be right except for the fact that the increase in the GSDP does not reflect the taxable base for a state. We need to measure (and reward) the effort of a state in terms of what is legitimately possible. This is generic and is applicable to all the states, except for the fact that the state of Maharashtra is peculiar in the composition of its production structure. With a huge proportion coming from services, and with industry and agriculture along with related sector being squeezed in the proportionate sense, the incremental taxable capacity for the state does not rise as fast as the income. Thus, the contention here is that despite being a highly taxed state, Maharashtra does not get its due on this criterion. We thus urge the commission to use this criterion (indeed with added weight) but after appropriately redefining it. We suggest that the appropriate ratios could be, for example {Own-Tax Revenues/Revenue Expenditure} or {Own-Tax Revenues/(GSDP-Services Sector)}.

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Fiscal Discipline: This is a criterion that has been continued by the 12th FC in the same form as was originally proposed by the 11th FC. We endorse this completely (indeed, with an added weight) as an efficiency criterion. Of course, with FRBMA targets being met some of the elements of this index will perhaps have to be revisited by entering into the microstructure of state budgets. Of course, this will have to be done with care (keeping in view the scale effects) so that greater sophistication than use of mere ratios (which were fine for broad macro-fiscal-variables) may be called for. Indeed, it may be worthwhile to do so by revisiting it in the context of the whole issue of debate in the arena of “ revenue/capital” and plan/nonplan reconceptualisation.

Decentralisation: After the 73rd and 74th constitutional amendments, the third-tier of governments hasattained constitutional legitimacy. It is well-established in the context of realpolitik, to make them t ruly effective will require a constitutional amendment, by way of replacing “may” to “shall” to compel the states to devolve.10 It is also recognised that decentralisation is a “good practice” and it is in conformity with the tenets of both the enlightened self-interest of the states as well as incentive compatibility. Econometric evidence suggests that those states that decentralise well have been benefited through h igher tax buoyancies at local levels thus r elieving fiscal stress on the state itself. It is time that decentralisation is finally and truly “invited in”. While the earlier attempt at creating a decentralisation index may have come in for sharp criticism, and hence discarded, there is nothing to stop us from creating a simple transparent i ndex based on the 3Fs

– functions, functionaries and funds – in decentralisation literature. One could simply take the proportion of functions transferred in a state, the number of functionaries at the local levels as a proportion of state-level employees and the size of the government (normalised per capita) at the local level. Short of constitutional amendment, this will be a smart and a concrete way to underscore the importance of 73rd and 74th constitutional amendments as practice in good governance. One way thus, to empower the process of

vol xliv no 24


“decentralisation” is to add it to the criteria for devolution with a significant weight.

Thus, in sum, we would suggest: increase fairness of the devolution. Create greater discretionary fiscal space so that auto nomy of the states is increased and they are able to provide/deliver better public goods. Our suggestion tabulated (criteria and weights) are given in the table:

No Criterion Weight (%)
1 Population 30
2.a Income distance 12.5
2.b Standard deviation of state income 12.5
3 Area 15
4 Tax effort 10
5 Fiscal discipline 10
6 Decentralisation index 10


Apart from statutory devolution the way to strengthen decentralisation is to i ncrease the size of the local governments. While the capacity to absorb is a concern, it should not be used as an argument against augmenting the resources with panchayati raj institutions and urban local bodies. The real empowerment will come with revenue handles rather than revenue assignments and full expenditure auto nomy vested with the local b odies. But this is a larger agenda that will take a while and is not necessarily within the purview of the FC. Also, there is an argument of including the funds for the local bodies being given as a part of statutory devolution. This is worth s erious consideration (along with the a rgument that the FC should – in the present circumstances – be directly talking to the local bodies, by passing the state government), however, the legality of such steps needs to be considered. At any rate the crux of the matter is that there has to be a multiple-fold increase in the flows going to the third-tier of government. In making such assignments, it is essential that the formulae should not be cluttered or complicated. The present situation (including the working of the state FCs, and the prevalent “acts” that govern the functioning of local bodies) do not warrant revenue effort or such other criteria being used. The flows to local bodies should be focused on allowing the local bodies to operate and maintain the assets in some demarcated areas (such as water, roads and e ducation). Rather than equalising c onsiderations, the equalisation has to be worked out on the basis of existing a ssets. This has implications that backwardness or poverty indices will not work. The formula for working out the pro portions to the states should be based on population (pressure), area to be serviced and operation and maintenance (O&M) requirements.11

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june 13, 2009 vol xliv no 24

In Conclusion

Keeping in view the current ethos that is suited to the macro management of the Indian economy, the 13th FC must suitably devise a formula that moves t owards incentive compatibility. This is especially important in the context of the fractured polity. The points to keep in mind would be:

  • (1) Devolve greater proportion to the states, given their mandate for provision of social sector public goods and the d iminishing discretionary fiscal space.
  • (2) Give greater weight to efficiency criteria within the statutory devolution formula.
  • (3) Bring about changes in debt management by the centre.
  • (4) In computation of income-distance c riterion, keep the intra-state variations in mind.
  • (5) The variable tax effort, while laudable and important has to measured appropriately keeping in view the taxable capacity (potential) of the state.
  • (6) Strengthen decentralisation by adding a criterion to the statutory devolution f ormula
  • as well as augmenting flows to the local bodies for O&M of specified e xisting assets.


    1 All the references are published as Vibhooti S hukla Unit Working Paper Series, that are available on the web page of the Economics Department of the University of Mumbai web site. The reader interested in details may refer to some of these recent papers. These papers reflect different aspects of the points mentioned here. The detailed arguments as well as references will also be available in these papers.

    2 The relevant part of the terms of reference (ToR) of the 13th FC reads: The commission shall make recommendations as to the following matters, namely: (1) the distribution between the union and the states of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the a llocation among the states of the respective shares of such proceeds.

    3 “Financing the Panchayati Raj Institutions: Flagging Some Issues for the 13th Finance Commission” by Abhay Pethe, 2008, Vibhooti Shukla Working Paper series (VSUWP)- 27, Department of Economics, University of Mumbai.

    4 The relevant part of the ToR of 13th FC reads: 3. In making its recommendations, the commission shall have regard, among other considerations, to: (ii) The demands on the resources of the central government, in particular, on account of projected gross budgetary support to the central and state plan, expenditure on civil administration, defence, internal and border security, debt servicing and

    other committed expenditure and services. 5 See “Strengthening Decentralisation – Augmenting the Consolidated Fund of the States by the Thirteenth Finance Commission: A Normative Approach” by Abhay Pethe, B M Mishra and P Rakhe (2008), VSUWP 31, Department of Economics, University of Mumbai. 6 The commission shall review the state of finances of the union and the states, keeping in view, and in particular, the operation of the States’ Debt Consolidation and Relief Facility 2005-2010 introduced by the central government on the basis of recommendations of the 12th FC, and suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth. 7 In making its recommendations, the commission shall have regard, among other things to: 3 (vii) The need to improve quality of public expenditure to obtain better outputs and outcomes. 8 See “Introducing Expenditure Quality in Inter

    governmental Transfers: A Triple-E Framework” M Lalvani, K Hasra and P Brajesh (2008), V SUWP 32. 9 In making its recommendations, the commission shall have regard, among other things to: 3 (ix) The expenditure on non-salary component of maintenance and upkeep of capital assets and the non-wage related expenditure on Plan schemes to be completed by 31 March 2010 and the norms on the basis of which specific amounts are recommended for maintenance of the capital assets and

    the manner of monitoring such expenditure. 10 See “Finances of Panchayti Raj Instituions: A Simple Story But a Messy Plot” by Abhay Pethe and M Lalvani (2008), VSUWP 28. 11 See VSUWP 31 (op cit) and “Issues for the 13th Finance Commission: Welcome to the Grey World of Trade-offs” by Abhay Pethe (2008), VSUWP 34.

    The Other Media is a Delhi based organization that came into being more than seventeen years ago as a Forum for articulating dissent. We see in the people’s movements for peace, disarmament, denuclearisation, environment, gender justice and in the struggles of the working people’s, dalits, adivasis and religious minorities a robust and a healthy expression of popular desire for building a society based on justice, peace and democracy. In pursuance of these objectives the organization runs several programmes in different parts of India. We are looking for suitable candidates to fill the following vacancies:-

    Vacancy: Finance Management Coordinator

    The Other Media is looking to fill the vacancy of the Financial Management Coordinator. Reporting to the Executive Director, the Finance Coordinator will be responsible for overall management of the Finances Desk. He/she will be responsible for monitoring of the grants received by the organization, MIS generation and financial reporting and help with and support the financial audit of the organization. Lastly, the Coordinator will also be responsible to support the various program Desks of The Other Media in and outside Delhi in their financial management and planning.

    For this position, we seek a Post Graduate in Commerce with a minimum of 2 years of prior work experience. Diploma in Accounting, Finance or Management is an asset. The successful candidate will have excellent communication skills, be a team player and work under minimum supervision.

    Salary is negotiable depending on qualifications and experience. Women candidates are strongly encouraged to apply.

    Vacancy: Information and Communication Coordinator

    The Other Media is looking to fill the vacancy to manage its Information and Communication Management System to evolve a system of documentation, and data collection for research, dissemination and information.

    The successful candidate will be responsible to collect and document information on developments (including news, policy changes etc) in relation to the core areas of The Other Media's work, systematize this information for the purposes of research and dissemination, manage TOM’s websites, manage TOM's documentation holdings and organize, catalogue and manage sales.

    Individuals with a Bachelors or a Masters degree in any of the Social Sciences may apply. Desirable qualifications include knowledge of IT systems and association and previous work experience with social movements and campaigns.

    Salary is negotiable depending on qualifications and experience.

    Women and candidates belonging to SC/ST communities are strongly encouraged to apply.

    Interested candidates may send their CV and a 500 word note on the reasons for applying for this position. Completed applications may be sent to or post it to The Other Media, J-42, II Floor, South Extension – Part I, New Delhi - 110 049 no later than 25 June 2009. Selected candidates will have to appear for a personal interview at the above address. Outstation candidates will be interviewed over the phone.

    june 13, 2009 vol xliv no 24

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