The Hindu Business Line : States deserve a larger share

If political clout is to determine resource flow to the States, it can affect infrastructure projects and welfare schemes and, in turn, hit investor sentiment.

With roughly a year to go for the General Elections, Centre-State financial relations are heading into turbulence. There are many dark clouds on the horizon: rising cost of State borrowings; lower growth of tax receipts as a result of the industrial slowdown; higher expenditure commitments of the Centre, particularly on oil and fertiliser subsidies; and increase in the number of States ruled by the Bharatiya Janata Party and its allies. The first three factors will squeeze State finances. States have already pruned their revenue spending since the Fiscal Responsibility and Budget Management Act came into effect in 2003, leaving them with little elbow room in the event of a drop in projected revenues and capital receipts. This situation may force the States to knock at the doors of the Planning Commission for project-related transfers. Political equations will come into play; States that belong to the same political camp as the ruling coalition at the Centre are likely to benefit, particularly when the Centre, too, is squeezed for options. This scenario could, in fact, persist beyond the elections, if high commodity prices continue to act as a drag on growth.

If political clout is to determine resource flow to the States, it can upset infrastructure and welfare commitments, which, in turn, will hit investor sentiment. The role of the Thirteenth Finance Commission becomes all the more crucial in a situation of political flux; it should ensure that rule-based transfers play a bigger role than discretionary grants through the Planning Commission. If these issues have not assumed centre-stage, it is perhaps on account of a number of factors: tax buoyancy at the Centre; improved growth in State revenues, thanks to value-added tax; and relief to States by way of debt swaps and compensation packages after 2001. But as this positive picture could well change, the Finance Commission should consider increasing the share of States’ revenues from the present level of 30.5 per cent of its taxes.

Between the Eighth and Tenth Finance Commissions, States got about 45 per cent of the Union excise duty proceeds and around 80 per cent of income tax proceeds, while the Eleventh Finance panel settled for a devolution of 29.5 per cent of all taxes. Transfers to States were not hit by this change, as the kitty increased with the growth in cess-related and service tax revenues since 2000. High rates of economic growth in recent years also had a beneficial effect on transfers. Yet the fact remains that States deliver most of the public services, the costs of which are rising, and they also need an assured flow of funds to undertake long-term projects, irrespective of changing political equations. They deserve a higher share of the taxes collected.

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