Centre, states get road map to recast finance

Backward states will get extra for health and education.

The Twelfth Finance Commission (TFC) has provided the Centre and states a road map to restructure public finances""an issue ignored by the previous three commissions. The commission has also sought to provide relatively backward states with targeted equalisation grants for health and education.

Gujarat, Punjab, Maharashtra and Rajasthan are among the major beneficiaries of devolution while states whose relative shares have gone down include West Bengal, Karnataka and Kerala.

Devolution is proposed to be raised to 30.5 per cent with the indicative amount of overall transfers to states fixed at 38 per cent of central gross revenue receipts.

Uttar Pradesh, Assam and Bihar will gain the most from the targeted grants for health and education. These states are slated to get 86.6 per cent of the targeted health grants and almost 83 per cent of the grants for education over the next five years.

The recommendations will mean an annual outgo of Rs 26,000 crore for the Centre. The government has accepted all the recommendations of the commission, headed by C Rangarajan, which had submitted its report to President APJ Abdul Kalam on December 17, 2004.

The cumulative interest relief to states after consolidation, rescheduling and lowering of interest rates to 7.5 per cent has been estimated at Rs 21,275.65 crore in the period up to 2009-10.

The commission has assumed a nominal growth of 12 per cent for 2005-10 and has estimated that gross tax revenue will grow at a compounded annual growth rate of 14 per cent against 10 per cent growth in the Centre's expenditure in the same period.

The estimate of expenditure is based on the assumption that subsidies will be cut and service tax collections will rise by 20 per cent between 2005 and 2010.

In a move that will ensure greater fiscal discipline and reduce the fiscal deficit of the Centre, the commission has made a case for extending only Plan grants to states and leaving borrowings to them.

It has also suggested a detailed road map for restructuring public finances. This requires each state to enact a fiscal responsibility law.

On the grants side, rather than following the gap-filling approach, which induces states to spend recklessly in order to increase the revenue gap, the commission has attempted to follow a normative approach, which effectively neutralises adverse incentives for states.

While the Indian federal structure started out with the objective of achieving equalisation, a lot of money had been allocated without really improving capacities and without adequate consideration given to efficiency. This is an imbalance the report seeks to address.

Special grants for health and education, introduced for the first time, are viewed as a good idea, provided the conditionalities ensure that the money is well spent.

At the same time, complaints by better performing states ""that they have been losing out on tax devolution ""have also been addressed. This was done by reducing the weight given to income distance in the inter se allocation of resources from 62.5 in the Eleventh Finance Commission report to 50 in the present one.