TFC playing havoc with central finances

The government will face an outgo of Rs 26,000 crore a year on account of the recommendations of the Twelfth Finance Commission (TFC).

This amounts to 0.75 per cent of gross domestic product, putting pressure on the government's fiscal and revenue deficit targets for the next year.

Non-Plan grants to states are expected to go up to Rs 33,269 crore in the Budget estimate in 2005-06, up 135 per cent from the revised estimate of Rs 14144 crore in 2004-05.

The states' share of taxes and duties is up to 30.5 per cent against 29.5 per cent under the Eleventh Finance Commission. As a result, states will get Rs 94,959 crore (Budget estimate) in 2005-06 against the revised estimate of Rs 78617 crore in the current fiscal, an increase of almost 21 per cent.

On the other hand, central assistance plans for states and Union Territories have come down by Rs 29,003 crore as states will be required to raise this amount as market loans.

For the next fiscal, states have been given the option of raising this money from the market or through central borrowings.

However, when working out the fiscal deficit figure, Finance Minister P Chidambaram has assumed that all states will go in for market borrowings.

In effect, this means that he has under-budgeted for the Plan outgo, which will be somewhere between Rs 1,43,497 crore he has assumed for the next year and Rs 1,72,500 crore, which is the gross budgetary support, inclusive of central loans to states.

One fallout of removing the figure for Plan loans to states from the Budget totals is a steep decline in capital expenditure reflected in the Budget papers.

The cut in capital expenditure and in Plan expenditure is because these heads do not include Rs 29,003.22 crore worth of central loans to states, which states will be required to raise directly from the market, as per the recommendations of the commission.

Given the steep hike in grants going to states, the government has also passed on a number of small centrally-sponsored schemes to states.

States will also be able to reschedule all central loans contracted up to March 31, 2004 into fresh loans for 20 years, carrying 7.5 per cent interest if they enact fiscal responsibility laws.

This has been done in accordance with the commission's recommendations.

The final transfers, of course, will depend upon how well central tax collections do. In the past, for both the 10th and 11th commissions, with central tax collections below target, states have got a lot less than targeted.