Give states Rs 30,000 cr a year: Panel

Finance panel for more devolution

The total outgo to states on account of the Twelfth Finance Commission's (TFC) recommendations is expected to be around Rs 30,000 crore a year.

This will include the benefits states will get because of higher devolution, significantly higher non-Plan grants, a reduction in the interest rate on outstanding debt to 7 per cent and an extension of the repayment period to 20 years.

The commission's recommendations will be in effect for the next five years (2005-10). It has also recommended increasing the share of the divisible pool of central taxes and revenues for states to 30.5 per cent.

The TFC is also reported to have recommended that the Centre should do away with Plan loans to states and allow them to go in for market borrowings.

Therefore, if the recommendations are accepted, the Centre will continue to give states the 30 per cent grant component of central assistance and do away with the 70 per cent loan component.

The commission has said such a move, along with the sharp increase in the non-Plan grants recommended in its report, will help improve the fiscal position of states.

Whether the recommendations will be applicable to all non-special category states or to a limited number of fiscally-responsible states is, however, not clear.

Doing away with Plan loans will be favourable with states, especially in the case of social sector schemes like those for education, which do not generate any returns.

The argument for doing away with Plan loans is expected to be that, in order to get a grant of Rs 30 as part of its Plan, the state has to take a loan of Rs 70 from the Centre.

In the case of social sectors, where there are no monetary returns, forcing a state to take a loan will mean worsening its debt position, as it will have no commensurate increase in revenue to show for an investment.

In addition, states are likely to get equalisation grants to develop their health infrastructure. The equalisation principle is based on the Canadian experience, where states with a fiscal potential below the national average get a grant from the Centre equal to the difference between the national average and their tax-raising potential.

This ensures that citizens in all states get a comparable level of services.

The report will be tabled in Parliament, along with an action taken report, during the Budget session which starts on February 20.