Finance commissions are the only statutory instrument through which equalisation in access to public services is sought to be achieved in the Indian federal structure. Parallel state-level commissions exist for third-tier local services within each state. Couched in legalese, the terms of reference of national finance commissions have an arcane ring for those unfamiliar with articles and clauses in the Constitution, but the core burden of their task is to ensure the capability for roughly equivalent levels of public services to any Indian citizen, regardless of state of location. Finance commissions attempt compensation for differences in fiscal need, modified by cost disabilities, across this vast and varied country. This is necessary, but not sufficient, to ensure equality of access.
By convention, every commission seeks to familiarise itself with the needs of states by making a formal visit to each state. But no visuals can substitute for comparable numbers on fiscal capacity, on the basis of which alone any objectively equitable allocation of fiscal resources across states becomes possible.
For some reason, this is not an act we have managed to get together in 60 years. We do not know the relative income of states on an accrual basis; we only have estimates of domestic product originating within each state. Expenditures taxable by the state, whether in the pre- or post-GST era, are financed from income, regardless of the source of that income. Income may accrue from (net) inward remittances into the state, or from activity originating within the state. And this is where we live in a vast ocean of ignorance.
Remittances accruing to a state could alter very substantially the relative ranking of states by fiscal capacity. Kerala is informally estimated to receive inward remittances from other countries amounting to a quarter, at least, of income originating within the state. In recent years, it has also become a source of outward domestic remittances to eastern states. The net balance is anyone’s guess. Although external remittances flowing into the country are known, their distribution across states is not tracked. Periodic eruptions of turbulence alert us to the phenomenon of labour movements within the country, but there is no systematic record of the corresponding domestic remittance flows.
This is by no means to disparage the hard work done by the national income unit of the Central Statistical Organisation (CSO). Perhaps the pressure to issue country-level figures, in full view of the world, with quarterly frequency and greater accuracy than was the case as recently as 10 years ago, has come in the way of looking at the subnational situation. But a minimal degree of coordination between national and state statistical authorities could have ensured the generation of subnational estimates simultaneously with the national effort. A mutually cooperative process could actually reduce the burden of estimation at each level.
At present, states generate their own estimates of domestic product, and these are reported on the website of the CSO. However, official bodies like the finance and planning commissions cannot use them, because they are said to lack methodological uniformity. But why is this so? Every state finalises its domestic product estimates only after bilateral discussions with the CSO. The entire country follows a standard methodology laid down by the United Nations Statistical Office. Indeed, many distinguished Indian statisticians were among those who drafted that manual. Why then should there be departures within the country for a process which, though arduous, should have a uniform information-gathering mechanism in place?
The CSO, therefore, supplies official bodies with “comparable” estimates of state domestic product. Fortunately, Finance commissions by convention publish these in their reports, so that a comparison with the website figures is possible. If the margin of disparity between the two is not wide, there should be no need for estimates on two tracks. And if it is wide, as indeed is the case for some though not all states, the need for methodological convergence to a single set, publicly available, is paramount.
A few possible reasons for the disparity are dimly visible in what remains a dense fog. Agricultural estimates are revised several times for the non-comparable estimates, often substantially, but frozen at the first estimate in the comparable estimates, which are never revised. If agriculture was the only cause of disparity between the two estimates, the margin should, in principle, alternate in sign between years, which it does only in the case of some states (Bihar, for example).
There are other states where the margin is systematically positive or negative (and large) across the years. One possible reason could be that they use their own index of industrial production in place of what the national index assigns to them. Instead of incorporating state-level estimates of industrial production into the national index, which should ideally be so built up, the comparable estimate imposes the national index on all states.
For both reasons, the (final) non-comparable estimate on the website is likely to be the truer estimate. But official bodies are compelled to use the comparable number. Quite aside from this functioning in effect as a data barrier to equalisation, we need to clean up our act on state income estimates for other reasons.
The new GDP series introduced in 2010 carries some methodological changes along with the switch to the new base of 2004-05. One of these is the shift to the Annual Survey of Industries in place of the Index of Industrial Production as the base for estimating industrial production. That is a good start. If state estimates are also shifted to this platform, the national and state estimates will be aligned, at least for this sector. And if we are serious about agricultural productivity, as indeed we should be if we do not want food price inflation to get hard-wired into the Indian system, we need to sharpen our measurement instruments there as well.
The author is honorary visiting professor, ISI Delhi
