The Fourteenth Finance Commission, which will re-set the formulae governing the share of states in the tax revenues of the Government of India for 2015-20, will be constituted in November 2012. Finance Commissions are given 24 months in which to do their work, after which they die an institutional death. Like all its predecessors, the Fourteenth Commission will seek a further extension of two months, but it simply cannot go beyond December 2014, because the Centre has to know the statutory flows due to states well before its Budget for the fiscal year 2015-16 falls due in February 2015.
Even though these timetables are well-known and totally predictable, no spade work is done before the notification of each Finance Commission so as to ensure that it actually gets 24 months of work time for its task. Instead, the focus in the months before notification focuses excessively on the people who will be on it, rather than on the processes that will facilitate their task, no matter who they might be.
Because Finance Commissions are newly constituted every five years, the physical premises in Delhi have to be located anew each time, the lease closed, and the interior carved into office space for its chairman, four other members, and a staff size of about 100. Astonishingly, this process is only begun after the Commission is notified. Because the Thirteenth Finance Commission had an exceptionally able secretary, the entire task was miraculously completed within a space of six months. Office space of about 10,000 square feet, in a single location that is accessible yet secure, is increasingly difficult to find in Delhi.
The premises cannot belong to the Central government because the Commission is an inter-governmental body appointed by the president of India, which cannot be beholden to any of the governments between whom it apportions resources. The lease can only to be taken from a private party or a parastatal, and the crushing urgency of the need pushes up the cost of securing it astronomically. I will be surprised if the next Commission is able to rent premises for anything less than a rental of Rs 12 crore per year. That adds up to a total expenditure over the life of the Commission of Rs 26 crore for rental alone, adding on the two-month extension.
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If the premises were located and ready for occupancy before the Commission is notified, their task could begin the very first day, and actually have a whole 24 months for completion, rather than 18 months or less.
The other process that could begin right now is a letter to all states for appointment of their Finance Commission cells, required to assemble the data for what is by now a well-known exercise repeated in a five-yearly pattern. With this, state cells could in principle be manned and running right at the start of the two-year period. After installation, they need anywhere from six months to a year for assembly and transmission of the data required by the Commission. These requirements are extremely onerous, covering fiscal projections of state revenue and expenditure, as well as accounts of state-owned enterprises, and equivalent information on urban and rural local governments.
When, as at present, all movement towards setting up state cells is started only upon receipt of a communication from the Finance Commission, the data from states on the basis of which work can begin arrives about a year later.
That leaves a year for the Finance Commission in which to complete its assigned task. During this period, the Commission is required to visit every single state capital to obtain clarifications on the data submitted, meet with the political leadership and the bureaucracy, and take on board state views on federal fiscal arrangements. With 28 states, and three days on average for each, state visits take a bite of three months out of the residual year. That leaves nine months.
In the time that remains, the Commission has to meet in Delhi with the accountant-general of each state, to get an independent and confidential assessment of the fiscal situation prevailing in each. It also has to meet with all the major Central ministries, separately by department, for the Central schemes emanating from them, and the co-funding from states required in respect of these. This takes another three months.
The actual work of setting the structure of statutory flows therefore gets done in great haste in the last six months. During this time, the information gathered has to be digested, opinions formed, differences sorted out, drafts written and re-written, and the final report proofread and printed. You see why they always need an extension.
This business of terminal hour stress is entirely avoidable. It happened with the Commonwealth Games, and it happens every fiscal year with the March push to spend funding allocations.
Some suggest that the trauma surrounding the birth and death of Finance Commissions could be avoided by making it a standing body, like the Planning Commission. My personal opinion is that a standing Commission would be a bad idea. One of the best features of our Constitution is the provision for a fresh set of five people, appointed every five years, to look at Centre-state fiscal arrangements. It is among the strongest institutional pillars of the Indian federation, and offers the best protection possible against the build-up of vested interests. We have an established tradition whereby the recommendations of Finance Commissions have been accepted without demur or modification by the government. At a time when government and Parliamentary processes stand heavily corroded and stalled, the conventions surrounding the formation and disbanding of Finance Commissions need to be preserved. Just a little advance preparation will ensure that every new Commission gets a full two years in which to execute its all-important task.