Ceiling On Funds Devolution To Reduce Share Of States

The 37.5 per cent ceiling on the devolution of funds recommended by the 11th Finance Commission is inadequate and will squeeze plan allocations to states. An analysis of the EFCs recommendations carried out by the Andhra Pradesh government concludes that this ceiling will lead to a cut in the budgeted provision for states share of central resources in the budget for 2000-01. The EFC has recommended that "all transfers have to be taken in totality and their components like tax devolution, grants-in-aid and grants in other forms like plan grants should be decided in the light of the overall ceiling." In addition, the states have been further constrained by the EFC by placing restrictions on the borrowing limits of states. While no specific limit has been laid down, the declining central transfers and increasing commitments of the states to develop and maintain social and economic infrastructure, this condition will have a dampening effect on the capacity of states to leverage funds from private and external sources, the analysis claims. The state has called for a discussion in the inter state council or the national development council before a final view is taken. The state has also criticised the construction of the index of fiscal discipline in the limited terms of revenue receipts as a ratio of revenue expenditure. The index needs to account for other aspects like performance in loan recovery, effort and efficiency in disinvestment, or it may prove to be a disincentive in the long run, it warns. States have also lost out due to the normative approach adopted by the EFC. AP has lost out due to unrealistic assumptions about the states revenue receipts and lower projections of revenue expenditure. AP has been included in the highest tax buoyancy category, with a tax buoyancy figure of 1.35 and 18.9 per cent per annum growth rate of tax revenue. In addition the normative returns assessed on the states' investments in power and transport sectors are completely unrealistic, the state claims. On the other hand, lower projections of the establishment costs and maintainance of irrigation and road infrastructure have led to AP not benefitting from the EFCs recommendations. The analysis also points out that the criteria adopted for distribution among the states has been varying as per the perceptions of each of the Finance Commissions, without these becoming an identifiable and flexible part of an overall framework of fiscal federalism. The note circulated by the state also states that the high income and middle income states which contribute to the GDP and export effort in a significant manner have had to suffer at the hands of the EFC. The share of the high income states in the devolution of taxes has gone down to 9.75 per cent in the EFC from 13.14 per cent in the TFC. In addition, the middle income states appear to have suffered a marginal decline in share in tax devolution and in total resource transfer mainly becausse of a sharp increase in the share of West Bengal. The approach adopted by the commission has put a premium on non performance and may ultimately lead to the economic stagnation spreading to the rest of the country, the analysis states. In addition the Andhra governments' critique of the EFCs recommendations is based on inadequate debt relief. States with high tax to GSDP ratio will not be able to take advantage of the debt relief scheme in its current form.