I. The Thirteenth Finance Commission has hiked the share of the states in Central taxes from the existing 30.5% to 32% while making a strong pitch for greater fiscal discipline both at the Centre and in the states. The commission also made a case for disinvestment and privatisation of state public sector units (PSUs), saying non-working ones should be closed down by 2011. The government had accepted most of the major recommendations, while some others like the ones related to the goods and services tax (GST) scheme or the fiscal roadmap were accepted in principle but the modalities were yet to be worked out. The commission has advocated a calibrated exit from the government stimulus package in response to the financial crisis and also suggested that proceeds of disinvestment should be made available for funding infrastructure projects. It has also recommended financial incentives for states with good performance in areas like infant mortality and administration of justice.
II. The commission’s report estimated that over the period 2010-2015 the states would get around Rs 14.5 lakhs crore as their share of Central taxes and duties and another Rs 3.1 lakhs crore as grants-in-aid if its recommendations are implemented.
III. The latter sum includes Rs 50,000 crore to be set aside for compensation to states for moving to the goods and services tax (GST) which is slated to be introduced from April this year. It also includes Rs 5,000 crore each for reducing infant mortality rates (IMR) and introducing renewable energy programmes.
IV. The grants also include a sum of Rs 51,800 crore set aside specifically for eight states the northeastern states barring Assam and Sikkim as well as Himachal Pradesh and Jammu & Kashmir as a grant to help them bridge their non-Plan revenue deficits.
ADVERTISEMENTS:
V. Like the grants for reducing IMR and for introducing renewable energy, there are others linked to outcomes. One of these is an Rs 5,000 crore grant for improved administration of justice and one of Rs 2,989 crore for implementing the unique identification (UID) system.
VI. Local bodies like panchayats and municipalities are to get an estimated Rs 87,519 crore over the next five years, which would be around 2.3% of the divisible pool of Central taxes. The commission has also said that state governments should share royalty income derived from things like minerals with the local bodies in whose jurisdiction the income arises.
VII. The changes made by the commission in the formula for sharing this pool among the states are likely to leave some states crying foul that they have been short-changed while others quietly celebrate a windfall.
In its indicated roadmap for fiscal correction, the commission recommended that the Centre should have no revenue deficits by 2013-14 and its fiscal deficit should be less than 3% of GDP. As for the states, they would have to meet the same targets in a staggered manner depending on their current deficit levels with the last of them meeting a 2014-15 deadline. The combined debt of the Centre and states should also come down to 68% or less of GDP by 2014-15.
ADVERTISEMENTS:
VIII. Recognising that Pay Commission awards have had serious adverse implications for state governments in particular, the Finance Commission suggested that in future recommendations of pay commissions should not be made retrospectively effective. Instead, they should take effect only after they had been accepted by the government.
IX. A recommendation made in this context that could have a far reaching impact on senior citizens in particular is that the small savings schemes should have market-linked interest rates to reduce the distortions the current higher rates introduce.
X. On the move to GST, the commission said that states should be offered a grand bargain, and only those states that accept the grand bargain should get compensation from the Rs 50,000 crore fund for that purpose. The bargain would include, among other things, a binding agreement between the states and the Centre that would allow the latter veto powers on any changes in the rates. It would also mean that rate changes approved by three-fourths of the states would have to be accepted by the rest provided they are not vetoed by the Centre.
XI. The report came down on the Centre for its practice of raising a substantial chunk of revenues through cusses and surcharges, which do not form part of the pool to be shared with the states. In fact, this is cited as one of the reasons for enhancing the states share in the divisible pool.
ADVERTISEMENTS:
It also criticized the Centre for tax exemptions which not only lead to large amounts of revenue foregone, but also skew the benefits in favour of certain states because some of them are area- based exemptions. It pointed out that the revenue foregone due to tax exemptions was of the order of Rs 4.2 lakhs crore in 2008-09, by the government’s own admission. yy Another bone of contention between the commission and the finance ministry was that according to its calculations, the Centre was actually not giving the states the 30.5% share they were supposed to be getting under the 12th Finance Commission’s recommendations.
It said the Centre had offered an explanation on this suggesting that its accounts do not entirely reflect the true position and that in fact it was passing on 30.5% to the states. The commission said if this was the case, the Centre should ensure greater transparency in its accounting.
XII. The commission also expressed the view that it would be better to move away from centrally- sponsored schemes to formula-based sharing with the states to preclude the possibility of skews in the regional dispersion of the funds for such schemes. » The practice of moving several major liabilities like the oil and fertilizer bonds off-budget also came in for sharp criticism on the grounds of lack of transparency.