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Finance Commission and Backward States

Commission. And that is what was found by the TFC. Punjab and Kerala both being Finance Commission high per capita income level states were assessed to have per capita pre-devolution revenue deficit of the order which was and Backward States K B L MATHUR Even though this is not the season for comments on Finance Commission issues, the provocation for this piece is to respond, in brief, to a minor but important issue raised by G R Reddy (EPW, August 12, 2006) in the special article on

Discussion

Commission. And that is what was found by the TFC. Punjab and Kerala both being

Finance Commission

high per capita income level states were assessed to have per capita pre-devolution revenue deficit of the order which was

and Backward States

K B L MATHUR

E
ven though this is not the season for comments on Finance Commission issues, the provocation for this piece is to respond, in brief, to a minor but important issue raised by G R Reddy (EPW, August 12, 2006) in the special article on ‘Twelfth Finance Commission and Backward States’. Reddy has expressed a concern on the “use of grants as an instrument for state-specific and purpose-specific targeting”. According to him, “while the latter objective has been met to a large extent, the objective of greater equalisation has not been met”. This, Reddy concludes by saying that “the benefit of sizeable specific maintenance grants for roads and buildings has mostly gone to better-off states”.

Conclusions like this are reached even by expert analysts, like Reddy, perhaps because of (a) the overhang of the equalisation objective, and (b) non-recognition of the distinction between a “better-off” state by income level and by fiscal balance level.

First, the very fact that a “sum” is being allocated on the basis of normatively assessed specific need of a specific state, any such allocation cannot be targeted to fulfil the equalisation objective. And therefore, it is not fair to analyse specific purpose grant allocation on the criterion of progressivity and that too with respect to per capita income level.

Second, it is not correct to assume that all better-off states in terms of per capita income level are better-off in terms of fiscal balance as well. Thus a high per capita income level state may have a negative pre-devolution revenue deficit as normatively assessed by a Finance

Table: Twelfth Finance Commission: Grants for Roads and Buildings – Select States

Select States Per Capita Pre-devolution Population Per Capita Grants for
GSDP Revenue (2001) Pre-devolution Maintenance
(Average of Deficit (-)/ (Crore) Deficit (-)/ of Roads and
1999-02) Surplus (+) Surplus (+) Buildings
(Rs) (Rs Crore) (Rs) (2005-10)
(Rs Crore)
(1) (2) (3) (4) (5) (6)
High income
Punjab 28030 -9367 2.44 -3839 573
Maharashtra 26994 +27317 9.69 +2819 1414
Kerala 22824 -12468 3.18 -3921 746
Haryana 26256 +18783 2.11 +8902 3 3 5
Gujarat 22708 +13735 5.07 +2709 1098
Low income
Rajasthan 15059 -22670 5.65 -4012 846
Madhya Pradesh 13340 -7256 6.03 -1203 1030
Orissa 11234 -29089 3.68 -7905 1864
Uttar Pradesh 10798 -57228 16.62 -3443 3003
Bihar 6539 -46214 8.30 -5568 669

Source: Report of the Twelfth Finance Commission (2005-10), November 2004, GOI. For col 2 Annex Table 7.7 of the Report. For col 3 Annex Table 6.12 of the Report. For col 4 Annex Table 7.6. For col 6 Table 10.7 and 10.8 of the Report.

almost three times that for Madhya Pradesh – a low per capita income level state and more than that for UP, again a low per capita income state (see col 5 of the table).

One may, as usual, say that the higher per capita state would not deserve specific purpose grants as compared to a low per capita income state as the first one would have higher capacity to raise resources. But it needs to be remembered that these fiscal imbalances for the states are after the normative assessment made by the Finance Commission for both revenue and expenditure projections where the state specific capacity to raise revenue is already factored in. Similarly, even in the allocation of grants for maintenance of roads and buildings the TFC made normative assessment for the sums required for each state.

Even so, out of the total amount of Rs 20,000 crore grants recommended by the TFC for all the states (Rs 15,000 crore for maintenance of roads and bridges and Rs 5,000 crore for maintenance of buildings), the first five high per capita income states were allocated Rs 4,166 crore compared to Rs 6,812 crore for the last five low per capita income general category states. To convert these sums into per capita would tantamount to nothing but committing yet another folly simply because the allocations are strictly based on the state specific requirements assessed normatively taking into account the road lengths and plinth area for buildings. Population criterion in any case is equity neutral as rightly agreed to by Reddy himself.

Thus Reddy’s conclusion that “the benefit of sizeable specific maintenance grant for roads and building has mostly gone to better-off states” does not bear logical or factual testimony.

EPW

Email: kblmathur@hotmail.com

Economic and Political Weekly September 2, 2006

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