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Guiding Role of Central Finance Commission Regarding State Counterparts

State finance commissions ensure that finances are appropriately devolved to all the tiers of the panchayat bodies. This role is supplemented by the central finance commission, establishing an "organic" link between the two. Can the Thirteenth Finance Commission prove to be a better guide to the SFCs than its predecessors?

PERSPECTIVEEconomic & Political Weekly EPW may 31, 200825D Bandyopadhyay ( is with the Council for Social Development, New Delhi.Guiding Role of Central Finance Commission Regarding State CounterpartsD BandyopadhyayState finance commissions ensure thatfinancesare appropriately devolved to all the tiers of the panchayat bodies. This role is supplemented by the central finance commission, establishing an “organic” link between the two. Can the Thirteenth Finance Commission prove to be a better guide to the SFCs than its predecessors?The 73rd constitutional amendment was enacted to restore power to where it belonged. Devolution of powers, functions, authority at the sub-state level was the objective of this amend-ment. Thus, theoretically, the 73rd amend-ment conceived of a six-layered polity starting from the gram sabha, through the gram panchayat, block/tehsil panchayat and zilla parishad to the state and the centre. The idea could really take shape if the finances could be correspondingly devolved for all the tiers of the panchayat bodies in an appropriate manner.For this purpose, the Constitution pro-vided for the creation of the state finance commissions (SFCs) every five years under Article 243 I for the devolution of finance from the state level to the three tiers of panchayats. The Constitution also amen-ded Article 280 regarding the Central Finance Commission (CFC) adding sub-clause (bb) to clause (3) of the same article. TheCFC was mandated to suggest “measures needed to augment the consoli-dated fund of a state to supplement the resources of the panchayats in the state on the basis of the recommendations made by the finance commission of the state”. Link between CFC and SFCBy mandating the CFC to base its recom-mendations to augment the resources of the panchayat on the basis of the recom-mendations made by the SFC, the Consti-tution established an “organic” link between theCFC and the SFCs. The Elev-enth Finance Commission (EFC) accepted this linkage by observing in para 8.11 “the determination by us of the measures needed for augmentation of the consoli-dated funds of the states for supplement-ing the resources of panchayats and municipalities has to be done on the basis of the reports of the SFCs. In factSFCs’ recommendations should have been the basis of our report but it could not be so in full measure for several reasons” [GoI 2000]. TheEFC also listed these reasons. These were: (i) the non-synchronisation of the period of recommendations of the SFCs and the CFCs; (ii) the lack of clarity with respect to the assignment of powers, authority and responsibilities to panchay-ati raj institutions (PRIs); (iii) the absence of a time frame within which the state governments are required to take action on the recommendation of SFCs; and (iv)the non-availability of the reports of theSFCs [GoI 2004].The Parliament enacted the Finance Commission (Miscellaneous Provisions) Act 1951, which prescribed the qualifica-tions a person must have to be appointed as the chairman or a member of the CFC. In spite of the provisions under Article 2431(2), only a few states had enacted laws similar to the central act. This had led to a wide diversity in the matter of qualifica-tions of the chairman/members of the SFCs. “For instance in some states, serving government officers are appointed as chairperson and members of the SFC and that too in ex officio capacities. This puts limitations on the ability of the SFC to act as an autonomous body to make recom-mendations in a free and independent manner, as has been envisioned in the Constitution” [GoI 2000]. TheEFC recom-mended appropriate legislation to the states to ensure that chairperson and members of SFCs should be drawn from amongst experts in specific disciplines such as economics, law, public administra-tion and public finance (ibid). Thus, willy-nilly, theEFC gave itself the role of a guide though it provided for no mechanism for the monitoring and enforcement of its guidelines and non-fiscal recommenda-tions. In view of the various constraints which prevented the EFC to base its advice on the recommendations made by the SFCs, it suggested an amendment to the Constitution by deleting the words “on the basis of the recommendations made by the finance commissions of the state”. Though one could sympathise with the EFC, in their total exasperation and annoyance about the SFCs in making this
PERSPECTIVEmay 31, 2008 EPW Economic & Political Weekly26recommendation, it was good that the central government did not accept the suggestion, otherwise this organic link would have snapped, perpetuating the existing confusion.It must be said to the credit of the EFC that it did perform its oversight role though it made no attempt to formalise and institutionalise it. EFC’s three areas of concern related to preservation of civic services, maintenance of accounts and audit and a very weak database. The EFC did not stop by only expressing its con-cern. To remedy the situation, it provided for an ad hoc annual grant of Rs 1,600 crore for panchayats primarily for “main-tenance of accounts, development of a database and audit to be the first charge of this grant. The amount remaining there-after was to be utilised by the local bodies for maintenance of core civic services” [GoI 2004]. Since there was no monitor-ing and supervisory agency, the result was that out of Rs 200 crore set apart by the EFC for the creation of the database, states could spend only Rs 93 crore. Worse still was that out of allocation of Rs 483 crore for maintenance of accounts only Rs 113 crore was utilised. This is a poor reflection on the priorities of the states. Equally dis-turbing is the fact that although the Comp-troller and Auditor General prepared budget and accounting formats for PRIs and urban local bodies with a view to rationalising them, only six states have issued formal orders to implement them [Oommen 2005]. States and Their Finance CommissionsHow did the states treat their own finance commission reports? It is a tale of gross disregard, utter disdain and total inaction. One feels constrained to believe it but the brazen and ugly facts fly in one’s face. The TFC commissioned a study which was con-ducted by the National Institution of Rural Development on this issue. The TFC sum-marised findings of the study in the fol-lowing terms: “With regard to implemen-tation of SFC reports, which were accepted the following issues were highlighted: (a) several states did not take follow-up action in terms of legislative/admini-strative measures; (b)recommendations marked “under examination” met with “natural death”; (c) very few states have honoured their commitment for the release of additional resources against these recommendations; (d) budgetary provisions regarding these recommenda-tions have “fallen short”.The study has admitted that it could not succeed in assessing the net additional resource flow from the states to the pan-chayats consequent to the implementation of the SFC recommendation [GoI 2004]. Thus, states treated the recommendations of their own SFCs with utter contempt and disrespect. No further comment is called for.Augmentation of the consolidated fund of a state to supplement the resources of the panchayats is required when panch-ayats have been endowed with functions and activities as indicated in the 11th schedule of the Constitution. With the devolution of functions budgeted funds and functionaries, panchayats would require additional funds to implement their basic function to put into effect plans prepared for economic development and social justice. Intensity of activities would be much higher and deeper with local level planning as mentioned in Article 243G of the Constitution. Hence, to be fair and transparent, theCFC should have an objective indicator of the real devolution of powers, functions and activities. Thus, an objective “devolution index” (DI) prop-erly constructed with appropriate ingredi-ents would have been greatly helpful. The EFC did try to approach the issue ration-ally. It devised the following 10 parame-ters for the purpose of arriving at the index of decentralisation: (i) enactment/amendment of the state panchayat legisla-tion; (ii) intervention/restriction in the functioning of PRIs; (iii) assignment of functions to PRIs by state legislation; (iv)actual transfer of functions to PRIs by way of rules, notification and orders; (v) assignment of power of taxation to PRIs; (vi) extent of exercise of taxation powers; (vii) constitution of the SFCs and submission of action taken on their reports; (viii) action taken on the major recommendations of the SFC; (ix) regular elections to PRIs; and (x) constitution of the district planning committees as per the letter and spirit of the Article 243ZD (ibid).One may agree or disagree with these 10 point parameters for the construction of the DI. There was undoubtedly a scopefor further refinement to make the DI more realistic and effective. In spite of that, one has to appreciate that the EFC tried to create an objective set of criteria for recommending additionality of funds. Since there has not been any real devo-lution of functions and activities except in Kerala the preparation of such an index could have been politically embarrassing. This is probably why having set the param-eters, the EFC did not proceed further. Role of 13th Finance CommissionThe TFC having acknowledged the work done by the EFC could not, perhaps, mus-ter the courage to proceed with the issue. Sensing its grave political awkwardness, with superb bureaucratic timidity, it dropped the idea. Thus, it chose the role of the proverbial blind man searching for an elusive and mute black cat in a totally dark room. One could question both the ration-ality and objectivity of their recommenda-tions under Article 280(3)(bb).The 13th Finance Commission (13th FC) has the opportunity to set right many acts of omission and commission ofits worthy precursors, not on the grounds of the usual predecessor-successor complex but to strengthen the financial base of thePRIs on sound, objective and rational founda-tions.In the first place, it should openly and explicitly assume the role of overseeing the functioning of the SFC from a techni-cal angle without, in any way, trying to influence their judgment as implicitly laid down in Article 280(3)(bb) of the Consti-tution. This should include, inter alia, a standard formatting of the structure of the report, commonality of database and the methodology of interpreting both the required financial and economic data and information that would go into the sub-stantive part of the report.Second, it should review the quantita-tive and qualitative aspects of the expend-iture of monies granted by the EFC and TFC for administrative upgradation, etc. Unjustified failures should be sharply brought out followed by some degree of disciplining activity. For instance, since only 30 per cent of monies granted by the
PERSPECTIVEEconomic & Political Weekly EPW may 31, 200827EFC was spent on creating a database and preparation and maintenance of accounts of thePRI, any further grant inthis regard would be subject to the state’s own effort to fill the gap out of its own resources before fresh money could be released.Third, the 13thFC should develop a workable, objective and rationalDI, which should be the basis of augmenting the con-solidated fund of a state to supplement the resources of the PRI. If significant devolu-tion had occured after more than a decade and a half of constitutionally mandated PRIs started functioning, why should the consolidated fund of the state be aug-mented to supplement the resources of PRIs? If they do not have any worthwhile function, why should they require addi-tional resources?Fourth, under the constant pressure of the ministry of panchayati raj institutions (MOPRI) of the government of India (GoI), many state governments have completed activity mapping for the three tiers of pan-chayat bodies but some of them are unfor-tunately glossy public relations materials containing hardly any real activity. The 13th FC should go beyond the shining façade and try to find out the reality. A study on activity mapping by Ghosh and Sircar (2007) shows how hollow are some of the so-called “activity maps”. They observe “the activity mapping exercise undertaken so far by some state govern-ments, including West Bengal government have been largely unsatisfactory. Most of them have approached the issue from the angle of transferring various ongoing schemes sponsored by the government at the centre or states. This is an erroneous approach because the objective of activity mapping is not to transfer schemes but to transfer certain functional responsibilities from one level of a government to another. In fact, after a specific activity is trans-ferred, a panchayat should have the right to determine whether an ongoing scheme of a higher level of government should be continued or not for an organisation to which certain responsibilities are trans-ferred should also have the authority to determine how such responsibilities should be discharged.” Thus, completion of activity mapping for the three tiers would not mean that devolution has occurred in any real sense. Mapping could be completed without any devolution. The 13thFC should perhaps be careful about it and try to pierce the glittering veneer to get at the substance.Fifth, as mentioned earlier, most of the state governments treat their own SFCs with utter disdain and contempt. Even after formally accepting the recommenda-tions, they refuse to follow them up and do not release the recommended funds. While they are far too eager to augment their own consolidated funds under Article 280(3)(bb), they tend to deprive their own PRIs of required resources, ignoring the recommendations of their own SFCs. In its new proactive guiding role, the CFC should bring home to the states that such double standard amounting to chicanery would not be acceptable. The 13thFC should withhold the grant of funds to augment the consolidated fund of a state till such time the states do not make good all the withheld funds recommended by their SFC and accepted by them in their Action Taken Report to the legislature out of their own resources. Sixth, for the conditional release of funds as suggested above, the ministry of finance has neither the charter nor the monitoring system to operationalise. This is the task of the subject matter ministry. Hence, it is suggested that the transfer of funds under Article 280(3)(bb) should be handled by the MOPRI. Bulk allotment of funds should be placed with the MOPRI for the five-year period. Seventh, external technical assistance and guidance might help the SFCs to upgrade the quality of their own reports. That many of these reports were not accepted among academia was mainly due to their uneven quality. Devolution of resources recommended by the SFCs ranged from 2.5 per cent in Rajasthan, through 16 per cent in West Bengal to 40 per cent in Karnataka. A mere look at this statement would make some of the recom-mendations rather suspect. Moreover, style, language and the manner of presen-tation also varied widely. As an irreverent person quipped, “the quality of these reports oscillated between scribblings of neo-literates and undergraduate disserta-tions”. In practice, things might not be as bad as made out but it depicted the wide divergence in quality, which requires to be remedied.Eighth, theEFC was taking a proactive leadership role regarding theSFC. It went ahead for a while, then it faltered. The TFC lacked the courage and tenacity to pursue the line. It deliberately opted for a soft option. The 13thFC, consisting of persons of high technical competence and proven probity, it is hoped, will have both the courage and skill to give appropriate guid-ance that theSFCs require, which is so vital for financial devolution. Ninth, any guideline that the 13thFC would issue should evolve out of mutual consultations, which might be put into effect through exchange of letters between the 13thFC andSFC. A better option would be to bring in a short amendment to the Finance Commission (Miscellaneous Pro-visions) Act 1951 giving this power to the CFC in such a manner so as not to offend the sensitivities of the states. SFCs came into existence precisely four decades after the above-mentioned central law was enacted. It requires to be updated by appropriate amendments at this stage.A Long Way to GoLastly, though we have been talking rather loudly about decentralisation of power since the 73rd constitutional amendment, in reality, we have been practising a bit of political fraud. One unmistakable indica-tor of real devolution is the percentage of expenditure of local bodies to the com-bined central and state expenditure. This figure worked out to be only 4.7 per cent in India. It is important to recall that in advanced countries, local governments normally account for 20-35 per cent of total government expenditure. It is as high as 45 per cent in Denmark and 41 per cent in Finland [Oommen 2005]. Thus, we have a long way to go. The 13thFC could be a pathfinder.ReferencesGhosh, B D and A K Sircar (2007): ‘A Note on Func-tional Devolution to Panchayats’, Kolkata (not yet published).Government of India (2000):Report of the Eleventh Finance Commission, 2000-2005, Ministry of Finance. – (2004):Report of the Twelfth Finance Commission, 2005-2010, Ministry of Finance.Oommen, M A (2005): ‘Twelfth Finance Commission and Local Bodies’,Economic & Political Weekly, Vol 40, No 20, pp 2022-26.

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