The Twelfth Finance Commission has recommended scrapping a Rs 35,000-crore kitty that was originally set up to give incentives to states to better manage their finances.Instead, the Commission found that money from this facility was being released on political considerations rather than economic ones. The panel, in a recently submitted report, has suggested that the Fiscal Reform Facility (FRF) should not be extended over the next five-year-period (2005-10).This proposal, if accepted, will come as a jolt to states friendly to the Centre, who have come to depend on these bail-outs.The Twelfth Finance Commission’s views could carry even more weight than usual as its chairman C. Rangarajan is now heading the PM’s Economic Advisory Council. Meanwhile, the Finance Ministry is now studying the report. The Commission has stated that ‘‘the Central government has not been able to strictly adhere to the conditions of the facility.’’ The Commission has reasoned that ‘‘releases (by the Centre) have not always been based on credible data such as finance accounts..changes seem to have been made on a selective basis to accommodate states when they faced a fiscal crisis.’’The purpose was to help states meet initial burdens like severance payments for downsizing PSUs and initial reform costs.Instead, the report has noted: “Medium term loans of Rs 3151 crore were extended to six fiscally-stressed states, namely Manipur, Orissa, Assam, Rajasthan, West Bengal and Nagaland, to fund 66 per cent of their opening deficit for 2002-03.”The Commission has argued that the entire programme has not been very successful because, despite it, the aggregate fiscal deficit of states actually increased from 4.64 per cent of the GDP in 1999-2000 to 4.97 per cent in 2003-04 as compared to the target of 2.9 of the GDP. The outstanding debt of states also rose from 25.20 per cent of GDP in 1999-2000 to 31.23 per cent in 2003-04.The report has also argued that the incentives provided by the facility were not sufficient to counter the short-term ‘‘rewards’’ of imprudent fiscal behaviour by states. It has also reasoned that the programme involves huge discretionary powers which can lead to ‘‘dilemmas in a federal fiscal structure.’’ When the scheme was first introduced, the government had prescribed a single indicator to decide whether money should be released from the fund. A state was entitled to get money from the fund if it made a minimum improvement of 5 per cent in its deficit/surplus as a proportion of its revenue receipts each year. The year 1999-2000 was to be used as a base. Now this could go down as another idea that failed to take off.
