Two commissions, one story

Three days from now the National Development Council will meet to approve the XIth Five Year Plan.

Three days from now the National Development Council will meet to approve the XIth Five Year Plan. This plan period runs from 2007-2012. The government recently also appointed the XIIIth Finance Commission, under the chairmanship of Vijay Kelkar, a constitutional body that mainly deals with the distribution of revenues between the Centre and the states. They report by October 2009 and their recommendations would determine resource distribution from 2010 to 2015.

This would impact the last two years of the XIth Plan. Not synchronising the Five Year Plans with the Finance Commission is disadvantageous in manifest ways, most importantly, the uncertainty of resources for Gross Budgetary Support and finances that may be available to the states for a good part of the XIth Plan. Since the Finance Commission is a constitutional body, its appointment and timing is predictable. Five Year Plans still represent the socio-political strategy of the government in office and are liable to the unpredictability of electoral cycles. Considering the Plans8217; developmental significance, modalities for bringing them in sync need closer consideration. Over the years, the Finance Commission has served the important purpose of an orderly distribution of revenues between the Centre and the States and has generally been perceived to be fair and rational. The focus of each Commission has however undergone changes.

The XIIIth Finance Commission has inter alia the mandate to examine the 8220;need to improve the quality of public expenditure to obtain better outputs and outcomes8221; as well as 8220;the need to manage ecology, environment and climate change consistent with sustainable development.8221; It is also expected to examine 8220;the resources of the Central Government on account of the projected Gross Budgetary Support to the Central and State Plan.8221; This implies a holistic view of all resource availability to sustain both Plan and non-Plan expenditure. It will consider the impact of the proposed implementation of taxes on goods and services with effect from April 1, 2010.

The recommendations of the Finance Commission on revenue sharing are in theory advisory, but in practice binding, being accepted in the nature of an award. There are, however, some broader issues which deserve consideration:

8226; First, a common terms of reference of the last three Finance Commissions has 8220;been to seek the need for ensuring reasonable returns on investments by states in irrigation projects, power projects, state transport undertakings, departmental commercial undertakings and public sector enterprises.8221;

While the overall finances of the state have improved, the application of user charges for public goods remain problematic. The power sector in particular is an unhappy story of many missed opportunities. Financial incentives were strong enough for states to tread the difficult path of accepting revenue and fiscal deficit targets under their FRBMs. I wonder if strong enough incentives can be built to foster power and public utility reforms which can have multiple benefits all around.

8226; Second, over the last five years, beginning 1998, there has been a steady decline in the ratio of funds distributed to states in accordance with the accepted formula. This has only got worse in the proposed distribution of Gross Budgetary Support GBS in the XIth Plan to be considered by the National Development Council. Foreclosing resources meant for states on the ground that Centrally Sponsored Schemes are anyway meant to help them is untenable. The increase in the discretionary influence in devolution of resources undercuts the flexibility and autonomy designed for states.

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8226; Third, improving the quality of public expenditure has hardly been attempted. Evaluating expenditure merely in terms of fiscal and financial targets is grossly inadequate. External auditing and sustainability of gains after project completion is never easy. Besides, the proliferation of mammoth populist schemes that put enormous pressure on the already strained public delivery systems is the wrong way to go.

8226; Fourth, environment and sustainable development need mindset changes. The Central government8217;s distortionary fuel-pricing policy is the worst culprit. Vijay Kelkar and I had worked together to dismantle the Administrative Price Regime. The evil crept back in a more virulent form. Would he now, as Chairman of the Finance Commission, undo the damage? Besides, issues of climate change needs an integrated energy policy that spans the Centre, the states and a large number of agencies and organisations. It would require bold and purposive recommendations with built-in incentives and penalties.

The XIIIth Finance Commission has a daunting mandate. In many ways, both Montek Singh Ahluwalia and Vijay Kelkar need to sing the same tune. Both the Commissions must have a common tale to tell.