Tax change

The recommendations of the 13th Finance Commission,chaired by Vijay Kelkar,are a mix of the radical,the useful and the expected. Kelkar called for an increase in the states share of the common pool of taxes by one percentage point,from 30.5 to 31.5 per cent. That in itself,though it reflects the continuing shift of power to increasingly dynamic state governments,is not a giant shift.

Reworking the fiscal prudence strategy is,however,an eminently useful suggestion. It follows on from the fact that in the difficult post-crisis period,a hefty,if temporary,increase in government spending was generally considered essential to keep the engine of the economy going. But that increase would have been impossible had the Fiscal Responsibility and Budget Management Act of 2003 still been in force. Certainly,the aims of the FRBM were clear and laudable. But they were undermined in two ways: one,by their inability to account for business cycles,and the consequent ups and downs in government spending; and two,significant spending on such things as oil and fertiliser subsidies werent covered. Kelkar wants to plug both gaps. First,he recommends that FRBM-style budgetary constraints not be applied yearly,but be averaged across five years. And second,he wants below-the-line budgeting to stop in other words,expenditure on subsidies should be treated like all other government expenditure.

But perhaps the most overdue recommendation,capable of revolutionising Indian governance,is the suggestion that urban local bodies be permitted greater financial autonomy. This would allow them to,presumably,draw on the common pool of taxes the way states currently do. This is a radical departure for independent India,and one that is very welcome. Indias urban areas will need to scale up as growth explodes. Financial autonomy will help them prepare.