Could Federalism Be The Real Solution Of NE India's Problem Of Insurgency
(Special Reference to the study of Naga's peace Talk)
- Part 3 -

Dr. Dhanabir Laishram *

A Map of North East India

NEW ISSUES IN CENTRE STATE FINANCIAL RELATIONS:
(Post-Liberlisation Scenario)

Declining Tax Revenue: The post-liberlisation period witnessed a fall in revenue mobilization of the centre, mainly on account of reductions in direct and indirect taxes and the overall weakening of the resource mobilization effort. Revenue mobilisation by the Central Government declined from 12.17% of GDP in 1990-91 to 10.74% of GDP in 1998-99. States' own revenues, however, remained fairly stable at around 7% during this period. Central transfers to the states also declined from 4.73% of GDP in 1990-91 to 3.79% of GDP in 1999-00. During the reference period of the Eleventh Finance Commission (2000-05), the actual collection of central taxes fell significantly short of the projected amount. As a result, the actual amount received by the states has also been substantially less, by nearly 19%, from what was recommended by the commission. (State Finance, Reserve Bank of India, Nov, 2006; Handbook of Statics on Indian Economy and Report of the 11th Finance Commission, June 2000).

Tax Concession: While there has been some improvement in revenue collection by the centre in the recent period, the resources mobilization effort continues to be severely constrained by tax myriad tax concessions. The latest budget documents show that revenue worth Rs. 2.78 lakh crore were foregone on account of the various extent direct and indirect tax exemptions in 2007-08, which amounted to 48% of total central tax collection in that year.

These tax concessions, especially the ones on corporate taxes, not only course enormous revenue losses, but also distort the patterns of investment and growth and aggravate regional imbalances. Tax experience of mushrooming Special Economic Zone following the passage of the SEZ Act, which grants a ten-year income tax holiday for the developers and units in the SEZs is a glaring case in point. This also has major implications for the revenue mobilization capacity of the states. The competition to attract investment of the leads to the states offering exemptions from states taxes and duties and other concessions in a competitive manner, are causing revenue losses. There is an urgent need to review the central tax exemptions and devising mechanism to compensate the states for the losses and distortions arising out of such tax exemptions. There is also need for the centre as well as the states to set some collective limits to tax concessions in order to safeguard against a race to the bottom.

Fiscal Crisis of the State: The Eleventh Finance Commission had failed to recommend only increase in the states' share of central taxes beyond 29.5% or provide debt relief to the states. Rather, the commission recommended that the revenue deficit grants for the states be linked up with the condition that 15% of the states entitlement of revenue deficit grant would be withheld unless the states has complied with a progressive reduction of the revenue deficit over the period 2000-2005. There were strong protest from the states, and a dissent note was also submitted by a member of the Eleventh Finance Commission (Dr. Amaresh Bagchi) who wrote that the centre had no business "to withhold even a single paisa of the grants arising out of the needs assessed by the commission". However, this conditionality was imposed by the Union Government, thereby forcing the states to impose a virtual ban on recruitment that created genuine problems in the delivery of welfare services and development activities of the states. Moreover, this mechanically applied conditionality also started showing signs of design failure. The prescription of a uniform 5% compression of revenue deficit to revenue receipt every year was oblivious to the widely different causes and magnitudes of the revenue deficit to revenue receipts ratio among the states, and it created an anomalous situation in centre state relations.

The Twelfth Finance Commission had also imposed several conditions on states, one of them being enacting Fiscal Responsibility and Budged Management (FRBM) Act in order to avail of debt relief and restricting from the centre. The implied annual reduction targets of revenue and fiscal deficit with the total elimination of revenue deficit by 2008-09. This restrictive conditionality for revenue deficit reduction, which had been imposed without any inadequate understanding of the components of revenue expenditure. Grants to the local bodies (Panchayats, Municipalities etc.), aided schools and colleges, expenditure on account of salaries of doctors, medicines etc., came under revenue expenditure. Efforts to achieve the deficit reduction targets of the FRBM Act would therefore severally constrain the fiscal space for the states and adversely affect development expenditure. Moreover, the restriction of fiscal deficit to 3% of the GDP will also impinge upon the capital expenditure of the states. The obsession with curbing the size of the fiscal deficit and cutting down upon government expenditure in order to impose fiscal discipline irrespective of the economic situation is not based upon any sound economic theory.

In keeping with a World Bank recommendation, the Twelfth Finance Commission also suggested the abdication of the central government's responsibility in borrowing by the state governments. Accordingly, the loan component of the central assistance to state plans has been done away with, resulting in a huge disadvantage for backward states. The states are therefore being pushed into negotiating high interest and or conditionality linked loans from external agencies like the ADB and the World Bank. Moreover, the Twelfth Finance Commission had also echoed the conditionalities suggested by the RBI, of creating a guarantee Redemption Fund and a Sinking Fund for amortization of loans outside the consolidated fund of the states and centre, to avail debt relief. These are meant to subject the states to greater market discipline; which will only imply conditionality linked and high interest cost loans for the states and abandonment of projects whose risks are assessed to be too high by the market.

These conditionalities being imposed by the Finance Commission are violating of the principles of fiscal federalism and severely impinge upon the financial autonomy of the states – debt relief for the states on account of the central loans must not be tied to any conditionality solutions should be worked out in a state specific manner, with a component of the relief in terms of writing off a part of loan and another part in terms of consolidation of past loans with a provision of interest relief. The debt of the special category states should be settled in a one-time manner.

A new problem has recently arisen due to the rate of interest as bank deposits becoming much higher than the rate of interest on small saving schemes resulting in erosion of small savings collection. The interest rates on small saving schemes also need to be realigned in order to maintain its attractiveness relative to bank interest rates. National Small Saving Fund Loan: The central loans connected with small savings collection (National Savings Scheme Fund) involved a special burden since the rate of interest charged by the union government from the states is significantly higher (often by more than 2%) than the rate of interest paid to the depositors. The states had urged upon the Twelfth Finance Commission to suggest remedial measures. However, none of the major problems of the state were satisfactorily addressed. The debt-relief package recommended by the commission in respect of central loans to the states specially excluded from its purview the NSSF loan extended by the centre to the states from 1999-2000 onwards, which constitutes the predominant component of the central loans for several states. Debt relief vis-à-vis the loans from the NSSF should be worked out in a state specific manner.

Problems with Centrally Sponsored Schemes: The proliferation of centrally sponsored schemes, whose design and implementation are totally determined by the centre without adequate consultation with the state governments, is another serious problem. These excessiveness or centralized and rigid formats of these schemes often man them ill-suited for the specific needs of the states. Since the state governments have to bear a part of the expenditure behind such schemes in most cases, the states find it difficult to make proper allocation of their own resources keeping their own priorities in view. Moreover, conditionalities are often imposed through these schemes, which impinge upon the autonomy of the states.

For instance, the centrally sponsored JNNURM requires the state governments to bring down the stamp duty rate within five years to a level not exceeding 5% and also impose user charges for various utilities and necessary services. This is a direct intrusion into the power of the states, since with respect to takes in the state list like the stamp duty, the Legislative Assembly has full powers to prescribe rates. Recently, the Union Government has accepted in recommendations of the Vaidyanathan Committee on revival of the co-operative credit structure. In the case too, the power of the states in regard to the co-operation has been curtailed and the flow of funds linked up with the acceptance of the attached conditionalities. In some of the schemes, the share of the states financial burden has also been unilaterally increased. For instance, despite repeated objections by all the chief ministers, the share of the states in the Sarva Shiksha Abhiyan will be increased from 25% to reach 50% by the end of the Eleventh Plan Period. The inflexibility of the design as the manner of provision of funds for the SSA also leads to significant under utilization of funds. Similarly the rigidity in the Schedule of work under the NREGA also precludes its effective implementation in several states.

At the conference of the chief ministers convened by the then Prime Minister on May 4, 1996, it was resolved that all centrally sponsored schemes pertaining to the states subject, would be transferred to the states with funds. Since then, although several exercises have been carried out in this regard from time to time, there has been no effective resolution of the issue. Rather, more and more centrally sponsored schemes, with attached conditionalities, have been introduced by the central government. While central transfers to the states as a proportion of the centre's revenue receipt have fallen over the years, the proportion of transfer of funds with conditionalities in the form of Grants-in-Aid has increased from 40.9% in 1980-81 to 49.3% in2005-06.

All centrally sponsored schemes under the state subject, as well as those under panchayats and municipalities, should be transferred to the states with funds. Broad guidelines can be worked out on the basis of discussions between the centre and the states and also appropriately periodic joint Centre-State review. However the formation and implementation of the schemes should be left to the states along with transfer of funds. Besides ensuring decentralization, transfer of the central scheme to the states would also reduce the cost of programme implementation and save central resources.

Decentralisation, Devolution and Local Self-Government: The proliferation of centrally sponsored schemes has also meant an imposition by the centre into the functional domain of the panchayats and the municipalities. Direct fiscal provisions are made in some cases to the local bodies from the centre by pass the state governments. This, in addition to the capacity building of members of local bodies by the centre amounts to an extremely centralized motion of decentralization. In such cases the real decisions are made at the centre rather than being delegated to the states and the local bodies and there in an effort to decide the pattern of decision making at the local body level from the centre. These perversions of decentralization should not be promoted and the states should be given the freedom to create an overall contact within which local bodies can function. Moreover, a target minimum level of local self government expenditure to GDP or combined government expenditure (Centre and States) needs to be set by the Finance Commission. Funds developed to the local bodies should mandatorily be routed through the state governments.

There is also a trend towards involving entitles like private corporate groups or NGOs, in governance at the local level. These entities, which have no desecratic accountability, should have, absolutely no role to play in governance. Rather ways and means of improving accountability and transparency in governance through greater participation of common people in policy planning and their implementation should be explored.

Special Category States: In view of their relative backwardness, the problems faced by the special category states, especially the North Eastern States and Jammu and Kashmir should be accorded priority. The differential benefits given to these states in term of the non-plan gap grant and normal central assistance should continue and adequate resources allocated to these states to meet their development needs. The debt of these state governments should be settled in a one time manner without any conditionality. The release of funds to the special category states under the central sponsored schemes should be done in a timely manner without stringent conditions on fund utilization.

Other Issues: There are several other national and inter-states issues, which are important for centre-state relations these include major irrigation projects, erosion of major rivers, central investment in CPSUs, railways, national highways, ports, airports etc. In each of these issues, the interests of the centre and states are involved and it is necessary to ensure inter-state balance in taking decisions. There are also issues like strengthening the PDS, BPL identification and administration of the Essential Commodities Act, which have become very relevant in the backdrop of inflation. The present scheme of the National Calamity Relief Fund needs to be changed in order to increase the corpus of funds for the states. In view of the inter-state competition over mineral resources, there is a meet to set some common norms regarding extraction of minerals. The royalty rates on coal and other minerals should be revised more frequently. It is also important to involve the state government in the policies of credit disbursement by banks and financial institutions, particularly to ensure proper allocation priority sector lending and an inter-state balance in the sphere of the loan disbursement. Effective resolution of these and other issues requires robust institutional arrangement within which center-state and inter-state consultations can take place on a regular basis and decisions reached.

Regarding natural resources the position of Nagaland is very clear that all natural resources in below and above the soil will belong to Nagaland. But in the response and its position, Government of India belittle NSCN(IM)'s insistent on their proposal without any dilution because the existing position also gives greater powers to Nagaland in this respect

Issue Related to Present Institutional Arrangements: The institution bodies through which the issues related to centre-state relations are supposed to be discussion and resolved are the Inter-State Council, National Integration Council, National Development Council, Planning Commission, Finance Commission and the Boards of the Reserve Bank of India and other financial institutions. However, a past record shows that neither have these bodies worked with effective representation of the states. In fact, these have functioned ceremonially and almost as an extension of the Union Government with an implied bias in favour of concentrating power at the centre. These need to be changed and these institutional arrangements developed into vibrant bodies with appropriate statutory backing.

Inter-State Council: The functioning of the Inter-State, which had gathered some momentum in the earlier years, has once again lost steam. Despite the council arriving at several decisions regarding implementation of the Sarkaria Commission's recommendation they have not been implemented by the Union Government. The decisions of the Inter-State Council therefore have to be made binding on the Union Government through appropriate constitutional amendment. All major issues involving centre-relations, including legislations under the concurrent list, have to be discussed and decided by the Inter-State Council. The schedule of meetings of the council as well as the standing committee of the council has to be made mandatory. The Inter-State Council should mandatorily meet twice in a year. The secretariat or the Inter-State Council should have better representation from the states.

To be continued...

REFERENCES

- Gourachandra, Political Development in Manipur (1984-2002), Unpublished Thesis, Submitted to M.U.
- Patrick Hoenig is Visiting Professor at the Academy of International Studies, Jamia Millia Islamia, New Delhi. He is currently working on a project on federalism and identity in India, with a special emphasis on Jammu and Kashmir and Northeast India.
- Dhanabir Laishram, The Stitch, Akansha Publishing House, New Delhi, 2009.
- Dhanabir Laishram, The Middle Space, Akansha Publishing House, New Delhi, 2011.
- Jain S.N., Allocation of Taxing Power Between the Centre and the State, N.Sanajaoba(Ed) Basic Issues on Centre-State relation, Omson Publications, Gauhati, 1985.
- Approach Paper on Restricting of Centre-State Relation – A dopted by the Central Committee of the CPI(M) at its meeting held at Kolkata from October 12-14-2008.
- State Finance, Reserve Bank of India, Nov,2006; Handbook of Statistics on India Economy and Report of the 11th Finance Commission, June 2000.
- The Gist of Status of Discussions and Negociations on Various Issues Submitted By NSCN(IM) 2011.
- The Hindu, August 10,2009.
- The Sentinel, April 12, 2012.
- The Sangai Express
- The Seven Sister' Post.