the devolution proposals of the Twelfth Finance Commission
(TFC), now approved by the Union Council of Ministers, impose
an additional burden of about Rs.26,000 crores on the Union
- through additional transfers and grants, and lost receipts
and interest on account of state debt write-off or restructuring.
Offsetting these trends are two positive factors which promote
fiscal prudence. First, the education cess which raises
substantial additional revenues of the order of Rs.5000
crore per annum, and second, the proposal to dispense with
Central loans to states as part of plan assistance and allow
states to borrow directly from the market subject to Union
approval under Article 293 of the constitution.
the whole, additional allocations to the social sector -
particularly education and health care, greater devolution
to states, education cess, and eliminating Central loan
component in plan assistance - are welcome steps. But budgeting
is not merely about allocations, resources and priorities.
It should also be about who will spend the money, and how.
Perhaps this is what the FM should focus on.
the case of local governments. Though the 73rd and 74th
Amendments to the Constitution envisaged elected Panchayats
and Municipalities as genuine local self-governments, in
most states they exist with little power and few resources.
And yet evidence is conclusive that people are more likely
to pay for public goods and services at the local level,
provided the link between the taxes and services is clear,
and there is transparency and local accountability. In fact,
people are also willing to pay specific health and education
cess at local level, and mobilize additional resources through
voluntary contributions if they are confident that the money
is well-utilized, and that they will get the best value
for every rupee spent. Despite this, the state governments,
legislators, and bureaucracy are extremely reluctant to
part with powers or resources. This is only to be expected,
as there is always a propensity to concentrate powers, and
a marked reluctance to delegate. This is particularly true
when rent-seeking is institutionalized in most public services
and corruption is integral to the system. The nature of
incentives in public office and the process of power are
at the heart of this crisis. No FM can alter this through
budgetary mechanisms. However, the budget can create new
incentives to ensure greater devolution and institutionalize
transfer of resources in a politically palatable way.
principle of subsidiarity, which lays down that whatever
can be done best at a level close to the citizen should
be done at that level and not at a larger level, is based
on the simple insight that stake-holding and power-wielding
should go together. Only then can authority fuse with accountability.
But local governments have neither power over the subjects
listed in the XI and XII Schedules, nor resources to fulfil
their obligations. Estimates show that in 2002-03 all Panchayats
put together had about 0.06 percent of GDP as their own
resources! Clearly, a quantum leap is needed to make local
governments responsive and effective.
terms of reference of the Eleventh Finance Commission (EFC)
required the Commission, for the first time, to make recommendations
on the measures needed to supplement the resources of Panchayats
and municipalities. The EFC accordingly, recommended grants
totaling Rs.10,000 crores for local governments during 2000-05.
The TFC built upon this precedent, and recommended Rs.25,000
crores for local governments during 2005-10. But this simply
is not enough to make the third tier of governance effective.
So, is there a way out?
the current budget offers a priceless opportunity. The States
will get a bonanza of Rs.26,000 crores during 2005-06. This
is the result of an enhanced share of central taxes and
duties, up from 29.5 percent to 30.5 percent (Rs.4000 crore);
consolidation of all central loans to states and rescheduling
(Rs.7,000 crores in reduced interest and debt write off
per year); and additional grants-in-aid to States (Rs.15,000
most painless and effective way of empowering local governments
would be to transfer this Rs.26,000 crores to local governments
as a per capita grant. Conditions could be imposed about
its utilization. For instance, this money could be utilized
only for education, healthcare, infrastructure, and civic
amenities. A non-lapsable health fund could be created for
each district, and all public hospitals could be funded
from this fund for services rendered. In other words, money
will follow the patient, and there will be choice and competition.
a mechanism has several advantages. Sizeable resources -
Rs.200-250 per capita - will go to local governments every
year, but without an additional burden on states. Public
expenditure will follow national priorities. The way the
money is utilized will be dramatically altered, enforcing
accountability. We can create ombudsmen for every district
and impose strict prudential norms of spending and effective
public auditing. Public services will improve. As part of
the package, states can be asked to empower local governments
to levy and collect more taxes. The local governments will
be increasingly self-reliant. These are win-win-win solutions
all the way.
does it take to make this happen? We need to shed our fear
of innovation and learn to think outside the box. A few
procedural changes are required. But that is what a Finance
Bill is about. Rarely do we have huge outcomes with no additional
costs. Here is a priceless opportunity. Will the FM grab
it? Will the Council of Ministers have the courage and perseverance
to think afresh and change the way we manage public finances?