Issues Before 13th Finance Commission Regarding Himachal Pradesh As A Special Category State

Although the Finance Commissions have historically not made any distinction between the Special category States and the other States or for that matter between the revenue deficit States and the Special Category States while deliberating upon the design and specifics of the tax devolution scheme under their terms of reference, yet a close perusal of the summary of recommendations of the successive Finance Commissions reveals that the Special Category States have all along figured among the revenue deficit States at the post-tax devolution stage. This fact calls for a separate view on the finances of the Special Category States and the devolutions recommended by the successive Finance Commissions.

Presently, the number of the Special Category States stands at 11. These include Arunachal Pradesh, Assam, Himachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand. According to the 2001 census, these States combined together account for 6.216 per cent of the total population of India and 18.117 per cent of the total geographical area of the country. However, since the Finance Commissions are mandated to take into account the population figures as of the 1971 census in their design of tax devolution and other considerations, it is important to mention the population share of the Special Category States according to the 1971 census data which stood at 5.912 per cent of the total population of the country.

For the purposes of analysis, the data from the Seventh Finance Commission onwards has been taken in this paper. The cross time comparisons will take into account the gross devolution in the first instance and later on also view the tax devolutions. The data on the gross devolution to the Special Category States is depicted in the following table:-

Commission period Number of States Population %age (1971) Area %age %age of gross devolution to total devolution Ratio of per capita devolution to all India average = 1
Seventh(1979-84) 8 4.938 13.286 9.72 1.968
Eighth(1984-89) 8 4.938 13.286 14.06 2.847
Ninth(1989-90) 10 5.084 16.485 16.55 3.255
Ninth(1990-95) 10 5.084 16.485 14.92 2.935
Tenth(1995-2000) 10 5.084 16.485 15.13 2.976
Eleventh(2000-05) 10 5.084 16.485 13.44 2.643
Twelfth(2005-10) 11 5.912 18.117 14.42 2.439

It is evident from the above data that the number, population percentage and the area percentage of the Special Category States have increased over time. The total devolution to these States between the years 1984 to 2005 has ranged from 13.44 per cent during the Eleventh Finance Commission period to 16.55 per cent for the interim award year 1989-90 of the Ninth Finance Commission. During the award period of the Twelfth Finance Commission, the number of these States became 11 and their share in the population and area also increased to 5.912 per cent and 18.117 per cent of the country aggregates, respectively. It also emerges that from the Ninth Finance Commission onwards, the relative per capita devolution to these States has seen a gradual decline. This decline is drastically disadvantageous to the Special Category States as the area weightage has an inbuilt infirmity in the devolution design (because the States of Goa, Haryana, Himachal Pradesh, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Punjab, Sikkim, Tripura and Uttarakhand have been given an identical weight of 2 per cent each by the Twelfth Finance Commission) on the one hand, and disability factor of the mountain areas has not been taken into account, on the other. The gradual decline in the per capita devolution is indicative of the fact that the Special category States are being given a comparatively less favourable deal in the recent times as compared to about a decade ago.

As is common knowledge, the gross devolution comprises of the tax devolution and the gap filling grants, besides some nominal discretionary grants. It is also a recognized fact that the tax devolution is generally dynamic whereas the devolution through the grants is static in nature. It is in this context that the total devolution to the Special Category States over the study period would merit a look, the data for which are presented in the following table:-

Commission period Tax devolution as % of total devolution Grants as % of the total devolution
Seventh(1979-84) 45.3 54.7
Eighth(1984-89) 68.7 31.3
Ninth(1989-90) 54.8 45.2
Ninth(1990-95) 67.9 32.1
Tenth(1995-2000) 80.8 19.2
Eleventh(2000-05) 47.0 53.0
Twelfth(2005-10) 45.5 54.5

The above data clearly reveals that the successive Finance Commissions have attempted to meet the assessed transfers by tax devolution up to the Tenth Finance Commission whereafter the share of tax devolution in the total devolution to the Special Category States has been declining. It is apparent that the tax sharing formula has started getting adversely weighted against these States. This could be due to the elements of the tax sharing formula between different States.

Coming to Himachal Pradesh, the data on gross devolution the tax devolution recommended by successive Finance Commissions (in terms of per cent share to total devolution) is depicted in the following table:-

Commission period Tax devolution to HP as % of total devolution Grants to HP as % of the total devolution Total devolution to HP as % of total devolution
Seventh(1979-84) 0.53 1.03 1.56
Eighth(1984-89) 1.34 0.62 1.96
Ninth(1989-95) 1.18 0.58 1.76
Tenth(1995-2000) 1.65 0.45 2.10
Eleventh(2000-05) 0.68 1.03 1.71
Twelfth(2005-10) 0.42 1.49 1.91

The above data reveals that the share of Himachal Pradesh in the tax devolution as a ratio of the total devolution to all States put together by various Finance Commissions does not follow a pattern. It is more a function of the elements which go into the formula for determining the shares of individual States. Due to this irregular pattern, the gap filling grants also do not exhibit any set pattern. Due to these irregularities of patterns, it would be more dependable to go by the share of gross devolution to Himachal Pradesh as a percentage of the total gross devolution to all States put together. The figures vary from 1.56 per cent to 2.10 per cent and the average comes to about 1.83 per cent. Going by the present formula elements, it would be prudent to assume about 0.5 per cent to 0.6 per cent share for Himachal Pradesh from the scheme of tax sharing. This in turn implies that the larger part of the revenue gap as may be assessed by the Thirteenth Finance Commission may have to be met by the gap filling grants.

On the question of area weightage into the formula for tax sharing, there are two very important issues. The first one relates to the actual percentage of the area of different States. Since the data for this aspect is readily available, the Thirteenth Finance Commission should adopt the actual area of each State to be used for tax sharing design. The second issue which the author intends to raise relates to the actual area of the mountain States and not the plane table area as historically been adopted. The argument is that all developmental infrastructure in the mountain States is required to be laid on the mountain slopes and not the hypothetical plane table area as is given by the Surveyor General of India. Till recently, when the technology for actual assessment of the total surface area of the mountainous States was not available, one could take this constraint as an accepted thing. Recently, the State Government of Himachal Pradesh contracted a study to the Centre for Geo-informatics Research and Training of the CSK Agricultural University, Palampur for determination of the total surface area of the State of Himachal Pradesh. The outcome of this scientific study is extremely revealing and important. The area calculated on the basis of a three-dimensional approach for different districts of Himachal Pradesh in this study is presented in the following table:-

(Area in Sq. Kms.)

Sl.

No.

Districts Area according to SGI Area according to 3-D calculation Per cent increase in area
1. Bilaspur 1167 1327 13.7
2. Chamba 6528 11675 78.8
3. Hamirpur 1118 1147 2.6
4. Kangra 5739 7088 23.5
5. Kinnaur 6401 11762 83.8
6. Kullu 5503 9694 76.2
7. Lahaul-Spiti 13835 22893 65.5
8. Mandi 3950 5403 36.8
9. Shimla 5131 7888 53.7
10. Sirmour 2825 3654 29.3
11. Solan 1936 2285 18.0
12. Una 1540 1569 1.9
Total H.P. 55673 86385 52.2

The data in the above table reveals that the actual surface area of the State of Himachal Pradesh is 52.2 per cent larger than the SGI figures. For all mountainous States in the Himalayan region, it could be safely presumed that a similar quotient would hold good. This aspect needs to be taken into account because all roads, irrigation projects, schools, water supply schemes, health projects and the other miscellaneous infrastructure is placed on the actual surface area. The successive Finance Commissions have allowed an allowance of 30 per cent extra cost norms for the purposes of maintenance of infrastructure as also for putting up new infrastructure under their special upgradation grants for various purposes for the hill States. This allowance merits to be raised further on this account because the higher cost norms are for the factors of remoteness and inaccessibility and not for the larger actual surface area.

Among other considerations, the Thirteenth Finance Commission has also been mandated to look into the need for improving the quality of public expenditure for better outputs and outcomes. This truly is an area of greatest challenge because given the huge overhang of salary related expenditure in the basket of public expenditure and the general lack of accountability, the parameter of improving the quality of such expenditure is difficult to be realized. It also merits to be factored in that a bulk of public expenditure in the sectors of education, health, social welfare, animal husbandry etc, is salary related and a vastly predominant number of the employees in these sectors are the ground level functionaries. The axiom of accountability and thereby improving the quality of public expenditure could possibly be better achieved if the effective control of the public servants at the ground level is entrusted to the local government institutions. The Thirteenth Finance Commission could possibly devote some focus on this important issue.

Another important aspect which is in the domain of the Thirteenth Finance Commission and which hugely impacts the quality of maintenance of physical infrastructure is the element of the non-salary expenditure in the basket of maintenance expenditure. Historically, it has been seen that the expenditure related to the wages of the workers hired for maintenance of the physical assets like roads, irrigation, water supply, electricity supply, etc. has been crowding out the non-salary expenditure due to overall budgetary constraints on the one hand, and the populist pressures to raise the wages, on the other without any linkage to the productivity, on the other. Even the preventive maintenance suffers and leads to public discontent. How can this be remedied will be a difficult task but very small and totally earmarked increases in the non-salary expenditure provisions for maintenance of physical assets could go a long way in enhancing the public satisfaction. This could be further enhanced if the responsibility for maintenance of primary assets at the local level is entrusted to the local governments.

The terms of reference have a specific entry in regard to the need for strengthening the finances of the local governments. Since the local governments in different States are at different levels of being, the Thirteenth Finance Commission may consider the reports of the Third State Finance Commissions towards meeting the objectives. This could impart greater realism in the context of recommendations the Commission may make in this behalf.

The Thirteenth Finance Commission has been mandated like its predecessor Commissions to go into the issue of debt of the Union and the State Governments. The States are themselves seized of the gravity of the debt overhang and the impact it has on the fiscal well being and sustainability of the State finances, the Commission may have to consider working out debt stock management recipes on a case to case basis, keeping in view the reality of debt stock rise. If it has cumulated due to good reasons like targeted increased expenditure in social sectors, it could merit a different treatment. One off debt write offs may also have to be considered or partial set off of the debt. Some of the loans of the Central Government to the States could be considered to be converted into loans in perpetuity so that the capital account burden of the debt servicing is eased.

On the issue of the need to manage ecology, environment and climate change consistent with sustainable development, the Twelfth Finance Commission had initiated the maintenance corpus for the forestry resources. In the case of Himachal Pradesh, this provision was more in the nature of tokenism than getting anywhere close to the reality. Such maintenance provisions should be related to the total growing stock of the forests in the State because the forest cover in Himachal Pradesh has a massive impact on the sustainability of the States down stream which include Punjab, Haryana, Delhi, Rajsthan, Uttar Pradesh, etc.

Last but not the least, the States like Himachal Pradesh which have exhibited a good track record of expanded infrastructure and also shown a better output on the social service indicators besides the increases in the per capita incomes, should not be put at a disadvantage in the devolution design. There are two aspects to it. One relates to the performance aspect and the other relates to the need for maintaining the levels reached. There is always a danger of erosion of the gains made on the social development front if the present levels of committed expenditure are not realistically assessed and provided for.

DK Sharma, an economist, retired as the Principal Adviser Planning to Himachal Pradesh Government.

Devinder Kumar Sharma, a former Principal Adviser and Secretary Planning, Government of Himachal Pradesh, is a visiting professor and an economist. He lives in Shimla.

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1 Comment

  1. With the 13th Finance Commission due to appraise the state finances of Himachal Pradesh, sometime this month, DK Sharma has made out a case about the various aspects the commissions needs to look at vis-à-vis the Special Category States.

    The Data presented does show that there is no consistency in the tax devolution as a percentage of total devolution. In fact the 11th and 12th Finance commission period has actually reduced it.

    The difference in the states surface area as calculated by Survey General of India and that by a study done at the Centre for Geo-informatics Research and Training at Palampur Agriculture University is over 52 percent.

    If indeed there is such a vast difference, then it overturns all calculations about densities of population, roads, schools, hospitals, forests and other developmental works undertaken by the state.

    Given the relatively good social indicators the state has achieved, it would not be wrong for the 13th Finance Commission to give a hard look at the overall debt of Himachal Pradesh.

    The money borrowed has not been wasted; human resource and infrastructural assets have been built over a period of time.

    A debt write off or it being converted into loans in perpetuity could help sustain the gains a made in the social sectors.

    The investment made to sustain the states expanding green cover too needs to be taken into account. Acting as huge carbon sinks these forests have helped conserve the ecology of not just Himachal but other states down the stream, as pointed out by Sharma.

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