Finance Commissions and Himachal Pradesh

RESOURCE TRANSFERS TO HIMACHAL PRADESH THROUGH THE FINANCE COMMISSIONS

The question of central support to Himachal Pradesh keeps coming up time and again and the lack of appreciation on the part of various interest groups creates impressions which are far from the truth. As is well known, the two major platforms through which the financial resources are transferred to the States are the Finance Commissions and the Planning Commission.

The Finance Commissions are statutory bodies constituted every five years and are responsible for determining the tax sharing design between the centre and the States on the one hand, and among the States, on the other. The former apportionment is called the vertical devolution in the context of the States and the latter is called the horizontal distribution. Apart from determining the tax sharing design, the Finance Commission also assesses the own resources in totality; and the expenditure needs specifically for the non-plan revenue account of the States. Towards meeting the assessed non-plan revenue expenditure (NPRE), the Finance Commission balances it against the assessed the tax and non-tax revenue receipts of the State, the share of central tax for each State and even after pooling these, if any gap still remains in fully meeting the assessed NPRE commitments, the Finance Commission also recommends revenue deficit grants(RDG).

In theory, it is possible that the entire NPRE commitments of a particular State are met by their own tax and non-tax revenue(SOR). In such a situation, the State shall get its share of central taxes and such devolution is a matter of right. Such devolution in this particular scenario becomes surplus available with the State for investing in its development. In some cases, State’s own revenues and the share of central taxes put together fall short of meeting the NPRE commitments of a State. In this scenario, the Finance Commission recommends revenue deficit grants to meet the gap. Historically, the special category States have been recommended revenue deficit grants to meet their non-plan revenue expenditure commitments. The following equation clarifies the picture:

RDG = NPRE – SOR – SCT where
RDG is the Revenue Deficit Grant,
NPRE is the assessed non-plan revenue expenditure of an individual State,
SOR is the State’s own resources (tax and non-tax revenues), and
SCT is the share in central taxes for an individual State.

It, therefore, flows that the amount of revenue deficit grants a particular State can receive during the five year tenure of the award of a Finance commission is the unmet gap between the NPRE and the State’s own tax and non-tax revenues plus the State’s share in central taxes. Therefore, from the award of one Finance commission to the other and so on, there can be no historicity to the quantum and level of grants on account of the revenue deficit. This is amply evidenced by the data given in the following table for Himachal Pradesh from the Seventh Finance Commission onwards:

(Rs. crore)

When one looks at the above data, it emerges that there is no clear pattern in the level of revenue deficit grants. For the period covered by the dispensation of the Seventh and the Eighth Finance Commissions, the annual level of revenue deficit grant for Himachal Pradesh was about Rs. 40 crore. This does not mean that the Eighth Finance Commission discriminated against the State in any manner. The important thing was the level of the share in central taxes which increased from about Rs. 63 crore per annum for the Seventh Finance Commission period to about Rs. 150 crore per annum for the period covered by the Eighth Finance Commission. A comparison of the dispensation provided by the Tenth and the Eleventh Finance Commissions also merits consideration. The share in central taxes for the Tenth Finance Commission period was about Rs. 750 crore per annum which dropped to about Rs. 515 crore per annum for the award period of the Eleventh Finance Commission. On the other hand, the annual transfer by way of revenue deficit grant increased from Rs. 155 crore for the Tenth Finance Commission period to about Rs. 910 crore for the Eleventh Finance Commission period. This should not be viewed as a favour done to Himachal Pradesh by the Eleventh Finance Commission. All it did was that it met the unmet gap in the level of assessed NPRE by the revenue deficit grant.

Come to compare the dispensation of the Twelfth Finance Commission with that of the Eleventh. The average annual level of share in central taxes marginally increased to about Rs. 640 crore from Rs. 515 crore, the level of the revenue deficit grant increased to Rs. 2040 crore from about Rs. 910 crore. Should it be understood that the Twelfth Finance Commission favoured the State?

A similar comparison of the dispensation of the Twelfth and the Thirteenth Finance Commissions reveals that whereas the annual transfer on account of the revenue deficit grant declined from about Rs. 2040 crore for the Twelfth Commission to about Rs. 1578 crore for the Thirteenth, the annual transfers on account of the share in central taxes increased from Rs. 640 crore for the Twelfth Commission period to Rs. 2265 crore for the Thirteenth Commission period.

The objective of putting the time series data on the statutory transfers due to the share in central taxes and the gap filling revenue deficit grants is to emphasize that these two should not be viewed in isolation but in conjunction with each other. Another factor which is extremely important in this design of transfers is the capability of individual States to muster up their own revenue receipts. If the own revenue receipts increase to a level to entirely cover the NPRE, the State will receive its constitutional share of central taxes and would be free to invest it the way it likes. But in such a scenario, there will be no transfers on account of revenue deficit grants as there will be not be any unmet revenue deficit.

Given the above picture, one should look at the aggregate transfers. The level of aggregate transfers has gone up from about Rs. 905 crore per annum for the tenure covered by the Tenth Finance commission to about Rs. 11425 crore per annum for the Eleventh Finance Commission tenure. This further increased to about Rs. 2680 crore per annum for the Twelfth Finance Commission tenure and to about Rs. 3843 crore per annum for the Thirteenth Finance Commission tenure. It also needs to be highlighted that the State’s own revenues have seen a quantum jump by way of much larger collections due to imposition of VAT on the one hand, and the non-tax revenues on account of free power from various projects in the public and private sectors and State owned power generation from Nathpa Jhakri hydroelectric project.
The State Governments should emphasize the assessed NPRE commitments beyond their own revenue receipts to be met by the transfers through the tax sharing design rather than a tax share plus deficit grant system because the tax sharing design imparts a certain level of buoyancy rather than a fixed level and static transfer of revenue deficit grants which does not take into account the erosion in the real worth of the RDG due to inflation.

Whereas there is little merit in questioning the wisdom of the Finance Commissions in what they determine as transfers to the individual States, one can always comment on the methodology in general, and the relative weights assigned to the elements incorporated in the tax sharing design. All these are very objective and transparent and leave little to imagination.

DK Sharma

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.