YSRCP submits proposals to 14th Finance Commisison
On Sept 13, 2013, YSR Congress party has submitted proposals to the 14th Finance Commission which visited Hyderabad. The following the full text of the proposals submitted to it by the party senior leaders DA Somayajulu and Ummareddy Venkateswarlu.
Memorandum to Fourteenth Finance Commission
Hon’ble Chairman and Hon’ble Members of Fourteenth Finance Commission.
We sincerely thank you for the opportunity given to us to make our submissions on the subject of devolution of Central taxes to States. This mainly covers two issues viz,
(1) What andHow much of the Central Revenues should be distributed among States? and
(2) What weightage should be assigned for various factors for apportionment of the divisible Central revenues among various states?
Before discussing the above issues, I would like to express serious concern at the way the Central Government is virtually messing up country’s finances and as to how the country is being dragged into an irretrievable debt trap and unprecedented foreign exchange crisis. Even in 1991 when India faced its biggest foreign exchange crisis, it had a Current Account Deficit of only 2.6% of GDP. As against that, today India has more than 4.5% CAD. It is reported that the short term debt burden with one year maturity has reached about 25% of the total external debt, substantially pushing up the country’s short term debt repayment obligation, further jeopardizing the already worsened foreign exchange position of the country.
The fiscal deficit has been upwards of 5% of GDP in each of the last four years and about 80% of this is going for meeting the revenue deficit. Because the Central Government has been recklessly borrowing money not for stepping up public expenditure and plan expenditure but for funding its ever mounting revenue deficit, the RBI strangely has been starving the corporate sector of its due share of funds. With the result, the corporate sector, which is the main vehicle of India’s economic growth, is only seen in a casino called
stock exchanges where so much depends on the throw of the dice and not on the fundamentals of Indian economy. The Union Finance Ministry in its July 2013 monthly report said
‘Overall growth in the Index of Industrial Production (IIP) was (-) 2.2 per cent during June 2013 as compared to (-) 2.0 per cent in June 2012. During April- June 2013-14, IIP growth was (-) 1.1 per cent as compared to (-) 0.2 per cent in April- June 2012-13. Eight core Infrastructure industries registered 0.1 per cent growth in June 2013 as compared to growth of 7.9 per cent in June 2012. During April- June 2013-14, these sectors grew by 1.6 per cent as compared to 6.9 per cent during April-June 2012-13.’
The same Report brought out that the Revenue Receipts of the Central Government for the first quarter of the current fiscal was (-) 1.3% over that of the corresponding figure of the previous year, which was 30.6% over its previous year. At this rate, where is the country going? What a sad state of affairs!
I have never known Indian economy being in such dire straits. There is no coal, no gas and no electricity in the country with about 60% of SME sector units virtually closing their shops. The prices of essential commodities are going up. The saddest thing is that at the end of the first quarter, as a proportion of budget estimate, the actual fiscal deficit and revenue deficit during April–June 2013 were 48.4% and 55.4% respectively, as against what should be 25%. This means India’s revenue and fiscal deficit are going to go through the roof, further fuelling inflation. In the last fiscal itself, the interest on borrowings accounted for more than 30% of the Central Revenues. Given the current performance, there will be no surprise if interest on loans will go upto 50% of Central Revenues. Citing external factors as responsible for the present mess up is completely incorrect as India with its $ 300 billion exports and $ 500 billion imports has one of the lowest exposures in international trade. Despite this, the Central Government goes on announcing one CSS or the other having huge revenue impact. They want to penalise all the states even for minor violations of the FRBM act, while they themselves have been behaving most irresponsibly. One of the important items of TOR for the Fourteenth Finance Commission is about the central revenues also.
Given the present situation, how will the 14th Finance Commission go about its task in distributing Central revenues, which started registering negative growth rate? Yet, the show must go on. Hence, the following submission!
I. What and How much of the Central Revenues should be distributed among States?
Various Political Parties and various State Governments have represented to the Thirteenth Finance Commission that the cesses and surcharges along with the non-taxable revenues of Central Government also shall become part of the divisible Central revenues, which presently include only Customs Duty, Excise Duty, Service Tax and Direct Taxes. It was also submitted that the indicative ceiling on all revenue account transfers be fixed at 50 per cent of the Centre’s gross revenue receipts. The Thirteenth Finance Commission, however, did not accede to the request of the States for inclusion of cesses and non tax revenues for division among the States. They recommended rising of this indicative ceiling to only 39.5 per cent of the Centre’s gross revenue receipts. Further, the thirteenth Finance Commission recommended that the share of states in net proceeds of shareable central taxes shall be 32 per cent in each of the financial years from 2010-11 to 2014-15, as against the demand of 40% by majority States of the country. The main reasons why the Central Government should agree for much higher levels of devolution compared to the 32% that they recommended are given below.
(1) Prior to 1991, Central Public Sector played a very crucial role in building Indian economy, especially for employment and revenue generation and for removal of regional disparities. The Central Government in keeping with its commitment for Regional Balanced Development of the entire country, used to ensure that proportionate industrial investment has been made in all the States in the country. Besides, using the industrial licensing mechanism, Government used to ensure that there was reasonable dispersal of industrial units in all regions of the country. For instance, in our own state, many large Public Sector Units like BHEL, HMT, HAL, IDPL, HCL, ECIL, BHPV, MIDHANI, BDL, Vizag Steel Project, Ordnance Factory, NFC, BEL and many more such projects were set up by the Central Government and these projects together with their ancillaries have provided employment to lakhs of work force in the Sate, in addition to generating substantial revenues to the State Government. During the first 3 decades, many prestigious R & D laboratories like CCMB, DRDL, DLRL, DMRL, NIN, NRSA, NGRI, IICT, Sriharikota Satellite Launching Pad and ICRISAT were set up in AP and this has positively helped AP to emerge as one of the important knowledge Hubs in the Country. All these initiatives have enabled the local entrepreneurship to blossom, so much so that today AP is the largest producer of bulk drugs and cement in the country. With the Government of India opting out of further investments in Public Sector and with the removal of licensing system for industrial promotion, it has essentially become the responsibility of the State Governments to develop world class infrastructure for attracting industrial investments, which requires substantial additional investments by the state governments compared to the pre-1991 era. It should also be implied that there are more surplus funds in the hands of Central Government; now that they have stopped investing in Public Sector and by implication those funds should be transferred to the state governments for creation of infrastructure. The 14th Finance Commission should therefore come out with a methodology to make greater allocations to the states that have been embarking upon creation of good infrastructure facilities and setting up of institutions like SEZs. Additional devolution should also be made to state governments that are setting up exclusive institutions for upgrading the skills and productivity levels of our labour.
(2) India is such a huge country that some of the States are bigger than many countries in the world both in terms of area and population. Each State in India has its own varying levels of development and prosperity among various districts, varying levels of Human Development Index, varying resources and therefore each State should be allowed to develop its own socio economic strategy consistent with its resources and priorities. Unfortunately, every year the Union Government has been adding one centrally sponsored scheme (CSS) or the other. For instance, the NREG Program which is intended to provide a minimum of 100 days employment in the years of drought to rural population is implemented across the country even in years of excess rainfall. Besides, this scheme will be of little relevance to States in the Indo-Gangetic plain as they do not depend so much on the rains in their own states for their Agriculture. As against that, the situation is completely different in respect of States that are located in south of Vindhyas, where even the river system is rain dependent. We have seen in our own State as to how for about 5 out of last 15 years the important rivers virtually ran dry. So, it is inexplicable as to how the Central Government is implementing such schemes uniformly all over the country? Similarly, the Central Government has been implementing RKVY for incentivising States that will meet the targets of achieving average annual growth rate of 4% besides enhancing the food grains production of the country by 20 million tonnes in a five years period. This whole scheme has become counterproductive because of the formula that was adapted to incentivise States, as this has nothing to do with the outcomes. States that maintained a particular level of budgetary allocations for Agriculture and allied activates in proportion to their plan expenditure were given this incentive, irrespective of whether they really achieved the targets set out in the National Food Security Mission. We really wonder as to how the Central Government can fix a uniform basis for the whole country, particularly in respect to Agriculture, which is completely location specific. For example, Andhra Pradesh itself has identified 322 farming situations, each of which requires a different strategy and different levels of investments. Already many States in the country have their own poverty alleviation programs based on the local requirements. Some States like Andhra Pradesh, thanks to the commitment of Late Dr. Y S Rajasekhara Reddy, have implemented a plethora of welfare measures offering food security, old age security, health security, housing and access to education at Government cost on a saturation mode even while remaining FRBM compliant, without any Revenue Deficit and without increasing rates of VAT, municipal taxes, water charges, RTC charges and Power charges to any class of consumers over a full five years period 2004-09. It is submitted that the States are better placed to understand the needs of the people and have the required capacity to prioritise expenditure within the framework of FRBM act.
In the light of this, the Union Government may kindly consider dispensing with a large number of CSS programs and instead make higher revenue devolution to the States and allow them to make their own choices for spending money on the welfare of the people and development programs. It is strongly urged that the Fourteenth Finance Commission should consider adding cesses and surcharges and non-taxable revenues of Central Government to the present divisible taxes and of that atleast at 40% should be shared by the Union Government with states.
II. What weightage should be assigned for various factors for apportionment of the divisible Central Taxes among various states?
The Thirteenth Finance Commission has recommended the following weights for devolution of Central Taxes among various States of the Country.
Table 8.1: Criteria and Weights for Tax
Devolution (per cent)
Criteria Weight
1. Population (1971) 25.0
2. Area 10.0
3. Fiscal Capacity Distance 47.5
4. Fiscal Discipline 17
The Thirteenth Finance Commission has given highest weightage of 47.5% for Fiscal capacity distance. According to the report, “the Fiscal distance is obtained for each state by the distance of its estimated per capita revenue, from the estimated per capita revenue of Haryana, the second highest in the per capita income ranking after Goa. The distance so computed for all states, barring Haryana and Goa, defines the per capita revenue entitlement of each state based on fiscal distance. For Haryana and Goa, a revenue entitlement of Rs. 100 per capita has been assigned. For Maharashtra, with average per capita GSDP slightly lower than that of Haryana, the fiscal distance computed based on the procedure described in the earlier paragraph worked out to be negative. We have assigned it a notional revenue entitlement of Rs. 100 per capita, at par with Haryana and Goa. These per capita entitlements are then multiplied by the respective 1971 population figures of each state to arrive at the share of each state in tax devolution. We have assigned a weight of 47.5 per cent to the fiscal capacity distance criterion. The use of average tax-to-GSDP ratios specific to each category neutralizes to an extent the fiscal disadvantage of special category states in terms of tax capacity. Finally, another principle governing devolution has to be cost disability, so that the amounts devolved conform to equity-based fiscal need, modified by differing costs of service delivery. Cost disability affects both general and special category states.” The intent is to estimate per capita fiscal capacity at reasonably comparable levels of taxation by application of the observed group average. This, in our opinion, is not the best way of devolution of funds. Performing States with higher revenues to GSDP ratio and higher Per Capita GDP or Per Capita Net State Domestic Product will be punished and States which continue to remain backward because of mis-governance will continue to get incentivized, which the country should not encourage. The important consideration should be the Human Development Index of each of the 600 odd districts in the country. Per Capita estimates by themselves do not reflect the correct position of a particular State. Within each State there are large variations of Per Capita income, Human Development Index and other parameters. Just because Andhra Pradesh has a very high Per Capita tax revenue, it does not automatically ensure better Human Development for all the people living in different districts in the State. For instance, the GSDP of Maharashtra is Rs. 13.72 lakh crores for the year 2012-13 and naturally it has the highest per capita income among big states in the country. The finance commission considers that all the 35 districts of Maharashtra are equally developed and have the same Rs. 1,05,000 per capita income. Unfortunately this is not true. Nine of their 35 districts in Maharashtra, not only have per capita incomes lower than that of the State average but also lower than the Country’s average of Rs. 61,656 for the year 2011-12. 17 districts in all have lower per capita income than the State average. These districts are as bad as those in Orissa or Bihar or other places. Same is the case with Andhra Pradesh, which had per capita income of Rs.60703 for year 2010-11 as against national average of Rs. 54151. 9 out of 23 districts of Andhra Pradesh have per capita incomes lower than that of national average and of the balance 14, ten districts clearly have much lower per capita income than the State average. Maharashtra does not mean just Mumbai and Pune cities, where only 15-20% of the State’s population lives; it includes all those living in semi urban and rural areas. For example, as per latest RBI statistics, whereas the total bank lending in Maharashtra as on 31-12-2012 was Rs. 14.36 lakh crores, the urban centers accounted for a lending if Rs. 13.67 lakh crores, while the balance 75% of people in the State are availing of a bank credit of Rs. 69,000 crores. Similarly for Andhra Pradesh, as against the total bank lending of Rs. 4.10 lakh crores as on 31-12-2012, about Rs. 3 lakh crores is in urban metropolitan areas where less than 20% of the State’s population lives. And going by the average NSDP, if whole of Maharashtra is considered is a super-rich state and are not given even one rupee under this weightage, how sad it is? Is it not a travesty of justice? The State GDP is mainly driven by the services and industry sectors which hardly employ 20% of the state’s population. These are few islands of prosperity surrounded by ocean of poverty. Most of this GDP is concentrated in very few large urban areas and is unable to percolate to the lowest levels and do not benefit large sections of people, who continue suffer substandard life. If the States are denied their due share of devolution, it will be a big mistake. It is unfortunate +that performing States like Maharashtra (5.28%), Gujarat (3.08%), Tamilnadu (5.04%) and Andhra Pradesh (7.04%) continue to get lower percentage of devolutions than States like Bihar which gets 11% and UP which gets 19.98% of the central devolutions. The equity should not mean dis-incentivizing better performing States and incentivizing non-performance. But unfortunately this is what has been happening in the last 50 years. In the light of this, it is requested that this weightage of 47.5% be reduced to 20%, distributing the balance 27.5% to parameters like population, area, social sector spending and higher plan outlay.
(1)Para 7 of the TOR says that in making its recommendations on various matters, the commission generally take the base of population figure as of 1971 in all cases where population is a factor for devolution of taxes, grants and aid; however, the commission may also take into account the demographic changes that have taken place subsequent to 1971. For a long time now, the Government of India has been following 1971 census as the base for tax devolutions. Now, the Government is empowering the commission to also take into account the demographic changes that have taken place post 1971. This particular sentence is adding confusion, as the first sentence very clearly requires the Commission to adopt 1971 base as the sole criteria for devolution. If subsequent changes in demography are taken into account, state like Andhra Pradesh which took great pains and made huge investments for family welfare will be put at a disadvantage as their population share in that of the country has fallen from 8% in 1971 to 7% in 2011. At a time when the greatest need of the hour is to reduce population growth, if by any chance the Commission alters the base year, it will tantamount to incentivising states that are not bothering for effective implementation of population control. We therefore strongly urge that 1971 population base should be taken as the basis for devolution of taxes and revenues from Centre to States. This weightage should be increased to 30% as this is the biggest equity factor in a country like India which is placed at 138th rank by the Human Development Report of UNDP, which takes into account 74 important parameters like health, housing, education, sanitation, democratic rights, empowerment of women, environment etc that define the life of quality of people. This clearly establishes that about 70-80% of the population of India irrespective of the State in which they live are leading a life of abject poverty. Therefore, it is strongly recommended that population should be given the highest weightage of 30% for devolution of central revenues.
(2)The need of the hour is to step up the economic growth of every State. After all, the GDP of the country is nothing but the sum total of the GSDP of all the states. Higher the investments, higher will be the GSDP. Higher GSDP means higher revenues in the hands of the State that can be used for stepping up governmental and public expenditure. That Private investments grow only in tandem with Public investments is a well-known fact. Therefore, States having better revenues should be allowed to borrow more for stepping up the Public and Government expenditure so as to catalyse the Private investments for giving a push to the GSDP. On the recommendations of the 12th Finance Commission headed by Dr. C Rangarajan, the Parliament has enacted Fiscal Responsibility Budget Management act 2003 providing, inter alia, that the Revenue deficit should be brought down to zero by the year 2008-09 and the fiscal deficit should be maintained at 3% of GDP. Most of the State Governments are reporting compliance with these provisions. It is respectfully submitted that there is a mistake in linking the fiscal deficit, which is nothing but the net borrowings of the State Government for a particular year to Gross State Domestic Product. The borrowing limit has nothing to do with the GSDP. Infact it is more to do with the State’s own revenues, as the repayments are made out of the revenues of the State and not out of the GSDP. Moreover, it is not necessary that the revenues bear a standard ratio / proportionality to the GSDP. For instance, AP has a State owned revenues to GSDP ratio of 10.71% for the year 2012-13, as against 5.54% for West Bengal, 7.59% for Maharashtra and 6.10% for Bihar. This clearly shows AP has been able to raise higher level of revenue income for the same GSDP than other states and therefore should be allowed to borrow more than other states which have low revenues to GSDP ratio. In the light of the above, the Commission is requested to recommend a change in the eligibility for borrowings by the States by scrapping the present FD/GSDP ratio formula and by linking borrowings to revenues. Otherwise some of the States will get into irretrievable debt trap, if they have not already got into.
(3)One of the reasons why Andhra Pradesh has been able to achieve much higher States own revenues ratio to GSDP than many other states is because of the decisive steps taken by Dr Y S Rajasekhara Reddy to increase economic buoyancy in the State. He did not believe in increasing tax rates. Increasing economic base was his top priority. This is evidenced by the fact that for each of the last 10 years, AP has been having highest plan expenditure for any State in the country, with the possible exception of Uttar Pradesh In just one or two of the last ten years; it is important to note that UP has more than twice the population of Andhra Pradesh. The total Plan Expenditure in the State has gone up from Rs.10,366 crores in 2003-04 to Rs.32,701 crores in 2008-09, which works out to a CAGR of 26%. Plan Expenditure/total expenditure for 2008-09 worked out to 40.5% of total expenditure as against 27% in 2003-04. This was highest for any state in the country. Similarly, the capital expenditure has gone up from Rs.3,804 crores in 2003-04 to Rs.10,359 crores in 2008-09. It is reported that even as per the 12th Five Year plan projections, AP will have the highest plan outlay in the country. Naturally, this will add to the country’s growth and state’s like AP should be incentivised. Similarly, AP, under the leadership of Dr Y S Rajasekhara Reddy is the first state to have implemented a large number of welfare programmes in proportions unheard of in any state in post independent India. The Governor’s Address 2013 stated that AP which occupied 23rd place in India in 2003 in terms of implementation of of poverty alleviation programmes under the 20 Point Programme has now reached first rank in the country. This is no ordinary achievement. This could never have happened but for the implementation of a large number of welfare programmes by Dr Y S Rajasekhara Reddy government. The outlays on irrigation and weaker section housing essentially drive the Plan Expenditure of our state. You may also kindly consider a special grant for Irrigation projects in our State, as they contribute more towards the National Food Security than of our State. We request you to also consider coming up with a mechanism of sharing a part of our expenditure on free power for agriculture as that too is going towards contributing to national food security. As we have seen, from our own experience, the capital investments on Irrigation Projects will have an all-round beneficial impact on the economy. Because we are implementing a large number of irrigation projects and weaker section housing programme, the cement and steel industries in our State have doubled their capacities. It is requested that the Commission should give a high weightage of 25% for the devolution of Central funds to States, which have been consistently stepping up the plan expenditure comprising, among others, plan outlays on irrigation and weaker section housing, and implementing welfare programmes, as the very essence of governance is to improve the quality of life of people through improved investments..
(1)The biggest challenge our Country is facing today is the low growth rate in agriculture and stagnated productivity levels, contributing to perpetuation of low levels of incomes for about 60% of our population dependent on agriculture. The average annual growth rate for Agriculture and allied activities in the country has fallen to 2.3% in the post reform period (1991-2012) from 5.2% per annum for the preceding decade 1981-1991. This is a very substantial fall in the incomes of the farmers, particularly considering the fact that such low level of growth has been persisting over two decades. When Agriculture fails, the entire rural economy fails. This is precisely what has happened in our country. In 1991 only 20 out of 630 districts in India were declared as naxal affected. Thanks to the failure of Agriculture, by 2004 as many as 200 out of 630 districts in the country are declared as naxal affected. Unless we do something very substantial for improving farmers' incomes, in the long run, we cannot achieve sustainable growth, let alone inclusive growth. Besides, with our population growing at more than 2 crores per annum and the global tradable surplus in foodgrains coming down because of developing countries converting their lands to bio-fuel crops, augmenting additional domestic foodgrains production becomes the top priority. In recognition of this alarming position, the Government of India launched the National Food Security mission in 2007, although belated. The results are not very encouraging. As there has been no major technological breakthrough in agriculture in the last two decades, the only way we can increase the productivity and consequently the farmers' incomes is by making more water available to farmers. This is precisely what Dr. Y S Rajasekhara Reddy Government had done. Our State invested substantially in Irrigation and in subsidizing agricultural power. The results were very positive. The Telangana region gained immensely from subsidized power so much so that in year 2008-09, the Telangana region produced 80 lakh tonnes of food grains, which is more than the total food grain production of Tamilnadu. If only free power was not extended, this would not have been possible and the State would not have been in a position to contribute upwards of 90 lakh tonnes of Rice to the central pool. The State achieved an average annual growth rate of 6.87% for Agriculture and allied activities for the five years period 2004-2009. Utilisation of every drop of water available in the State becomes very important for improving productivity in Agriculture. The Jalayagnam program and the subsidized power program in the State have gone a long way in improving the productivity and production of food grains in the State. The foodgrains production in the state has increased from 136 lakh tonnes in 2004 to 204 lakh tonnes in 2009. AP became the second largest producer of milk in the country, while continuing its predominance in horticulture, fisheries and animal husbandry sectors. As whatever additional food grains our State is producing is essentially for meeting the National Food security rather than meeting our own State’s requirements, we strongly urge that the Finance Commission should give a very high weightage in devolution of central taxes to the states producing additional food grains production. It is requested that states which are contributing to the national food security should be incentivised by allocating at least 5% of the central revenues in the devolution under the 14th Finance Commission. The Central Government should also agree for sharing power subsidies incurred by the states out of their revenues as the foodgrains thus produced are meeting the national food security.
(2)Area of the state is as important a parameter as population in governance related issues. The Thirteenth Finance Commission has given a weightage of 10% for this parameter. Unfortunately, they have also recommended that a minimum of 2% out of this 10% will be given as devolution to States whose area is less than 2% of the geographical area of the country. Consequently, even if a State has just 0.5% of the country’s geographical area, they will still get 2% of the 10% earmarked for this parameter. With the result, the size of the cake will substantially come down and States like Andhra Pradesh which has nearly 9% of the geographical area of the country will effectively end up getting 6 or 7% share, which is absolutely unjust. If a state has a large Area to manage, naturally its administrative expenditure in terms of delivery of services and maintenance of law and order will be very high. Given the extremist movements in most parts of the country, especially in states with large extents of forests, administration is becoming very expensive. Therefore, higher weights should be attached for this parameter than the present 10%. In light of the above, it is requested that the weight for this parameter be increased to 15%. It is further requested to drop the 2% condition for States having less than 2% of the country’s geographical area.
(3)Administrative reforms, decentralization of governance and giving top priority to environment and ecology with a proper trade off with growth and development are very important. Post 1991, there has been a paradigm shift in governance in the country. The role of states in economic development and promoting human development has increased phenomenally. Unfortunately, most of the states have not built back up think tank institutions, much less integrating them with governance. This is very important. The Finance Commission must incentivise states by offering additional funds for creating such institutions.
In the light of the above, we request the Commission to reduce the Fiscal Capacity Distance weightage from 47.5% to 20% and the balance 27.5% has to be transferred to parameters like population, area, plan expenditure in proportion to total expenditure and for social sector spending. Special weightage should also be given to states which are contributing to National Food Security by offering power subsidies from their budgets. We also request that population should be reckoned as at 1971 base. We further request that the criteria for fiscal deficit should be changed. It should not be linked to GSDP; instead the eligibility for borrowing shall be on the basis of states own revenues. States with better revenue buoyancy should be given permission to borrow more for stepping up public expenditure. After all, loans are repaid out of the revenues of the State and not out of GSDP.
In sum, we request the following weights for devolution of Central Revenues:
Criteria and Weights for Tax
Devolution Criteria Weight
1. Population (1971) 30%
2. Area 15%
3. Fiscal Capacity Distance 20%
4. Plan Expenditure proportion to total
expenditure & Social Sector expenditure 25%
5. States contributing foodgrains
for national security 5%
6. Administrative Reforms etc 5%
D A Somayajulu Ummareddy Venkateswarlu
Member – Political Affairs Committee Member – Central Governing Council
Date : 13th September, 2013
Place: Hyderabad