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The recommendations of the Eleventh Finance Commission (efc) have triggered off a row not just over the familiar, contentious Centre-state financial relations but also highlighted the inherent contradictions in the new economic policy. The proposals are bound to heighten tensions among various constituents of the ruling National Democratic Alliance (nda). This is because although the finance commission has provided for distribution of about 34 per cent Union taxes and duties to the states, it has at the same time drastically cut down the potential - even actual - shares in the name of equity.

The southern states stand to lose a total of Rs 12,204 crore in their shares of Central tax revenues over the next five years due to an alteration in their proportionate shares as suggested by the efc. While Tamil Nadu, Kerala, Andhra Pradesh and Karnataka would lose heavily despite better economic performance and fiscal discipline, laggards such as Uttar Pradesh, Bihar and Madhya Pradesh together stand to gain Rs 16,075 crore in the bargain.

The western states of Gujarat and Maharashtra, also economically more prosperous, are slated to lose Rs 10,232 crore. On an individual basis, Maharashtra will lose Rs 5,622 crore due to a decline in its share in Central tax revenues from 6.126 per cent to 4.632 per cent; Gujarat will get Rs 4,610 crore less from the Centre as its share will come down from the existing 4.046 per cent to 2.821 per cent. The other potential losers are better economic performers in the north - Punjab (Rs 1,182 crore), Haryana (Rs 1,107 crore), Rajasthan (Rs 293 crore) and Himachal Pradesh (Rs 79 crore).

The states which have gained at the cost of these fiscally more prudent states include Uttar Pradesh (Rs 7,476 crore), Bihar (Rs 6,537 crore), West Bengal (Rs 2,425 crore), Madhya Pradesh (Rs 2,062 crore), Orissa (Rs 2,112 crore), Assam (Rs 1,885 crore) and Jammu & Kashmir (Rs 727 crore). The smaller northeastern states - Tripura, Manipur, Arunachal Pradesh, Meghalaya, Sikkim, Mizoram and Nagaland - together gain Rs 1,776 crore as per efc proposals.

Such drastic financial re-engineering has obviously ruffled a few feathers. Andhra Pradesh chief minister and Telugu Desam supremo N. Chandrababu Naidu has convened a meeting of the chief ministers of 17 states in New Delhi on August 21 for discussing the adverse impact of the efc report on them. Naidu, who was one of the first chief ministers to speak out against the finance commission recommendations, spent most of last week talking to his counterparts in Kerala, Karnataka, Tamil Nadu, Haryana, Gujarat, Punjab and other states hit below the belt by the new guidelines. The meeting’s primary objective is to impress upon the Centre the need to take remedial measures to neutralise the adverse impact of these proposals. A delegation of chief ministers attending the conclave would meet Prime Minister Atal Behari Vajpayee, Union finance minister Yashwant Sinha and chairman of the Finance Commission A.M. Khusro to submit a representation in this regard.

And the man who will lead this delegation, Naidu, isn’t amused one bit. "The recommendations are loaded in favour of governments that flouted fiscal discipline and resorted to reckless borrowing while putting a damper on progressive and pro-development governments like Maharashtra, Gujarat, Haryana, Tamil Nadu, Karnataka and Andhra Pradesh," he fumes.

Maharashtra chief minister Vilasrao Deshmukh spells out the agenda of the ‘injured’ parties: "I have personally contacted the CMs of Karnataka and Kerala and we have decided Chandrababu should lead us. His party is after all one of the main supporters of the government at the Centre. First, the finance secretaries of all the states will hold a conclave. Then we will meet at Andhra Bhavan in New Delhi."

Since the Union finance ministry has accepted the recommendations of the efc, pressure is mounting on these states to pursue legal and Constitutional options to oppose the change. As Deshmukh explains: "This is a clear case of injustice to the developed states which should have received incentives and bonus. Instead, we have been penalised for our work. This is a disincentive for progress."

Comparing the shares of these states in the assessed Central tax revenues over the five-year period as per their earlier percentage shares (recommended by the Tenth Finance Commission) and the proportion recommended by the efc, Tamil Nadu is set to lose Rs 4,711 crore, Kerala Rs 3,078 crore, Andhra Rs 2,875 crore and Karnataka Rs 1,540 crore.

Excellence, clearly, doesn’t fetch rewards. That seems to be the moral of the story for Kerala. For all its spectacular achievements in the social and service sectors, the state has received what it perceives to be less than its due from the Centre. The efc’s recommendation will cause a loss of between Rs 2,500 crore and Rs 3,000 crore to Kerala over the coming five-year period. The state government as well as the state planning board have called for a review of the norms. Asks a bewildered I.S. Gulati of the state planning board: "Are we being penalised for our achievements?"

Maharashtra, too, can’t be blamed for feeling likewise. Because the country’s financial capital is here, the pressure on its infrastructure facilities and expenses to keep Mumbai in shape are obviously enormous. Since migrants from the bimaru states earn their living in the metropolis, many in the state demand an extra point for Maharashtra on the development index based on which the finance commission devolves funds to various provinces.

According to Shrikant Jichkar, Maharashtra’s former minister of state for finance, the indices, too, are open to debate. He points out that the Sixth Finance Commission had initially considered a large number of indicators in the use of composite indices for measuring the level of development. However, all subsequent commissions abandoned the idea. Maharashtra’s argument is that it has a high proportion of poor because of the centripetal pull it exerts on poor job-hunters from the less developed states.

Deshmukh also feels the efc has perhaps not considered the fact that the outgo on account of implementation of the Fifth Pay Commission recommendations had left the state with few revenue-generating options. "We have tapped as many sources as we could and squeezed the maximum out of them. Yet we are giving to the Centre the maximum in collection of duties and taxes. But this way in the not-so-distant future Maharashtra will turn into another UP or Bihar," he warns.

But there are many defenders of the efc. For the first time, they point out, the commission was asked to suggest how the finances of the Centre and the states could be restructured to restore budgetary balance. The efc could well have chosen the familiar refrain of slashing subsidies, increasing user charges and privatising public sector enterprises to manage a surplus in the states’ revenue account and a deficit of just one per cent of gdp at the Centre in 2004-05. It has instead chosen a holistic approach that calls for an increase in both tax and non-tax revenue and reduction in some forms of expenditure.

efc chairman Khusro maintains that states would gain from higher transfers recommended by the commission. Says he: "For the first time, a liberal provision has been made on grants which in absolute terms work out to over Rs 58,000 crore during 2000-05. In contrast, the Tenth Finance Commission had recommended transfer of only around Rs 20,000 crore as grants to states."

It’s also claimed that underdeveloped states do need more funds and, hence, the principle of equity. Deshmukh points out: "We are not opposed to them receiving more funds, But not at our cost. This kind of devolution only means there is a disincentive for progress."

The only positive fallout of the current controversy is that the resistance is above politics. Most of the national political parties gain in some states and lose in some others. Like, the cpi(m) gains in West Bengal but loses in Kerala. The proposals have also paved the way for a total re-look into the economic model we need for the country. But, surely, not everyone is happy with this equitable distribution of revenue, least of all the states which have cash sucked out of their tills.

The Revenue Pie Gainers Losers (in Rs crore) Uttar Pradesh 7,476 Maharashtra -5,622 Bihar 6,537 Tamil Nadu -4,711 West Bengal 2,425 Gujarat -4,610 Madhya Pradesh 2,062 Kerala -3,078 Orissa 2,112 Andhra Pradesh -2,875 Assam 1,885 Karnataka -1,540 Jammu & Kashmir 727 Punjab -1,182 Tripura 411 Haryana -1,107