Economist’s Column FINANCIAL AUTONOMY AND STATE FINANCE COMMISSION

By Nripen Bandyopadhyay

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Strengthened by the provisions of 73rd and 74th amendment to the Indian Constitution West Bengal took the lead in setting up the first State Finance Commission with necessary powers and a fairly broad terms of reference. It is to the credit of the Commission and the support provided by the state and cooperation offered by all concerned specially the departments of the state government that the assigned work could be completed within a period of one and a half year and the report was submitted to Chief Minister in the year 1995.

While the amendments gave special constitutional authority to the structure of local self-governments in the country, activation of Panchyats had started since the late seventies in the state of West Bengal. SFC started at a time when the local self-governments including the Panchyats had already acquired some experience from attempts at decentralisation and grassroots participation problems. SFC took adequate cognizance of the lessons and experiences already accumulated. From the experiences of earlier periods and the field tours and meetings conducted in the course of Commission's work it became clear that the elected LSGs are not able to realise their full potential largely because of uncertainty and inadequacy in their command over resources, specially financial resources. In this state, increasing efforts were being made to route development funds for rural areas through the Panchayats. Though the efforts were encouraging, the process largely lost its momentum in the midway mainly due to the fund crunch faced by the state. The situation in the early nineties became very grim in this respect. Thus a lack of credibility and a sense of futility afflicted Panchyats leaders at all levels and across the state. Participatory initiatives at the grassroots level started declining perceptively. Again the top-down tradition and method of funding is essentially counterproductive to any process of effective decentralisation and grassroots level participatory growth. It inhibits autonomy and responsible initiative. The amendment's declaration to the effect that all LSGs in a state collectively constitute a third tier of government emboldened the Commission to think in terms of automatic entitlement place of uncertain and often arbitrary project funds to the LSGs. The Commission felt that all units of constitutional governance should have defined areas of work and a specified share of taxes and revenues collected by the state. The basic principle underlying sharing of resources between the two tiers of government in the pre-amended Constitution should also apply to the newly integrated tiers. The entitlement to a well-defined share of state's tax revenue shall not only strengthen autonomy but also provide a basis for grassroots' planning. This would also encourage all units to participate in the augmentation of the overall resources of the state.

It thus became incumbent on the Commission to devise a rational basis of sharing between the state and the LSGs as a whole and also between the different levels and units of LSGs so as not to jeopardise the overall budgetary balances of the state. The Commission took note of the fact that the state was already spending more than 50% of the developmental expenditure through the LSGs and it was also perceived that only 16% of the tax collection of the state would be able to maintain the current level of expenditure without any major strain on the state's other budgetary commitments. The Commission also felt that entitled allocations should be tied to the tax revenues of the state rather than its plan size or development allocations.

The Commission was to set a rational allocation principle. It opted for an allocation formula based on simple transparent logic and using a limited number of variables whose authenticity is of a reasonable order. An 'incentive fund ' is to be kept to encourage augmentation of the unit's own resources. Half of the Panchayats' entitlement funds are to be divided between the Zilla Parishad and the Panchayat Samitis on a 30: 20 basis. A small yet significant departure was made in the selection of indicators of backwardness within different regions. Side by side with proportions of SC and ST, it included Muslim population in the rural areas as an additional variable. Allocation is to be made on the basis of block principle i.e. funds are to be divided in proportion to the intensity of each five factors representing levels of development. The Commission has also worked out in detail and upto the GP level the allocations in accordance with the recommended formula. There are areas of joint collection and areas for non-shareable tax collection.

While making recommendations for decentralised and autonomous financial management of the LSGs the Commission could not avoid the closely related issue of a reformed administrative approach for proper execution of the plans and projects at different levels of the administrative structure. All departmental activities are controlled vertically. The executive personnel all belong to the vertical line departments. The Panchayat bodies were acting in a consultative manner. They did not have any administrative control over the line department personnel functioning at different levels. Fund allocation applying entitlement principle would therefore not only require a restructuring of the state budget but also major changes in the administrative set up. The Commission, however, was fully aware of its terms of reference being limited to the financial aspect only. It also felt the need for creation of dependable database at all levels of LSGs in the state.

The Commission thus summarised the issue of effective decentralisation of financial resources strengthening grassroots initiative and autonomy of the LSGs.