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JOINT MEMORANDUM TO THE
TWELFTH FINANCE COMMISSION
* Report prepared by Asian Development Research Institute(ADRI) Patna.
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FINANCE COMMISSIONS The framers of the Constitution kept in view the need to make the nation as a whole into one economic space. In India there is vast regional diversity and iniquitous distribution of natural resources and as a result, the ability to mobilise revenue by the states differs. Therefore, diversity is the main reason behind the approach of fiscal transfers to the states which is mainly guided by the principles of equalisation. While allocating the functions and responsibilities to the Center and states, they recognized that the State level governance, which is closer to the people, would be able to respond better to the needs and aspirations of the people than the one that was farther away. However, there was a mismatch between the resources available and the responsibilities assigned to each of the two levels. The framers were alive of this mismatch and built in a mechanism for periodically reviewing the position and transferring resources from the Union to the States so as to enable them to discharge more adequately the responsibilities assigned to them under the Constitution. A Finance Commission is an institution through which this review and transfer take place. Articles 280 and 281 and the Finance Commission (Misc. Provisions) Act, 1951, as amended by the Finance Commission (Misc. Prov.) Amendment Act, 1955 are directly concerned with the appointment, functioning and duties of the Finance Commission. Article 280 indicates the time frame, composition and duties of a Commission, whereas Article 281 lays down the procedure for the implementation of its recommendation. The framers of the Constitution also recognized that since the economic situation would always be a dynamic one, there would have to be a periodic review. Therefore, they prescribed that a Finance Commission should do this not later than once in five years. Thus Finance Commission, like Planning Commission, is not a permanent body. Brought into existence through a resolution of the Government of India March 15, 1950. the Planning Commission emerged as an important channel for grants and loans for development to the States. The first two Finance Commissions made recommendations covering both revenue and capital requirements of the States but during this period, the Planning Commission had also begun to assume responsibility for allocation of resources for plan purposes, which included capital requirements also. The Third and Fourth Finance Commissions drew attention to the overlap in the functions of the Finance Commission and the Planning Commission which led to considerable legal quibbling regarding Article 282 of the Constitution. However, in due course of time, it was accepted that the Finance Commission would attend to only the non-plan requirements of the States and towards certain specific capital grants and the Planning Commission would make recommendations in respect of grants and loans for State Plans and discretionary transfers. About the method of functioning of the Planning Commission, there has also been a view that while the transfers recommended by the Finance Commission are statutory in nature, the Central assistance distributed by the Planning Commission is discretionary, even though a major portion of it is regulated in accordance with the Gadgil Formula evolved in 1969. However, it is to the credit of the recent Finance Commissions that progressiveness of statutory transfers has been improving compared to that of the plan assistance. It is also noteworthy that over the decades, the Finance Commissions have earned the confidence of the States. The awards of the successive Commissions have been generally well received by States because each Commission improved over the previous one in regard to the quantum of transfer of resources from the Union to the States. (Appendix-I) However, after the award of the Eleventh Finance Commission, some of the developed states sounded discordant note alleging larger than justifiable resource transfer to Bihar and other underdeveloped states. The note was unworthy and there is a need for regional consensus in Bihar that the award of the Finance Commission should not only continue to be even more progressive, but the devolution from the Centre should also increase further. This is necessary because, for both poor and richer states alike, financial transfers from the centre account for a major part of the states’ expenditures. It may also be seen from Appendix-II that Bihar’s actual receipts in the light of Eleventh Finance Commission recommendations are estimated to be much less. TWELFTH COMMISSION
In pursuance of the provisions of Article 280 of the Constitution of India, the Twelfth Finance Commission has been constituted under the chairmanship of Dr. C. Rangarajan. The Commission has to review the state of finances of the Union and the States and suggest a plan by which the governments, collectively and severally, may bring about a restructuring of the public finances restoring budgetary balance, achieving macro-economic stability and debt reduction along with equitable growth. The recommendations of the Commission relating to the transfers to states would cover the period 2005-10. The recommendations of the Twelfth Finance Commission assume a greater significance for Bihar. Already a backward and poor state, it has undergone a process of bifurcation, whereby its resource base stands severely curtailed and the vital interests of the state were overlooked in the process. The vital and valuable capital assets, sources of revenue, technical institutions, training infrastructure and other assets have been lost without a compensatory package. The truncated state would require heavy investments, if it has to develop. The Twelfth Finance Commission presents a rare opportunity to the State to seek additional financial resources for meeting its committed liabilities and also for generating surpluses for investments. Against this backdrop, this memorandum has been prepared for consideration of the Twelfth Finance Commission. GROWTH VISION :
BIHAR AND INDIA We are aware that Bihar is the most backward state of India and that India cannot attain a dynamic, strong and vibrant base leaving Bihar to fend for itself. In coming years, India has to become a more prosperous and more equitable nation for which a powerful set of catalytic forces may have to be developed which may accelerate the speed of development resulting in reducing the disparities among the States. Against this backdrop, the President of India has envisioned that for joining the global economy by 2020, India must grow at the rate of more than 10 percent every year. But empirical evidences show that the real economy of India sputters and slows. Considering the fact that India’s growth is dependent on agriculture, which itself is dependent on monsoon, this growth rate may appear to be ambitions. Indeed, even after good monsoon and other feel good factors of the economy, it is estimated that in the year 2003-04, India was able to achieve a growth rate of 8 percent. For a growthrate in excess of 10 percent, one needs even stronger impetus. We have seen that over the years India’s prosperous states have prospered further, while poor states have become poorer. The growth rate of SDP of major states have witnessed wide fluctuations. It may be interesting to note that the growth accelerated sharply to 8 percent during the period 1991-99 for two states each viz. Maharashtra and Gujarat, but decelerated in Bihar, Uttar Pradesh and Orissa with Bihar performing very poorly. This divergence, cropped up mainly due to the wrong policies of the centre, is apprehended to grow further as the SDP of the laggard states is growing at a lower rate as compared to the prosperous ones. The above situation confirms that even after ten Finance Commissions and nine Five Year Plans, the slogan of equalisation of states remains a far cry. On the other hand, the gap between states is continuously widening, which may have to be bridged without any delay. In the new era of liberalisation, where competitiveness is the key factor, the capacity and willingness of the country to grow will be decided by the growth pattern of the states.
Assuming, as the President of India has prognosticated, that India attains a growthrate of 10 percent in coming years, the Per Capita Income will grow at an annual rate of 8 percent. Thus, the national Per Capita Income of Rs. 12985 will become Rs. 28405 in 2009-10 and Rs. 60570 in 2019-20, all at 1993-94 prices. If India has to become a prosperous and equitable nation with reduced disparities among the states, Bihar’s State Domestic Product (SDP) needs to grow at a rate much higher than 10 percent (and Bihar’s Per Capita Income growing at much higher than 8 percent) so as to make her reach the national average Per Capita Income in 2019-20. This is a huge task, since during 1993-94 to 1998-99, united Bihar’s SDP had grown at a bare 4.2 percent. After bifurcation of the state, this growthrate has become even less for the (truncated) Bihar. The Per Capita Income of Bihar in 2000-01 was Rs. 3707 (again at 1993-94 prices) and, to catch up with the national per capita income level of Rs. 60570 in 2019-20, Bihar’s SDP has to grow at a rate of 15 percent per annum till 2019-20 (Scenario-I in Table below). Assuming that it is not possible to enhance the growthrate that sharply in short term, one may plan for a growthrate of 10 percent during 2000-01 to 2009-10; in that case, the required growthrate during the next decade of 2010-11 to 2019-20 will be as high as 20 percent (Scenario-II in Table below). The projections made are presented in Table below. Projections of
Per Capita Income
with the Goal
of Bihar Equaling
National Average in
2019-20
Note : 1. Per Capita Income figures
are at constant (1993-94) prices 2. Per
Capita Income figures for 2000-01 are triennium averages around the mentioned
year. The quest for higher overall GDP growth is feasible only when the sector-wise growth targets of agriculture, industry and services are achieved and sustained by the states, which may be possible following a turnaround in investment cycle, especially in the laggard states. If Bihar is to attain and sustain the growth rates as given in the above table so as to equal the national average in 2019-20, there have to be massive investments in all the sectors of rural infrastructure, education, IT, health, transport, power, water, etc. We are aware that the investment in any state is made by three investing agencies, viz. (a) investment by the concerned state, (b) direct central investment, and (c) investment in the private sector. Based on the estimates of the capital output ratio of 3.6:1 made for the Tenth Five Year Plan period by the state government, a rough estimate has been worked out of the investment to be made in Bihar so as to achieve the required growth rates mentioned in the above table. The details are presented below. Estimated
Magnitude of Investment
to Achieve the
Required Growth Rates
for Bihar
It is well-nigh impossible for any state to make such a huge investment annually till 2019-20, and as such it may have to come from the Centre, atleast till such time the infrastructure of the state is developed. Besides Bihar, other laggard states too may have to be brought at par with the national average in 2019-20, which may also require heavy investments. Based on the present rates of growth and aggregated growth projections, an exercise has also been made to work out the sector-wise growth rates for the State and all-India and the same is presented in the table below. While assuming the all-India growth rate in agriculture, the extent of biological factors involved, which may not allow sustainability in this sector, has also been kept in view. Projection
of Sector-wise Gross Domestic Products and Growth Rates with the Goal
of Bihar Equaling the National Growth
A glance through the table highlights that if Bihar has to catch up with rest of the country, what a stupendous task lies ahead for the state. It reflects the gravity of the situation the state has been placed in. It also focuses on higher pace of growth in each sector and the amount of extra efforts the governments, both the Central and the State, have to put in to get Bihar out of stunted growth syndrome. Considering that the development and equalisation cannot brook delay any further, it is suggested that the Twelfth Finance Commission may study this aspect in detail and recommend suitable special category award for realising the goal set for the year 2020. BIHAR’S BACKWARDNESSThe erstwhile state of Bihar was the most richly endowed State of India in terms of its total natural resource base. But after its recent bifurcation on November 15, 2000, almost the entire mineral wealth and much of forests have fallen to the share of Jharkhand. Erstwhile Bihar had already suffered before the continuous neglect by the Center and its bifurcation gave a severe blow to the economy of the present Bihar. The main reasons leading to the State’s backwardness are enumerated below : Less Area and Large Population : The present State of
Bihar has an area of 94163 sq. km. which is 2.8 percent of the total area of
the country. In sharp contrast, as per the census of 2001, the total population
crossed 8 crore mark, which accounts for 8.1 percent of the total population of
India. Thus Bihar’s share of all-India population is much higher than the share
of area. Consequently, population density of Bihar at 880 persons per sq. km.
is much higher than the figure for the whole country which stood at 324 persons
per sq. km. in 2001. Moreover, the population growth, which was 23.38 percent
for the decade 1980’s, shot up to 28.43 percent during nineties, while for
India as a whole it declined from 23.86 percent to 21.34 percent. To make the
matter worse, consequent upon bifurcation of the State, only 54 percent of the
land area has remained with Bihar, but it had 75 percent of population,
resulting into a severe deterioration of the land-man ratio. Declining
Growth of GSDP and Revenue Receipt : Apart from 96 percent of minerals and 78 percent
of forest, the divided Bihar has lost social and economic infrastructure, major
industries and technical and training institutions leading to the curtailment
of the potential of economic growth and revenues. The economy of Bihar is
predominantly rural in as much as 89.5 percent population is rural and about
75-80 percent of the population is directly or indirectly dependent on
agriculture. Therefore, share of agriculture in Bihar’s State income is more
which shows annual fluctuations in accordance with fluctuations in agriculture.
The State’s Gross Domestic Product (GSDP) which was Rs. 69,764 crore in
1999-2000 reduced to Rs. 50,987 crore in 2001-02 as a result of bifurcation of
the State. The State’s own revenue receipt was Rs. 4,251 crore in 1999-2000
which came down to Rs. 2,788 crore in 2001-2002, a decrease of 34.4 percent.
However, due to a disproportionate sharing of the burden of non-plan revenue
expenditure, the same registered declined from Rs. 12,821 crore in 1999-2000 to
Rs. 10,314 crore in 2001-02, a decrease of 19.6 percent. The steeper reduction
in revenue receipts compared to non-plan revenue expenditure imposed an
unbearable burden on the economy of the new state. Inadequate Irrigation, Recurrent Floods and Calamities : The truncated Bihar is left with abundant of water
and the rich alluvial soil which are inherently major assets for rejuvenation
of its agricultural growth. The State also gets fairly high annual rainfall of
around 1235 mm as against 1200 mm for the country as a whole. Not a single
district of Bihar falls within the low rainfall category, though instability of
rains is a serious problem. However, since proportion of rainfall received
during monsoon constitutes 75-80 percent of annual rainfall, irrigation becomes
important. Though the State has adequate irrigation potential, there is
inadequacy of irrigation infrastructure and only about 50 percent of the net
sown area is under irrigation. However, the most important negative feature of
the State is the recurrent flood which is due to the flood prone nature of the
terrain and of the rivers which flow through Bihar. The floods each year cause
immense damage to human lives, cattle, standing crops and infrastructures
including roads building, dams, water supply and other installations. The
National Commission on Floods identified Bihar as the most flood prone State in
India. The total flood prone area in the State is about 69 lakh hectares, which
constitute 17 percent of the total flood affected area in the country. Similarly,
of the total flood affected population of the country, 56.5 percent of the
population resides in Bihar. It may be worthwhile to mention that in 2002-03,
the total area affected by floods in the State was 19.69 lakh hectares;
whereas, the population affected was 1.62 crore, and the total damage including
crops, houses, infrastructure etc. worked out to over Rs. 3000 crore. The State
is victim of geography in so far as the floods are concerned and for mitigating
the menace of floods, the State alone cannot play any effective role because
most of the rivers originate from across the border and as such it comes under
the Central Government’s jurisdiction. Again, cyclones and hailstorms occur in different parts of the State entailing considerable expenditure on relief. The State also experiences extremes of heat and cold causing damage to lives and crops. Successively during the last two to three years, the temperature drops considerably leading to extreme cold wave which causes extensive damage to human lives, cattle and standing crops. Low Growth of Net State Domestic Product : In terms of the Per Capita
Net State Domestic Product (Base 1960-61=100), the State remained at the lowest
rung of the ladder right from 1961-62 (Appendix III). The growth of Net State Domestic
Product averaged around 4.2 percent per annum during the period 1993-94 to
1998-99 (after bifurcation, much less). The relatively low growth rate of NSDP
is attributed to low per capita plan outlay which stood at Rs. 319.02 as
against Rs. 1243.76 for Punjab during the period. As is evidenced from the
table below, after introduction of reforms in 1990, growth pattern increased
regional inequality when Bihar and other poor states performed very poorly.
Some states like Madhya Pradesh and Rajasthan, in spite of improvements
vis-ŕ-vis their past performance, fell further behind the national
average. Growth of Gross State Domestic Product and Per Capita Growth
Source : Cols.
3 & 4 Planning Commission; Cols. 5 & 6 Economic Policy Reforms and
Indian Economy, Oxford.
The states with greater economic strength gained at the expense of poorer ones. In the absence of powerful institutions, the benefits of progress has gone in favour of richer ones. It appears that existence of regional disparity has been institutionalised during the reform period, and no step has been taken to arrest this trend. The situation could have been somewhat better, had the States’ savings in the form of bank deposits been utilized for financing private sector investments. Lowest Per Capita Income : Even after five and a half
decades of independence, Bihar continues to be the state with lowest per capita
income. In 1993-94, Bihar’s per capita income worked out to Rs. 3034, while for
the country as a whole it was Rs. 7690. In 2000-01, the State’s figure was Rs.
3345 as against Rs. 10,254 for the all India. During the period 1994-2001, the
State’s per capita income change was only Rs. 311, while for all India it
worked out to Rs. 2564. This is a reflection on the backwardness of the state
and is a sad commentary on India’s commitment to reduction in regional
disparity. Inadequate Infrastructure : The infrastructure of
roads, irrigation and power needs a great deal of strengthening for the
development of the state. The index of infrastructure for Bihar was 81.33 in
1999 as against 187.57 for Pubjab. As a result of bifurcation of the State, the
infrastructure index for the present Bihar has come further down. Assured
irrigation through Canals and Tube wells is available to 28.45 lakh hectares
which comes to about 50 percent of the net sown area of the state. Per capita
power consumption is only 140.8 kw against 354.75 for the country as a whole.
Similarly, the road length in the State is highly inadequate (90 kms/lakh of
population as against 257 kms for all-India in 1997). The length of rail lines
in the State is only 30.22 km per 1000 km of the area against 42.49 km in
Punjab. Even during the plan periods, the infrastructure sector was
characterized by a declining trend, where the share of expenditure on
infrastructure in total plan fell from 46 percent in Fifth Plan to 33 percent
in Ninth Plan. Industrial
Development Tardy : The industrial development is yet to take place depriving the state
of the benefits of investment, employment and income over a long period. With
bifurcation, almost all the major and medium industries as also a majority of
small scale industries in erstwhile Bihar have gone to Jharkhand. For almost
four decades, the state suffered the most on account of freight equalization
and royalty on coal which took away the natural advantage of this region
denying benefits of its huge mineral resources. Though, this policy has been
withdrawn by the center only a couple of years back, the effect of this policy,
operative for a long period of four decades, is still there; and there was no
change in the investment climate because of the capital accumulation already
made elsewhere. Nor there has been any effort on the part of the center to
compensate the losses inflicted on the State. Low CD Ratio : Since nationalization,
the commercial banking sector in the state has expanded manifold without
brining commensurate benefit to the state. The nationalization of banks was
expected to usher in an era in which commercial credit would be easily
available to the backward regions and disadvantaged groups. But this never
happened and the State’s CD ratio declined from 40 percent in 1990-91 to 23.2
percent in the year 2002-03, which calculates to much less than half of the national
average of 58 percent. Infact, commercial banks became conduit for flight of
scarce capital from the state. The State has also not been able to secure
adequate benefit from non-banking financial organizations. As on March, 2003,
there were 31 registered NBFOs (Category A-2 & Category B-29) in the State;
most of the NBFOs syphoning away money from the State. Earlier, unscrupulous
NBFOs have deprived millions of customers of their hard earned savings. Even
the benefits of all-India Financial Institutions comprising six all India
Development Banks, two specialized Financial Institutions and three Investment
Institutions in terms of providing term lending too did not accrue to State. In
2001, the All India Finance Institutions sanctioned Rs. 103437.90 crore but the
share of truncated Bihar remained only 0.14 percent. Low Per Capita
Outlay and Central Assistance : The slow growth of SDP and per capita income in
the State is attributable to a large extent to the low level of per capita plan expenditure, inadequate
central assistance and inadequate flow of institutional finance. These have
been totally inadequate considering the vast population of the state. For
example, in the First Plan, the per capita plan expenditure for the state was
Rs. 25 and per capita central assistance was Rs. 14 as against Rs. 33 and Rs.
23 respectively for all India. During the Seventh Plan too, the same trend
continued and per capita plan expenditure for the state and all India worked
out to Rs. 733 and Rs. 1076 respectively. Similarly, per capita central
assistance during this period calculated to Rs. 340 and Rs. 375 for the state
and all India respectively (Appendix IV). The picture emerging out of per
capita plan outlay for Seventh and Eighth Plans is even more revealing. During
the Seventh plan, the per capita plan outlay for Bihar was only Rs. 653;
whereas for Punjab and Haryana it was Rs. 1775 and Rs. 1779 respectively.
Similarly, during Eighth Plan, the per capita outlay for Bihar worked out to
only Rs. 1506 as against Rs. 3252 and Rs. 3497 for Punjab and Haryana
respectively (Appendix-V). This was despite the fact that massive investments
were made to build Chandigarh. Infact both the States of Punjab and Haryana
have the benefit of the proximity of the National Capital at Delhi, integrated
economically with these two State. With the international airport and a dry
port at New Delhi, the disadvantage of being landlocked for both the states
also gets negated. Low Level of
Investment :
A low and declining level of investment in central sector also contributed to
the backwardness of Bihar. The share of Bihar in the gross investment fund of
the central public sector undertakings has been declining rapidly -while in
1975-76, the percentage of Bihar was 30.66, it declined merely to 8.24 percent
in 1990-91. The investment in private projects in 1995-96 in the State was also
the lowest (2.68). (Appendices VI & VII). As a result, the present Bihar is
left with only Barauni Oil Refinery and a Thermal Power Station at Kahalgaon. The
state has no central university, IIT or IIM. However, it is a matter of great
pleasure, that Bihar Engineering College, Patna has recently been declared to
be the National Institute of Technology, which would greatly improve the
academic ambiance of technical education in the state. Due to acute shortage of
technical institutions in the state, students of Bihar are spending about Rs.
5000 - 6000 crore each year on their education outside the state. Similarly,
there are very few central government installations like cantonments (only one
at Patna, Gaya cantonment is being shifted), etc., though Bihar happens to be a
bordering State. Poverty and
Unemployment :
The problems of poverty and unemployment in the state continue to be serious.
The incidence of both rural and urban poverty is far higher in Bihar than the
average for India as a whole. During 1999-00, 42.60 percent of state population
was below poverty line. Though, it is a decline from 54.96 percentage point in
1993-94, in absolute term, the population living below poverty line was much
higher (Appendix VIII). In 1993-94, based on the usual status unemployment rate
in rural and urban areas was higher in erstwhile Bihar than for all India. The
unemployment rate in Bihar was 8.3 percent more than all-India for rural areas
and 28.9 percent in urban areas. In 1999-00, however, the unemployment rate in
rural Bihar was lower than in all-India; but the urban situation had further
worsened, recording an unemployment rate which was 53.2 percent more than
all-India. After the division of the State the incidence of unemployment has
increased. The poverty reduction in the state like Bihar requires rapid growth
of GSDP, which is capable of generating a broad based expansion in employment
and income levels. Hence the development strategy must ensure accelerating the
respectable growth of GSDP of Bihar. Declining
Public Investment in Agriculture : The declining public investments in agriculture
over the last decade resulted in erosion of productivity potential of the States.
Public Investment Per Acre of Net Sown Area at Current Prices
Thus it is clear that, since mid-seventies, the public investment in agriculture sector too has been quite meagre, despite the fact that Bihar has had predominantly an agricultural economy. The recommendation of the constituted by the Planning Commission, Commission headed by Dr. S.R. Sen on improving agriculture in Eastern India, was not implemented. While developed agricultural state like Punjab is talking of diversification of agricultural production after reaching the plateau of land productivity, Bihar is, yet to reach the plateau of agricultural productivity in the traditional sphere. Its agriculture gets further disadvantaged by non-procurement of the product by FCI, whereas in Punjab and Haryana, there has been over-procurement. In the process Bihar farmers are annually disadvantaged by about Rs. 3500 crores. ISSUES
1. Sharing of Taxes (i) The marked difference among the states in terms of population size, population growth rates, the levels of socio-economic development, etc. led to poor performance by a majority of states. Such varying development outcomes are also caused by paucity of financial resources. As we are aware, poverty, illiteracy and poor development coexist and reinforce each other. In order to promote equity and reduce disparity among states, special assistance may have to be provided to poorly performing states. Under the present fiscal arrangement, most of the high yielding and elastic taxes are within the jurisdiction of the Central government. The Central government raises more revenues than it spends directly and transfers a part of resources to the State governments through various mechanisms, viz., Finance Commission recommendations, state plan grants, centrally sponsored schemes, etc. The Finance Commission transfers cover barely half the amount and other half comes under the ‘discretionary power’ which makes the states suffer from ‘Mai Baap’ syndrome. The Finance Commission may look into this aspect so that discretion is reduced to a reasonable extent bringing states out of this syndrome for attaining true fiscal federalism. One of the simple ways of reducing the current size of discretion based fund transfer would be to increase the size of shared taxes by including in it some additional tax heads. Corporation tax has long been suggested as one of these possible additional tax head since, as a tax category, it is nearly the same as income tax which forms part of the divisible pool. The Twelfth Finance Commission may consider enlarging the divisible pool to about 45 percent of the net tax revenue of the central government which indeed matches the share of responsibilities between the central and state governments. Admittedly, this would require some constitutional amendments, but they are indeed very easy amendments. (ii) The empirical evidences show that Indian economy changed markedly and growth rates did accelerate. However, consequent upon liberalisation, there has been flight of capital and labour from poor infrastructure states to richer states. The States which have not benefited from reforms and suffered owing to investment resources flowing towards other better-off States, must be assisted by removing the specific deficiencies that are holding them backward. The rate of investment is generally regarded as one of the most important factors bringing about growth in any economy, which is, more often than not, related to infrastructure. Infrastructure, as we know, is a multidimentional feature. However, the quality of infrastructure is quite important for the overall growth of any economy since they induce investors and producers to undertake industrial activities. But they have been abysmally poor in Bihar and consequently, the investors have been shying of making investments in the State. The backward states like Bihar presented relatively a lower index of infrastructure which is discernible from the table below. Relative Infrastructure Development Index
Source : Centre for Monitoring the Indian Economy To make the matter worse, the amount of loan disbursed under Rural Infrastructure Development Fund (RIDF), which emerged as important source of fund for development of rural infrastructure in the state, constituted only 0.19 percent, 0.31 percent and 0.33 percent of all-India disbursement in 2000-01, 2001-02 and 2002-03 respectively. Thus, even under RIDF schemes, the infrastructure of the state could not develop. There is a need to assist the states which have not been benefited from reforms. The only way through which the poor states could promote economic activities in their respective areas is through betterment of infrastructural facilities. The poorer states which need more of such infrastructural investment are left with less financial resources to undertake the task. The resources required for this has to come from the Central pool till the infrastructure and service levels come upto a stage when the private investments start flowing in a substantial manner. The Twelfth Finance Commission may consider the implications of the liberalisation and reform while deciding awards both in respect of size of shared taxes as well as grants-in-aid. (iii) The plan expenditure is undertaken by the Planning Commission for the development of the State. Thus the size of plan expenditure is one of the important indicators of growth. But a closer look at the plan expenditure of the Centre and States reveals that the states’ relative share in overall plan expenditure in comparison with the Centre has been coming down. While states accounted for 63.52 percent share of total plan expenditure during the First Plan, it fluctuated between 40.00 percent in Seventh Plan to 50.67 percent in Fifth Plan and came down to 38.71 percent in the Eighth Plan and became 43.07 percent the Ninth Plan. On the other hand, share of the Centre which was only 36.02 percent in the First Plan increased to 59.52 percent in the Eighth Plan. This has had an adverse impact on the States. The details may be seen in the table that follows. Percentage Share of Central &
States on Plan Expenditure (Rs. Crores, Current Prices)
Source : Indian Planning Experience A Statistical Profile, Planning Commission, GOI, Jan. 2001, PP.30 Again, when we examine state-wise plan expenditure vis-ŕ-vis the Gross State Domestic Product, it is found that the percentage of plan expenditure to GSDP in slower-growing states declined. Plan Expenditure as Percentage of Gross State Domestic Product
Source : Economic Policy Reforms and the Indian Economy, Oxford. But Bihar recorded the largest drop. Bihar has had the lower percentage during 1980-81 to 1990-91 and in 1991-92 to 1997-98, it showed a substantial decline. Some important tasks which remained unaccomplished even after decades of planning in the country has now acquired great urgency. It is desirable that the share of the state needs to be increased to accomplish the unfinished tasks, some of which are given below : (a) With a
view to improving the system of delivery of justice and raising the strength of
judicial officers, the Shetty Commission recommendations have to be implemented
which may require a total estimated sum of Rs. 3000 crore over a five years’
period of 2005-10. (b) According to a study, for all states taken together, the per capita expenditure on social services including education declined in the post reform period with adverse implication on their human development. However, this decline was quite considerable in the poor states, and rich states showed a little upward trend. Index of Per Capita Public
Expenditure on Social Services (1981-82 Prices)
Source : Background Paper for UNDP Report India : The Road to Human Development, UNDP, 1997 Bihar is a poor state with 42.6 percent of its population living below poverty line. Empirical evidences show that continuous efforts towards development of human capital and infrastructure holds the key for poverty reduction. Among various factors affecting the development, investments in education and health are found to be crucial. As a nation too, we are committed to the goals of ‘Education for All’. The elementary education has been made the fundamental right and it is mandatory for the State to provide free and compulsory education to all children between 6-14 years of age. Achieving 100 percent enrolment of all children in the age-group of 6 to 14 by 2020 is an ambitious goal, but it has got to be achieved. A tremendous expansion of schools and classrooms will be required to support a quantitative and qualitative improvement in the State’s school system. Therefore, the expenditure on education assumes prime importance. Given the magnitude of poverty and deprivation, inadequate quantum of fund may not be able to help. The total estimated cost of Sarva Shiksha Abhiyan excluding the cost of additional class rooms during five years period from 2005-10 would be around Rs. 15000 crore. Yet another Rs. 500 crore would be required for accomplishing the task assigned by NLM. The mandate of NLM (National Literacy Mission) is to banish adult illiteracy and to impart CE (Continuing Education) to adults in 15-35 age group. (c) The
implementation of mid-day meal scheme for students of primary schools during
the same period (2005-10) would cost about Rs. 3500 crore. (d)
Historically,
the health care system in the country has had a distinct urban bias. Attainment
of the goal of ‘Health for All’ by 2000 under National Health Policy is also
essential which may require an additional
2033 primary health centres, 16560 sub-centres, and 590 community health
centres. To attain the norm of health, education and nutrition, the Twelfth
Finance Commission may consider for providing fund for enabling the poor states
achieve the goal so as to keep pace with the better-off states, because it is
certain that the huge expenditure on these schemes cannot be met by normal flow
of funds and they may have to be especially provided for. The cost on all these
will entail a huge amount of about Rs. 20000 crore. (iv) The Reserve Bank of India observed in its Report on Currency and Finance in 1998-99 that “the stress on State Finances hinges upon the inadequacy of receipts in meeting the expenditure requirements as has been evidenced by the structural imbalances manifested through the revenue deficits since the mid-eighties. The resource gap further worsened since mid nineties when the revenue growth began to stagnate while expenditure growth accelerated. Constraint by the compulsions in meeting the large committed non-plan expenditure, the states often resorted to financing non-plan expenditure through cut backs in developmental expenditure.” It has been evidenced that the revenue receipts of the states are growing at a slower rate than non-plan revenue expenditure, resulting in increasing deficit on revenue account. Much of the revenue expenditure are committed interest on past borrowings. This has been the trend not only in Bihar, but in other states as well. The state government is alive to this acute problem and has already done an exercise on the projected revenue deficits during 2005-10 which comes to Rs. 1,01,888 crore. It will be difficult to meet the estimated deficit at the existing level of sharing of taxes between the Centre and the States. This trend clearly indicates the shrinking economic role of the state government when fiscal discipline is sought to be attained by the state without adequate fiscal support from the Centre. The Twelfth Finance Commission may, therefore, consider the ratio in which the shareable pool is divided between the Centre and the States. (v) The Central government retains large funds for the centrally sponsored schemes. The states, however, have been long pleading for transfer of most of the centrally sponsored schemes to states with the funds earmarked for them. This is because past evidences show that the Central schemes which require states’ matching grants do not benefit the poor states who are not able to muster their part of the grants. Thus, in the case of schemes with 80:20 Central and State grants, if the States are not in a position to meet 20 percent of the total cost of the scheme, they become deprived of the benefit of that scheme. This tends to make the already deprived state more deprived. But there has not been any reduction in the size of the centrally sponsored schemes. The Twelfth Commission may look into this and recommend limiting the scope of centrally sponsored schemes to a few of national significance and the rest be transferred to the States. (vi) Over the years, while growth accelerated sharply in some developed states, it decelerated in some ‘other’ not so priviledged states. The poverty reduction in those disadvantage states requires rapid growth of GSDP. But on the contrary, the inter-state inequalities in growthrate have increased. The ratio of per capita NSDP of Punjab, the richest state, has continuously increased over the past three decades as compared to Bihar and in 1991-2001 it reached a level as high as five times that of Bihar as is evidenced by the table below : The Per Capita Net State Domestic Product at Current Prices (Rupees)
Normally, the factors leading to growth are rate of investment, both
public and private, availability of human resources and quality of
infrastructure, both economic and social. The financial resources required for
promoting higher investment and stronger human resources have to come from both
from the public and private sector. But the participation of private sector is
not likely unless some minimum infrastructural base has already been created
through public sector investment. However, in case of poor states, their own
resources are hardly adequate to undertake substantial investment in
infrastructure and, therefore, resource support from the central government is
critical for them. The Twelfth Finance Commission may take note of this aspect
while recommending the criteria governing central transfers so that the laggard
states like Bihar may catch up with the richer states. (vii) For determining the backwardness of the states, the Finance Commission have generally relied on the per capita income of the states. A number of empirical studies have shown that as a measure of backwardness, a single variable of per capita income is too inadequate in the absence of other variables like literacy, life expectancy, energy consumption, consumer expenditure, population below poverty line, etc. in the consideration zone. As we are aware, the most sensitive index of a states’ backwardness is the proportion of its population dependent on agriculture and the proportion of agricultural labourers among the labour force. Again, as welfare indicators, the nutritional level and housing may also be considered, because these two basic needs require the focused attention for the poorer states. The Commission may like to take into account these criteria, so that a more scientific and appropriate formula for measurement of backwardness may be possible. The criteria adopted by the UN for identifying the least developed nations as well as indicators taken into account for arriving at the UNDP Human Development Index may also be considered by the Commission. (viii) A
closer examination of the States’ budgets during the past decades reveals that
some of the new schemes which States implemented during a new Five Year Plan
period took longer than five years to get commissioned. Ideally, these schemes
should have been considered as non-plan in the following Five Year Plan period.
However, this did not happen and states considered a larger plan size as a
positive reflection on their economic performance. The misrepresentation of
non-plan schemes underestimated the genuine requirements for non-plan. The
Central Finance Commissions, which assess the genuine non-plan requirements of
States and accordingly award necessary share of Central taxes and grants, ended
up devolving a lower amount. As a result, the savings under non-plan, which
States were banking upon, due to misrepresentation did not materialize for
augmenting plan resources. Consequently, provision for maintenance of existing
capacities suffered both on account of lower devolution by Central Finance
Commission and a limited availability of plan resources. The Twelfth Finance
Commission may like to look into these aspects so that the States do not
suffer. (ix) With a tremendous growth in the viewership of television, its advertisement revenue has increased substantially. On the contrary, the state governments lost a major source of their revenue due to shrinking viewership in cinema halls. The Twelfth Finance Commission may consider this growing advertisement earning by the Centre which may be shared by the states through evolving some appropriate mechanism. (x) The Central Statistical Organisation has estimated that the service sector would register 8.4 percent growth during 2003-04. This growing sector is further likely to contribute significantly to the Gross Domestic Product. It is suggested that the Service Tax may also be brought under the “divisible pool”. Criteria
with Weights Suggested The approach of the first to eighth Finance Commissions, by and large, was to fill the gap between the States’ revenues and expenditures to some extent. The empirical evidences show that the systems of Central transfers by the Finance Commissions adopting various criteria and weights has so far failed to address the problem of equalizing the capacity of different States to provide a similar level of services. The criteria and weights recommended by the last two Finance Commissions have been as presented below :
The above table further establishes that various permutations and combinations of criteria and weights adopted by different Commissions did not help the poor states and that the absolute level of transfers per capita to even the poorest States remained less than that of 14 major States. The table below illustrates the point : Per Capita Own and Total
Revenue of Bihar and Other Major States in 2001-02 (Rupees)
This necessitates effecting a marked improvement in the criteria and weights governing central transfers. As is apparent, Eleventh Finance Commission reduced the weight of population to 10 percent for governing Central transfers which put Bihar in a disadvantageous position. The population pressure in any State is a role of geography which could not have been ignored by the Eleventh Finance Commission. However, even if this dispensation continues, the income distance method, which was given 62.50 weightage by the Eleventh Commission, may be increased to 65 percent to ensure a more equitable flow of resources to states. The criteria of area introduced by the Tenth Finance Commission has been increased from 5 percent to 7.50 percent by the Eleventh Finance Commission to help states with larger areas. It is felt that when the index of infrastructures is being used, the area criterion becomes irrelevant and as such may be dropped. The Tenth Finance Commission introduced the criteria of index of infrastructure and gave it a weight of 5 percent for distribution of states’ share. The Eleventh Commission increased its weight to 7.5 percent. Since infrastructure plays a crucial role in attracting investments and backward states with low index of infrastructure need to be assisted to enable them to come up, it is felt that the Twelfth Commission may consider its weight to be increased to 15 percent. The Tenth Finance Commission introduced the criterion of tax efforts of the states in determining inter-se share of states and gave it a weightage of 10 percent. The Eleventh Commission reduced it to 5 percent. It may have been demonstrated that poorer states were indeed making inadequate tax effort, but any uniform criteria to judge the tax efforts of different states will always be a disadvantage to the poorer states. It is felt that the index of fiscal discipline is more comprehensive and permits flexibility to states to put their house in order by a combination of methods. Therefore, it is urged upon the Twelfth Finance Commission that the criterion of tax effort be dropped in favour of fiscal discipline and the latter be given a weightage of 10 percent. The Eleventh Finance Commission recommended 29.5 percent share of the States of the net tax revenue of the Central Government, which per se is quite inadequate to meet the growing revenue requirements to meet the essential obligation by the States. In Pakistan, which is the neighbouring country with bigger financial burden, the share of the states is 36 percent. Under the circumstances, Twelfth Finance Commission may consider to increase the share of states in Central taxes to 45 percent of the net tax revenue of the Central government. It may also consider the following criteria for allocation of shares to states :
2. Fiscal
Discipline Displayed by State It may be observed form the table below that in 2001-02, the Centres’ annual budget was worth Rs. 3.87 lakh crore vis-ŕ-vis States budget of Rs. 4.01 lakh crore. Similarly, the development expenditure incurred by the Centre alone was to the tune of Rs. 1.57 lakh crore, while the same by the States accounted for Rs. 2.34 lakh crore. It is also discerned from the table that the revenue deficit was more for the Centre (Rs. 80,000 crore); whereas for all the states taken together it was much less (Rs. 48000 crore). Again, one notable feature is that the credit facility extended by RBI to the Centre was more than six times than extended to the States. Budget and Development Expenditure of All States and Centre
Against the backdrop of much higher deficit shown by the Centre, it may be worth mentioning that the Eleventh Finance Commission had envisaged that the Central Government would bring down its deficit level of 3.81 percent of GDP in 1999-2000 and to 1.00 percent in 2004-05. But on the contrary, the Central Government recorded a deficit of 4.1 percent of GDP in 2000-01. Again in 2001-02 and 2002-03 the deficit registered by the Central Government was 4.4 percent and 4.2 percent of GDP respectively. Besides the heavy dose of deficit, the tax revenue of Central Government also fell short of its budget estimates. All this adversely affected the transfers to the states which remained below the estimates of the Eleventh Finance Commission and the same may be discerned from the table below : Recommended
by Eleventh Finance Commission and Actual Amount Received under Devolution of
Taxes (Rs. In Crores)
As against this, the backward state of Bihar, despite its bifurcation on November 15, 2000, has been able to increase its own revenue from 4.23 percent of its GDP in 1999-2000 to estimated 5.14 percent in 2003-04. Again, in spite of its entire mineral and forest resources falling under Jharkhand, the State has, as a result of adopting financial reforms, brought the revenue deficit down from 34.74 percent in 1999-2000 to 13.42 percent in 2001-02. The details are given below : Ratio
of Revenue Deficit to Revenue Receipt (Rs. in crores)
Source
: State Finances - RBI Thus it is evident that while the state has demonstrated fiscal prudence, the Centre is yet to fall in line. Therefore, it is strongly advocated that the Finance Commission may evolve a mechanism to ensure that the Centre must adhere to the targets as fixed by the Commission and the States do not suffer on account of any slackness on the part of the Centre. The Finance Commission may also consider that the States cannot go beyond a certain limit in increasing their revenues, both tax and non-tax and reducing their revenue expenditure. 3. Outstanding Debts of the State Governments The increasing revenue gap led the state government to resort to loans from the Centre and market borrowing to meet their expenditure requirements resulting into higher interest burden. The indebtedness of all the states has increased considerably over the period (Appendix IX). It has been mainly on account of inadequacy of revenue resources to meet the requirement of funds for development activities. The state governments have to perforce borrow from various sources. Most of these borrowings are from the Center. It is now quite apparent that most state governments will be unable of come out of their debt trap in the foreseeable future and the huge interest burden will force them towards a revenue deficit. In so far as Bihar is concerned, the total debt of the state as on 31-03-2004 is estimated at Rs. 40,309.51 crores. At the time of bifurcation of the state on November 15, 2000, the debt of the state stood at Rs. 31,581.83 crore. Since then, the debt of the state increased by about 28.22 percent. The total debt burden of the state constitutes about 61 percent of its GSDP. This castes a heavy burden on the State, as the outstanding debt entails an annual interest burden of Rs. 3,417 crore in 2003-04 and is equivalent to 26.23 percent of the revenue receipts of the state. The State cannot sustain such a high burden of interest payments. Shri Inder Kumar Gujral during the his tenure as Prime-Minister, waived off Rs. 8000 crore loan amount outstanding against Punjab. Since most of these debts are Central loans, the Finance Commission may consider this issue seriously in terms of waiving off the repayment of central loans as also the interest rates. In case waiving of loan is not possible, the interest payment may be waived atleast for 10 years so as to make the debt burden manageable by the State. The Twelfth Finance Commission may not only recommend continuation of the special debt relief scheme initiated by the Tenth Finance Commission, but do so on more liberal terms, consistent with the difficult debt positions of the states. The Twelfth Finance Commission may also consider the following additional debt relief measures : (i) The pattern of Central Plan assistance may be changed with a higher proportion (more than 30 percent) of grants, as at present. (ii) The levels of debt swap of Central loans against small savings and market borrowings may be enhanced. (iii) The rate of interest charged on loans by the Centre and Central sector financial institutions may be reduced in tandem with the reduction of rate of interest in the financial sector as a whole. Besides, setting up of a States Funding Corporation as recommended by RBI or a Loan Council as suggested by the World Bank to deal with the market borrowings by states may also be considered by the Twelfth Finance Commission. 4. Need for HRD Fund The human capital formation is recognised as a total factor input in growth accounting exercises. However, the government spending in this area will not reap immediate returns and would necessarily involve spending in areas, which are classified as revenue expenditure and non-plan revenue expenditure. When educational and health facilities are extended, the instant cost recovery will be low, though in medium and long term, it enhances the productivity of human capital, so essential for the development of the state/ nation. We all know that the ‘Health for all by 2000 AD’ and ‘Education for All’ appear to be a far cry with a number of states struggling for 100 percent literacy. But this struggle shows no sign of coming to an end in foreseeable future owing mainly to resource crunch, particularly in the poor states. For example, the statistics on selected human development indicators show that Bihar is far behind the all-India level in respect of all the parameters viz. population density (880/sq. km.), life expectancy at birth (59.6 years), literacy rate (47.43%), birth rate (31.5/1000), rural population (89.5%), population below poverty line (42.2%), per capita income (Rs. 3922 in 2001-02), etc. In terms of Human Development Index, the state of Bihar ranked the last (Appendix X). Therefore, a large quantum of help is needed to tone up the existing system. In recent years, there has been a major shift to the skill development and training needs of the manpower, keeping in view their employment potential. We expect that States with superior availability of human skill, and more rapid growth in these skills, are more likely to have higher per capita GSDP and to experience faster growth. Thus there is an urgent need to reorient the education system, particularly at the post-school stage. The education system in the backward states is woefully inadequate. For reorienting and strengthening their education system, and for setting up a few centres of excellence like IIT, IIM, etc. the state needs support from the Center. For this, a HRD Fund may be considered for a period of five years to enable the laggard states to strengthen their education system. 5. Compensation of Low CD Ratio States One important indicator of structural disadvantage of the backward states is current CD ratio of these states in the banking sector. In 2002-03, the CD ratio of the State worked out to 23.2 percent which was much less than the national average of 58 percent. The low CD ratio indicates outflow of capital from the State to other relatively better off states. The inadequate infrastructure and low capital stock are the main reasons for low CD ratio of a state. However, the fact remains that the deposits are generated by these states and flow out of backward states and are utilized by other better off states. Credit management of the banks are primarily guided by the Central Government norms, which are, more often detrimental to the interests of the poor states. The Finance Commission may consider compensating the poor states with low CD ratio so that they may improve their infrastructure and develop their credit absorption capacity. For freeing the poorer states of their structural maladies, a bolder initiative by the Finance Commission is required. 6. Adequate Resource to Local Bodies The 73rd amendment to the Constitution emphasises devolution of funds to the local bodies in rural and urban areas and implies a substantial revision of the federal arrangements. There is strong need of modifying the existing scheme of division of finances between the Centre and the states. The middle tier or states suffer from scarcity of the financial resource. It, therefore, becomes incumbent upon the Centre to provide additional grant to the states for meeting constitutional obligations. For Panchayats and municipalities in the country, the Eleventh Finance Commission recommended only a small sum of Rs. 10,000 crore for the entire award period of 2000-05. This amount proved much less to meet the requirements of local bodies. It may not be out of place to mention that studies conducted at the instance of the Commission estimated the requirements of local bodies to the tune of Rs. 1,42,128 crore for the tenure period of five years. Similarly, the National Institute of Public Finance and Policy estimated the fund requirement for maintenance of civic services ranging from Rs. 6,907 crore to Rs. 32,598 crore for the five years period depending upon the norms. But the Commission did not consider this requirement to the disadvantage of the local bodies, especially for the poor states like Bihar. It is suggested that the present Commission may study the whole gamut of issues related to the local bodies and arrive at a realistic estimate and recommend accordingly. For inter-state allocation, the Eleventh Finance Commission recommended the following criteria :
Based on these criteria, the share of Bihar came to Rs. 108.75 crore for Panchayats and Rs. 13.41 crore for urban local bodies. Using the Census 2001 figures, the per capita allocation for divided Bihar works out to Rs. 73 in respect of Panchayats and Rs. 77 in respect of municipalities. This sum is too paltry to make any impact on the availability of civic services. Considering the fact that there are few Central schemes meant for the Nagar Panchayats as compared to rural Panchayats for their proper development, the requirements of Nagar Panchayats in the face of development of market economy as a result of liberalisation, cannot be ignored and that some special package for them may have to be considered. Therefore, the present Finance Commission may consider enhancement of these allocations keeping in view the fact that the Panchayati Raj Institutions in Bihar have been revived after a long gap of more than two decades. It is also urged that the criteria adopted by the earlier Commission may be reviewed and following suggested criteria may be considered :
If adequate resources are not placed at the disposal of the local bodies, it cannot play an effective role in decentralisation and governance. The Finance Commission may take a realistic view in this regard. 7. Package for the Residual State after
Bifurcation After division of the state, the economy of residual Bihar has deteriorated. The truncated state is left with only 54 percent of the area, but 75 percent of the population. This has led to an increase in population density in the state putting great strain on land and other resources. Now the state has no mineral resources worth the name. In undivided Bihar, the public and private heavy industries were set up and good educational and technical institutions were established in places like Sindri, Bokaro, Jamshedpur, Ranchi, etc. considering the topography of the region, tribal population and availability of infrastructural facilities there. Whatever little capital was there in the rest of Bihar was diverted to this region. Now, after bifurcation of the state, the residual Bihar stands exposed to even poorer educational/ institutional infrastructure. The Finance Commission should either consider a special package for the truncated state or develop a separate norm for the devolution for these states. The Twelfth Finance Commission may also take into account this aspect. 8. Grants in Aid Grants-in-aid has an important role in the scheme of transfer of resources from the centre to the states. Apart from meeting budgetary needs, provision of basic administrative standards and social services in different states is an important objective of grants-in-aid. The maintenance of law and order is also vital for industrial and economic growth. In the absence of any firm approach adopted by the Finance Commission on ‘equalisation grant’, disparities in per capita revenue expenditure on basic services and post devolution non-plan revenue among the states remained large. The Eleventh Finance Commission gave post devolution revenue deficit grants, but along with several low income states, Bihar was also denied this grant. In respect of Bihar, this has normally been as low as zero and the maximum has been 22.20 percent. These variations occurred because different Commissions used different yardsticks. Increasing disparities among the states have been recognised by most of the Finance Commissions constituted so far, but sadly enough, none tried to address the issue squarely. For achieving equitable growth of the States, the equalisation grants are essential for providing certain basic national minimum standards of administrative and social services to the people at large. The grants-in-aid element in the transfer scheme should as far as possible be a residuary item and the attempt should be to make bulk of the transfer through tax sharing. It would be contrary to the spirit of the Constitutional provisions to deliberately increase the role of grant-in-aid merely to acquire the right of making transfers conditional. Against this backdrop, the Twelfth Finance Commission may consider that the grant-in-aid should be given to (i) cover the states’ resource gap; (ii) to reduce disparities in the level of general social and economic services of the states; (iii) to cover both revenue and capital expenditure as also developmental and non-developmental expenditure; and (iv) meet not only the current requirements but also future requirements of the expenditure including capital expenditure. It is also urged upon the Twelfth Commission that the grants received from the union government from DFID and external funding agencies be passed on to the states as grants and not as 70 percent loan and 30 percent grant as is in vogue at present. 9. Special Problem Grants The Commission has to give recommendations on
sums to be paid to the states which need assistance by way of grants-in-aid
under Article 275 of the constitution. As discussed in the sub-section (Growth
: Bihar Vs India) of the memorandum, Bihar needs huge investments to the tune
of around Rs. 39 thousand crore each year till 2019-20 to sustain a growth rate
of 15 percent per annum to reach the all-India average growth of 8 percent by
the year 2019-20. This huge sum may have to come as special grant. The Twelfth
Finance Commission may consider this aspect and suggest special problem grant
for the state so that Bihar does not remain a laggard state and contributes in
increasing the country’s growth rate. For creation of capital infrastructure
for upgradation of administrative and social services, the Commission may make
recommendation for targeted grants-in-aid. The major areas for which targeted
grants-in-aid may be required by the underdeveloped states may include the
following : Rehabilitation of Sick Units : As per the State Level Diagnostic Study of Small Scale Industries units, about 70 percent of the SSI units in Bihar are either sick or closed. However, upto 60 percent of the sick units can be rehabilitated and revived by giving them the required support. This will enable their capital assets put again to productive uses. Besides providing large employment opportunities, it may also contribute towards significant increase in the GSDP. The Twelfth Finance Commission may look into this aspect and recommend a special subsidy grant of at least 25 percent of the total debt for rehabilitation of sick/ closed units. It becomes all the more necessary in view of the fact that even under liberalisation, no new investments are forthcoming to Bihar. E-Governance : In the
present century, ‘knowledge’ based administration and governance is key for any
state government. In this connection, electronic connectivity is extremely
needed. The role of e-governance in enhancing efficiency and in providing
better services to the people is widely recognized. This would help to collect
and disseminate on line data of all the departments as also the local offices
operating all over the State. To operationalise this project, a grant of Rs.
100 crore from the Centre is needed. Secondary Education :
For strengthening and orienting the educational institutions for introduction
of skill development courses at the secondary level, an estimated amount of Rs.
600 crore is required so that the children of the state are not denied the
right to education. Information Technology : There is an urgent need for the state to advance towards a learning society founded on acquisition, renewal and use of knowledge. In an endeavour to move with the changing world, we may have to have a knowledge society. Our people must be educated and enabled to participate in the reform process. For this, the Government should give a thrust to Information Technology sector. An ‘operation knowledge’ campaign may have to be launched in the state for universalising Information Technology and IT based education. This may require construction of buildings and purchase of equipments and machinery for introduction of the new courses in Information Technology even at the diploma level. This may require additional fund which may be considered by the Twelfth Finance Commission. Civic Amenities in Urban Areas : With the rapid growth in urban
population, the demand for civic amenities including adequate safe drinking
water supply, provision of drainage and sewerage has increased manifold. This
cannot be overlooked and it is estimated that provision of minimum level of
civic amenities may require about Rs. 200 crore. Health Services :
Health care is one of the most important Human Development indicator. The state
is much behind in extending an adequate health care to its people. Inadequate
health infrastructure is a major factor leading to poor health care. Most of
the sub-centres, and additional primary health centre do not have pucca and
adequate buildings. With a view to improving health services in the State,
pucca buildings may have to be provided
for housing primary health centres, additional primary health centres and
sub-centres. The existing referral, sub-divisional and district hospitals also
require upgradation in terms of buildings, plants, machinery and equipments,
etc. which may cost Rs. 3000 crore. For providing the state of art health care
a further sum of Rs. 500 crore is needed. Infrastructure Development : Developed infrastructure including power
and road are the sine qua non for attaining the overall growth potential. The
state of Bihar is lagging much behind in terms of infrastructural development
which hitherto hindered the progress of the state. Even the RIDF managed and
operated by NABARD has been of a very negligible help. It is therefore, urged
upon the Twelfth Finance Commission to make special provision for
‘grants-in-aid’ for infrastructural development in the state. 10. Calamity Relief Fund According to the present arrangements, 75% of the Calamity Relief Fund is contributed by the Centre and 25% is contributed by the State Government. Eleventh Finance Commission while recommending the continuation of the existing scheme of the ratio of 75:25 to the fund, also recommended the discontinuance of the existing National Fund for Calamity Relief and suggested the creation of the National Calamity Contingency Fund in public account of Government of India with an initial core amount of Rs. 500 crore provided by the Centre. The calamity of flood is a recurring phenomenon in the State, particularly in North Bihar, mainly because of the heavy discharge of water by the Himalayan rivers. While the catchment of these rivers lies in Nepal, the damage is suffered by Bihar. The enormity of the problem may be gauzed from the fact the total flood prone area in the state is about 68.80 lakh hectare, which constitutes 17.2 percent of the total flood affected area in the country. As a permanent solution to the problem remains to be worked out by the Central government with the Nepalese government, it is suggested to make provision of a special fund to take care of floods in north Gangetic Plains, of which north Bihar is a part. These floods are ‘perennial’ in nature, unlike occasional floods elsewhere. Similarly, the calamities like drought, fire, cyclones, hailstorms and extreme heat and cold cause extensive damage to human lives, cattle and standing crops. Under present dispensation, some of these calamities mentioned above do not qualify for assistance. Considering the severity of such calamities and enormity of losses inflicted by them, it is suggested that the Commission may like to take a view and enlarge the list of natural calamities beyond the present six so as to include the heat and cold waves. The Central share of the calamity relief fund for the states should also be fixed at least at 90 percent of the total. The State government would also urge that whatever be the size of the calamity relief fund, inflation should be fully provided for. The following points are for consideration of the Commission. (i) All types of natural calamities should be made eligible for relief and not merely the six categories as at present. (ii) The size of the calamity relief fund should be fixed not merely on the basis of the average expenditure during the last several years but also on consideration of damages to infrastructural facilities. (iii) Central share of the calamity relief fund should be enhanced to 90 percent against 75 percent as at present. Appendix - I Transfer (State-wise and
Commission-wise) (a) Transfers Under Taxes and Duties
(Contd.)
l Included Bombay, ** Included
in Panjab, # Includedes Rs 26.2 crores for Part ‘B’ States. Figure in
Parenthesis are percentage to Grand Total. (b) Total Grants
(Contd.)
l Included Rs 3.7 Crores for
Part ‘B’ States. (c) Total Transfers
(Contd.)
Included Rs 29.9 Crores for Part ‘B’ States. Source : Fiscal Federation
in India - B.P.R. Vithal, M.L. Sastry, Oxford. Appendix-II Statement Showing Amount Recommended & Actually Received During Eight, Ninth, Tenth & Eleventh Finance Commission (Rs.
in Crore)
Appendix- IV Per Capita Plan Expenditure
and Central Assistance for Bihar and All India
during First to Seventh Plan
periods
Source : Draft Annual Plan
2000-01, Govt. of Bihar. Appendix- V Per
Capita Plan Outlay in the Seventh and Eighth Five Year Plans in major states.
Source : Draft Annual Plan 2000-01, Govt. of Bihar. Appendix VILow Level of Central Investment in Bihar
Source : Draft Annual Plan 2000-01, Government of
Bihar Appendix VII Investment Activity in the States in 1995-96 (as percentage of GSDP)
Source : Centre for
Monitoring the Indian Economy Appendix VIIIPercentage of Population in Poverty
Source : Planning Commission
Appendix IX Overall Plan Resources and its Funding (As a percentage of GDP)
Note : Figures in parentheses
indicate percentage share in overall plan resources Source : Reserve Bank of India (RBI) documents on state finances Appendix X Ranking of Indian States
Based on HDI
Source : B.G. Jandhyala Tilak (1991)
“Human Development Index for India” IASSA Quarterly 10(2) . A.K.
Shiva Kumar (1991) ‘UNDP’s Human Development India : A computation for India
States.” EPW Oct 22. S.P.
Pal and D. K. Pant (1993) “An alternative Human Development Index” Margin
Special Issue January - March Part - II.
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