Finance panel recommendations accepted

By Our Special Correspondent

NEW DELHI, DEC. 20. The Eleventh Finance Commission (EFC), in its second and last report, has addressed the grievance of the better performing States that they were being penalised for their better fiscal management and the Commission has now recommended that all the 25 States would be eligible for grants from the Incentive Fund to be specially created to encourage States to go in for economic reforms.

While the EFC had originally identified only 15 States which would be eligible for revenue deficit covering grants of Rs. 35,359 crores over the 2000-2005 period, it has now suggested that 15 per cent of the amount meant for the revenue-deficit States be withheld and put in a special Incentive Fund. The Centre has been asked to make a matching contribution to the Fund and from this, fiscal performance based grants are to be made available to all 25 States. (The EFC's recommendations pertain to the situation prior to the creation of three new States. These new States would get a proportion of the funds allotted to the original States).

The second report of the EFC was placed in Parliament today and the Finance Minister, Mr. Yashwant Sinha, accepted the report even as he pointed out that the new recommendations substantially alter the original proposals. ``Nevertheless, the recommendations have been accepted in the interest of furthering the cause of fiscal reforms in the States,'' the Minister said.

Based on the second report, a total of Rs. 5,303.86 crores would be withheld from the overall revenue deficit grant over the five- year period and with a matching contribution from the Centre, the total would work out to Rs. 10,607.72 crores. The fund would be apportioned at the static rate of Rs. 2,121.54 crores every year, but since the grants-in-aid are in a descending order from the first to the last year, the year-wise contribution of the Centre to the fund would increase marginally from year-to-year to retain the level of Rs. 2,121.54 crores.

The EFC has also stated that the grants for specific purposes like upgradation, special problems and local bodies, which remain unutilised due to non-observance of conditionalities attached to the release of these grants may also be credited to the Incentive Fund during 2004-05. It has also said that 85 per cent of the revenue deficit grant recommended may be released to the relevant States without linking it to performance under the monitorable fiscal reforms programme. Only 15 per cent of the revenue deficit grant to which a State is entitled may be withheld and linked with the progress in performance.

The EFC has suggested the creation of a monitoring agency for State-specific monitorable reforms which is to include, among others, representatives of the Planning Commission, the Finance Ministry and representatives of the State concerned.

The recommendations also state that if any State is unable to get the full amount initially earmarked for it in any year, this amount would not lapse and will continue to be available in subsequent years to the same State. During the first four years, no amount of this fund earmarked for assistance or incentive to a State would be transferred to any other State. However, if any State is not able to draw the amount indicated on the basis of performance of the first four years, the amount undisbursed would form part of the common pool and would be distributed to the performing States in the fifth year on a pro- rata basis in addition to the amounts to which they are initially entitled. The same would apply to the undrawn amount of the withheld portion of the grants to cover non-Plan revenue deficit.

It has also been said that the disbursements from the Incentive Fund as well as the utilisation of the grants recommended by the EFC in the main report, would be subjected to review by the 12th Finance Commission.

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