Wednesday, February 21, 2024

14th Finance Commission and Meghalaya: Issues for consideration

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By Sumarbin Umdor

Fiscal transfers from the centre to states are an important source of finance for a resource poor state like Meghalaya. The flow of assistance from the Union government to Meghalaya and other states comprises of share of central taxes and plan and non-plan transfers. Non-plan transfers comprise of non-plan revenue grants and other grants from Finance Commission. Plan transfers, on the other hand, comprise of Planning Commission grants for state plan and support for projects and schemes of central ministries implemented by states. Since Meghalaya is a special category state it has been receiving generous funding from the centre.  In 2011-12 out of the total revenue receipts of Rs. 4261 crore the state’s own revenue was 21 percent, with the share of central taxes and grants at 21 and 58 percent respectively. In recent years the Union government has been transferring a large quantum of funds directly to implementing agencies at state and district levels for implementing central schemes bypassing the state treasury route. In 2011-12 Rs. 815 crore was transferred through this channel.
The award of non-plan revenue grant by the Finance Commission (FC) is  on the basis of gaps between the projected non-plan expenditure and the sum of the projected own tax and non-tax revenues of the states and the share in central taxes. Meghalaya continues to have a post-devolution non-plan revenue deficit (NPRD) and successive Finance Commissions have awarded NPRD grants to fill this gap. The NPRD grant awarded to the state has steadily increased from Rs. 1572 crore during the 11th Finance Commission to Rs. 2811 crore by the 13th Finance Commission. Despite this increase in non-plan grants under successive Finance Commissions, the state has been diverting plan grants to meet the increasing non-plan revenue expenditure. Although, the 13th Finance Commission has recommended the stopping of diversion of plan assistance for non-plan purpose by adequate provision for committed liabilities this practice still continues.
The low own revenue generation by the state is an issue of concern which respective Finance Commissions have tried to address. A comparison of own tax revenue to GSDP ratio of other states and all India average with that of Meghalaya shows that over all the tax effort of the state is considerably low. In 2010-11 the average own tax revenue to GSDP ratio for non-special category states, special category states and all India was 7.2, 5.5 and 6.0 percent respectively while in case of Meghalaya it was 4.1. The own tax revenue to GSDP ratio of special category states like Uttarakhand (5.8), Himachal Pradesh (6.7), Jammu and Kashmir (6.4) and Assam (5.7) are much better than for Meghalaya and this shows the possibility of additional resource mobilization by increasing the ratio at least to the level of the above special category states.
While the state government has come up with addition resource mobilisation measures to generate more revenues, very less attention is being given to the huge loss of revenue to the state on account of under-assessment/short/non-levy/ and evasion of taxes which have been pointed in successive audit reports of the state government. Going by the audit reports, the state government can augment its meagre own revenues manifold by plugging the loopholes and leakages taking place through a systematic tax evasion and fraud committed year upon year without adequate remedial action. The same is also true for non tax revenue sources.
The state government provides many types of services which range from water supply to schools to health facilities and different types of economic services. For a state with very limited own revenue generating capacity, it is expected that the departments should levy appropriate and rational user charges to ensure maximum recovery without affecting the rendering of such services to the common man. Yet it is seen that the user charges are so low that very negligible amount is being recovered from these services. The widening gap between the receipts and expenditure on these services and the absence of timely revision of the users charges such as fees, price and rents on government extended services, shows a clear lack of initiative on the part of the state government to recover even a minimum of the cost involved in extending these services.
Another issue which is a cause of concern is the low level of returns from government investments on statutory corporations, government companies and cooperatives. During the period 2001-02 to 2011-12 as against the cumulative investment of 146 crore on government corporations, companies and various cooperatives, the cumulative returns in the form of dividends and profits from these entities in the same period was only 70 lakhs.
The state government has also not been very proactive in effective and productive expenditure management as can be seen from high revenue expenditure at around 80 to 85 percent leaving very little for capital expenditure which increases the productive capacity of the state. The proliferation in expenditure on salaries and pensions on account of implementation of the state fourth pay commission from 2009-10 has put additional strain on the state financial position and adversely affected the allocation of resources on non-salary component of social and economic services such as the provisions of equipment, materials and training. While there has been a fall in the share of non-development and non-plan expenditure to total expenditure in recent years, the low share of capital expenditure and its slow growth is a worrying phenomenon indicating very less availability of resources for investment in capital assets.
While the state government has implemented some measures towards improving the efficiency of public spending such as new contributory pension scheme for state government employees, there is much that needs to be done to reduce the expenditure on salaries and wages of the state government, reduction in revenue expenditure by curtailing wasteful and non-essential expenditure under administrative expenditure on all services, reforms of public sector enterprises by disinvestment, winding up or restructuring to reduce budgetary support and time bound implementation of public investment projects.
Acting on the recommendations of the 12th and 13th Finance Commissions, the state government enacted the Meghalaya Fiscal Responsibility and Budget Management (MFRBM) Act, 2006 and subsequently amended the Act in 2011. In terms of the fiscal targets laid out in the said Act, the government has achieved partial success in meeting the given targets. It has been able to maintain surplus in revenue account from 2006- 2010-11. However, by 2011-12 the surplus has been replaced by revenue deficit of Rs. 180 crores. The fiscal deficit as percentage of GSDP in the state which was 0.86 percent in 2006-07 had steadily deteriorated to 3.75 percent in 2008-09, exceeding the target of 3 percent of GSDP by 2008-09. In the following two years the fiscal deficit came down to below 3 percent of GSDP only to increase sharply to 6.5 percent in 2011-12 which is way above the target of reducing deficit to 3 percent or less as stated in amended MFRBM.
The funding of ADCs is also another issue that will come before the Finance Commission. All the three councils are in poor financial health with the GHADC not able to pay the salaries of employees for months together in 2010-11. The state government has enacted the Meghalaya Finance Commission, Act in 2012 under which a Commission is to be constituted with the objective to review and recommend the distribution of financial resources between state and the local bodies to enable these bodies to perform the functions assigned to them and also to improve the finances of these bodies. However, even after more than a year of the enactment of the Act, the state government is yet to constitute the Commission.
These are some of the issues that the 14th Finance Commission would have to take into account while considering the award for Meghalaya for the period 2015-2020.
(The author teaches Economics at North Eastern Hill University)

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