Fiscal Reform Agenda- Tasks Ahead

Expanded ‘concurrent powers’ and the consequent  overlapping of functions being performed by the two levels of governments amplify the merit in the concept of cooperation. Such an arrangement, however, necessitates a balancing mechanism for ensuring cooperation in the realm of independence of the federating units for the realization of common aspirations dictated by cultural, linguistic, religious, racial or regional diversities. A functional federalism ought to strive a balance between independence and interdependence. Correspondingly, the fiscal federalism ought to correspond with the functional federalism.
In actual practice, however centripetal tendencies tend to be more dominating particularly in respect of fiscal federalism in the Country. Division of financial powers and functions are asymmetrical with a pronouncing skewness in favour of the Centre. Seventh Schedule of the Constitution bears testimony to the fact that states have been entrusted with functional responsibilities incompatible with their resource generating capacities. By analogy ‘resources are more centralized while the responsibilities are more decentralized’.
This mismatch necessitates a large scale transfers from the Centre to the Unit governments through various channels including Finance Commission, Planning Commission and Government of India. These transfers are, by and large, formula based and unfavorable to a state like Jammu and Kashmir. Under such circumstances, achievement of even a modest level of financial autonomy is an unimaginable challenge.
The situation, as such, demands a departure from populism and adherence to professionalism in the process of fiscal correction (Revenue, Expenditure, Institutional) measures in the State. The fiscal reforms already initiated need to be further strengthened rather than rejected under sheer political expediency. As a case in point, Fiscal  Responsibility Legislation enacted in August 2006 deserves strict adherence. The commitments, inter alia, include: i) maintain revenue surplus; ii) reduce GFD/GSDP by  0.5 percent annually iii) lay down norms for prioritization of capital expenditure iv) pursue policies to raise non-tax revenue and v) reduce pre-devolution non-plan revenue deficit.
The VAT regime needs to be strengthened to provide a basis for additional resources mobilization, the parallels of which are already available in the country. Efforts need to be made to ensure that the TFC Recommendations, commencing from April 2010, are favorable to the fiscal imperatives of the state. The State Provident Fund needs to be managed on the pattern of NSSF. ADB, WB and DfID  need to be approached to launch ‘Public Resource Management Programmes’ in the state. Initiating the process of introducing new contributory pension scheme be considered. Initiative be taken to launch economically justifiable projects on PPP basis. Fiscal space be created by taking both revenue and expenditure measures. The closure, privatization and restructuring of loss making PSUs be facilitated. And the last but not the least, possibilities of swapping high cost debt with low cost concessional borrowings be explored.
These reform measures deserve serious consideration in the formulation of the forthcoming state budget.

The writer can be reached at  [email protected])


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