VIRUS IN THE PLAN - Bizarre fiscal arrangements between the Centre and the states

Ashok Mitra
The Telegraph, 21 January

The quinquennial event — the National Development Council’s approval of the five-year plan as prepared by the Planning Commission — is now no more than a charade. A plan is supposed to set rigorous targets for the economy as a whole as well as for its individual sectors, at the same time indicating meticulous measures to reach such targets. All that has fallen by the wayside in the free-for-all milieu of the liberalization era.

The 11th five-year plan, as ratified by the NDC last month, is nonetheless not an altogether vacuous exercise; it is intended to serve a particular objective: imposing the will of the Centre on state governments. This or that state chief minister may be totally opposed to the approach and contents of the plan. He or she must still walk the plank and fall in line with what is archly referred to as the consensus on the plan. Were a state government to refuse to go along, the Planning Commission will cut it out of all plan assistance; since the state disagrees with the projects and programmes constituting the plan and would like to go its own way, it cannot, it will be told, expect any financial accommodation from the commission.

Two outflows from the national exchequer form the lifeline of a state government: (a) statutory allocation recommended by the Finance Commission as per provisions of the Constitution, and (b) grants recommended by the Planning Commission for approved schemes under the five-year plans. The Finance Commission is formally appointed by the president every five years and empowered to decide the distribution between the Centre and the states of the revenue receipts collected by the Centre through income tax and excise duties; it also determines the inter se allocation among the states of the amount going into the state pool. In addition, it is authorized to recommend grants-in-aid to the states for specific purposes.

On paper, this constitutional arrangement for equitable distribution of funds between the Centre and the states looks fine. Given Article 74 of the Constitution, which makes the president a tool in the hands of the Union council of ministers, it is, in effect, the Centre which decides the Finance Commission’s composition and terms of reference. This Commission has in course of time become the deus ex machina to thrust the fiscal philosophy of the Central ministry of finance on the ambit of activities of the state governments; their statutory dues are now subject to conditions set by the commission on behalf of the Centre.

The experience of the states with the Planning Commission is not any different. This commission is not even a constitutional body. It was set up, way back in 1950, by a resolution of the Union cabinet, and functions just like any Central ministry. It acts as the eye and the ear of the Centre; it proposes what the Centre wants it to propose.

Consider the 11th five-year plan as prepared by the Planning Commission. It endorses New Delhi’s pet views on appropriate modalities for national development. The pursuit of free-market policies, it is confident, will ensure that the spurt of growth, already evident in the services and industry sectors, will continue during the 11th plan period, thereby engineering ±10 per cent annual rate of growth in gross domestic product. The only question mark is apparently with regard to agriculture, where the current annual rate of growth is only 2 per cent. For GDP to grow at 10 per cent, the rate of growth of farm output, the commission thinks, must double. Such an eventuality can take place, it further thinks, in case corporate bodies are invited to enter the rural sector and engage in contract farming.

The ruling idea of the Centre is the ruling idea of the commission; other considerations are of no consequence. Common sense suggests that once contract farming invades agriculture, small and middle farmers — as well as landless agricultural workers — will be at the mercy of corporate entities. Even if, for argument’s sake, it is assumed that farm growth will pick up, thanks to invocation of corporate magic, there will be no surcease though of distress in the countryside. Corporate bodies can be expected to insist on greater mechanization of farming, rural unemployment is therefore bound to grow. With peasant masses being no match in bargaining power to the giant invaders, both wage rates and prices at which small farmers sell their output will decline. The social unrest likely to ensue will nullify the prospects of accelerated farm growth too.

To nobody’s surprise, the plan says not one word on what is, by far, the most effective means for reducing agrarian unemployment: land reforms. Close to 40 per cent of the country’s farming population, the National Sample Survey estimates indicate, are either landless or very nearly so. Land redistribution, along with provision of cheap credit, could have provided these hapless millions with gainful work, which might have contributed to higher output as well. But it is a different sort of land redistribution the Planning Commission has in mind: transferring land from the poorer peasants to the care of sponsors of the special economic zones. What is envisaged is a state-of-the-art version of Cornwallis’s Permanent Settlement; the new set of landlords will have total sway over the commandeered land and, what is more, will allow huge tax concessions and licence to brush aside the country’s labour laws.

This must be one of the reasons for the plan document waxing extra eloquent on the supposed boons of labour-market flexibility. The expression is a euphemism for a regime that permits entrepreneurs to introduce the hire-and-fire practice, a most common feature in the United States of America. Should the change sought for come about, with industrial units increasingly opting for capital-intensive technologies, labour would be ruthlessly weeded out on the pretext of the need for efficiency to meet global competition. The same situation will then emerge in the urban sector as contract farming will bring about in the countryside: segmented growth of output accompanied by aggravated unemployment. Till now, labour displaced from agricultural and industrial sectors could try to eke out a living by joining activities like petty trading in the informal sector. That possibility will evaporate if, egged on by New Delhi, big business enters the retail trade.

It is in this context that the existing fiscal arrangements between the Centre and the states appears so bizarre. Agriculture, land use, industrial relations, et al belong to the State List in the Seventh Schedule of the Constitution and exclusively under the jurisdiction of the states. No matter, the Planning Commission, an extra-constitutional body, putty in the hands of the Centre, directs the states on policies and measures to be enforced in these areas. In case the states demur, they will be cut off from funds.

The day after the NDC met in December last to approve the 11th plan, the prime minister held a separate meeting with state chief ministers to discuss what he described as the virus of Maoist violence; a special Central force has been proposed to tackle the problem. The prime minister can rest assured: with the kind of plan he and his colleagues are plotting in New Delhi, discontent among the poor and the deprived will progressively multiply, often exploding not just in Maoist depredations, but in the form of interminable caste, ethnic and communal clashes too. If states are starved of funds, or are advanced funds on condition that they agree to implement the Centre’s carefully crafted anti-poor policies, viruses of diverse genres are to have a field day in the country.