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I am confident, the Finance Commission will support the State- KCR

Chief Minister K Chandrashekhar Rao at the meeting with the Chairman of the Fifteenth Finance Commission, N.K. Singh, distinguished members of the Commission, Dr. Anoop Singh, Dr. Ashok Lahiri and Dr. Ramesh Chand, Secretary and Officials of the Commission at Jubilee Hall, Hyderabad on 19-02-2019

  1. Chairman of the Fifteenth Finance Commission, N.K. Singh Ji, distinguished members of the Commission, Dr. Anoop Singh, Dr. Ashok Lahiri and Dr. Ramesh Chand, Secretary and Officials of the Commission, I have great pleasure in whole heartedly welcoming you to Telangana on behalf of 3.7 crore people and on my own behalf.
  2. Before presenting my views, I may briefly recapitulate the crisis like situation prevailing on all fronts at the time of the formation of the State. There were acute power shortages, high incidence of farmer suicides and the economy growing at below the national average. Many opportunities were lost and problems accumulated as a result of deliberate neglect of Telangana in the erstwhile State of Andhra Pradesh. We thought there was no point in brooding over the past neglect and be deterred by the challenges before us. We did not want such a serious crisis to go waste and took it as an opportunity to do things that were not done before to meet the suppressed aspirations of our people. We started the process of reinventing and reorienting the State to realize the goal of ‘Bangaru Telangana,’ i.e., Golden Telangana. We took up a number of programmes to alleviate the hardship of people and to put the Telangana economy on a higher growth trajectory.
  3. We have submitted a detailed memorandum indicating the first of its kind initiatives taken by the State Government since its formation in June 2014 and presenting our views on the terms of reference of the Commission. My officials will be making presentations on some of these programmes. Therefore, I will restrict myself to a few important issues relating to the role of the Finance Commission in promoting cooperative fiscal federalism and making the States fiscally stronger.
  4. At the time of the making of the Indian Constitution, the primary concern was preserving the unity of the country in the aftermath of the partition of the country and the problems associated with integration of numerous princely and diverse States. Therefore, by design, the Indian Constitution was adopted with significant centripetal bias in the distribution of fiscal powers between the Centre and the States. Added to this, Centre has been increasingly intruding into State subjects by running numerous Centrally sponsored schemes, shifting subjects from the State List to the Concurrent List and introducing new schemes in State subjects without any prior consultation with States.
  5. As per the assessment made by the Fourteenth Finance Commission, the Centre’s expenditure on State subjects increased from an average of 14 per cent of its total expenditure to 20 per cent and on subjects in the Concurrent List from an average of 13 per cent to 17 per cent between 2002-05 and 2005-11. This is indicative of the excess fiscal space available with the Centre, a major part of which can easily be shared with States through higher tax devolution. The Centre’s recourse to levy of cesses and surcharges on a permanent basis has significantly reduced the divisible pool of Central taxes, affecting the interests of States. Currently, cesses and surcharges account for 14.3 per cent of the gross tax revenue of the Centre, even after some of the cesses are subsumed under GST. What is also a matter of great concern is that proceeds of Road Cess and Clean Energy Cess are not being passed on to States fully as repeatedly pointed out by C&AG. Short transfer of Road Cess amounted to Rs.72,726 crore and that of Clean Energy Cess to  Rs.44,505 crore at the end of 2017-18.
  6. With rich natural resources remaining untapped, people deprived of minimum needs, agriculture which supports over 50 per cent of the country’s population mired in distress, the time has come to take a comprehensive view of Union-State relations and to realign the resources in favour of the States, which are assigned functions touching on the lives of the people. Now the States are mature enough to formulate their plans and prioritize their expenditure to suit the needs of people being closer to them. States are found to be lot more fiscally prudent than the Centre. The Gujarat and Kerala models of development were being talked about previously. Now, it is the Telangana model of development which has taken centre-stage.
  7. The Cabinet Resolution setting up of the NITI Aayog generated hopes of building Team India making States equal partners in nation’s development and promoting cooperative fiscal federalism. The Resolution also stated categorically that the one-size-fits all approach, inherent in Central planning and schemes have the potential of creating needless tensions and undermining the harmony needed for national effort. These hopes remained unfulfilled. The Hon’ble Prime Minister in his letter to Chief Ministers was categorical in stating that States should be allowed to chalk out their own programmes and schemes with greater financial strength and autonomy and expressed his strong conviction that strong States make a strong India and that the progress of the country depends on the progress of States. So far, no decisive steps have been initiated in fulfilling these commitments. I strongly believe that as a Constitutional institution for resource transfers to States, the Fifteenth Finance Commission has a decisive role in taking these imperatives forward and paving the way for path breaking reforms in Indian fiscal federalism in consonance with changing realities.
  8. The recent Finance Commissions have been assigning higher weightage to equity parameters like distance of per capita income in their tax devolution formula. We are not against preferential treatment to backward States. What we are worried about is that higher weightage to equity parameters has not served its purpose. Income inequalities across States have been increasing and the performing States are feeling discriminated. The Finance Commissions’ transfers are mostly restricted to the revenue account and for kick staring growth momentum in backward States, what is needed is capital infusion. Therefore, there is a need for separate institutional mechanism to support the capital needs of backward States outside the Finance Commission. We, therefore, strongly urge the Finance Commission to strike a balance between equity and efficiency in their dispensation so as to ensure that the performing States are not penalized.
  9. Now, I will briefly present before you my views on some of the terms of reference given to the Commission, which are of great concern to us. The Commission has been asked to take into account the impact of the substantial increase in tax devolution recommended by the previous Commission coupled with the continuing imperative of national development agenda including New India-2022. The tax devolution recommended by the previous Commission has not imposed any additional fiscal burden on the Union and the fiscal space of the Union remained the same but only resulted in a compositional shift in favour of tax devolution. The actual outcomes in the first three years of the award of the Fourteenth Commission indicate that the total revenue account transfers as percentage of gross revenue receipts of the Centre more or less remained the same as in the pre-award period. Taking into account the requirements for New India-2022 may result in reducing the fiscal transfers to States.
  10. Following the recommendations of the Fourteenth Finance Commission, the Centre had dispensed with a number of programmes like BRGF, Model Schools and increased the matching contribution of States in respect of a number of Centrally sponsored schemes. Telangana suffered a double whammy with these developments and reduction of its share in tax devolution. I am confident that the Fifteenth Commission will adopt a judicious approach while dealing with these considerations and ensure a higher flow of resources to States taking into account the reality that the development of the nation lies in the development of States.
  11. One of the considerations listed out in the ToR relates to the conditions that the Centre may impose while giving consent to States to raise loans. When the States are adhering to fiscal responsibility regime and containing their fiscal deficit at 3 per cent of GSDP and maintaining revenue balance, borrowings are obviously used for meeting capital expenditure. In such a situation, there does not seem to be any justification on the part of the Centre to think in terms of imposing conditions while giving consent to States to borrow.
  12. In this context, I urge the Finance Commission to recommend continuation of the facility of additional borrowings over and above the 3 per cent of GSDP limit to States which are fiscally prudent and have shown improvement in their own revenue collections. This will facilitate the States to put their ongoing projects on fast track and to reduce cost and time overruns. The Commission may consider raising the additional borrowing facility to 1 per cent of GSDP.
  13. The Fifteenth Commission has been asked to consider proposing measurable performance based incentives to States in a number of areas. I will only touch upon two areas. The inclusion of implementation of flagship programmes of Government of India and exclusion of similar programmes of the State Government from the purview of incentive grants is a matter of serious concerns. The expenditure on flagship programmes of the Centre in a State is a miniscule of the total expenditure incurred by a State in a year. I request the Commission to incentivize the States in the implementation of their own flagship programmes which are much better designed than the one-size-fits all programmes of the Centre, most of which are in the State subjects.
  14. Another performance based incentive relates to the control or lack of control in incurring expenditure on populist measures. There are no objective criteria to categorize schemes into populist and non-populist. India, being so vast and diverse, the needs differ from State to State and within a State from district to district. When the Government of Tamil Nadu introduced the Mid-day Meal Scheme, it was dubbed as populist. Similarly, the Employment Guarantee Scheme launched by the Government of Maharashtra was criticized. The same schemes were later adopted by the Government of India. Similarly, the ‘Rythu Bandhu’ scheme launched by Telangana is being replicated in other States and recently, the Government of India too launched it covering the entire country, though in a much diluted manner. Therefore, the introduction of welfare schemes is better left to the States. The Fifth Finance Commission expressed difficulties in taking a call on the propriety of policies of States and regulating grants based on any judgment regarding particular policies being adopted by individual States. I earnestly hope that this Commission too adopts a similar approach.
  15. I would like to flag another important issue for the consideration of this Finance Commission. In the interests of tax harmonization, States have compromised their autonomy and extended unstinted support to the Centre in introducing GST. Sales tax/VAT, the only major source of own tax revenue of States has been subsumed under GST. Even after the Union excise duties and tax on services are subsumed under GST, the Centre is still left with buoyant sources of revenue like income tax, corporation tax and custom duties. While GST has subsumed around 31 of the gross tax revenue of the Centre, it has subsumed much larger portion of States’ own tax revenue of around 50 per cent. As the States have sacrificed their fiscal autonomy, I request the Finance Commission to suitably compensate the States in the form of higher tax devolution.
  16. The formula proposed by the State for tax devolution is primarily guided by the imperative to strike a balance between equity and efficiency. We cannot improve the lot of the backward States by pulling down the performing States. Taking into account the dire need to realign resources in favour of States and the fiscal autonomy foregone by States in the interests of tax harmonization, we request the Commission to increase tax devolution to 50 per cent of the divisible pool of Central taxes. This can easily be accommodated by the Centre by reducing its expenditure on State subjects.
  17. Let me also briefly highlight the State-specific requirements in a few important sectors. I will focus mainly on local bodies, Mission Bhagiratha and maintenance of lift irrigation projects. We have taken decisive steps to strengthen the local bodies and make them more accountable. We have enacted a new Panchatat Raj Act and increased the number of gram panchayats from 8,368 to 12,751. Similarly the number of municipalities has gone up from 74 to 142. We request the Finance Commission to significantly increase grants to rural as well as urban local bodies. The need for such an increase has been elaborated in our memorandum.
  18. The Government has been according utmost priority to provide irrigation facilities to 1.24 crore acres. In fulfillment of this objective, we have fast tracked a number of ongoing projects whose implementation remained neglected in the combined State. We have taken up the prestigious Kaleshwaram lift irrigation project to provide irrigation facilities to over 18 lakh acres in 13 districts of the State at an estimated cost of Rs.80,000 crore. Since the State is located on the upstream of the rivers Godavari and Krishna, there is hardly any scope for surface irrigation. Invariably, we have to depend on lift irrigation projects, which are maintenance intensive. The maintenance cost of the lift irrigation projects during the award period of the Fifteenth Finance Commission is estimated at Rs.40,169 crore. We request the Commission to support the State Government by recommending this amount as a maintenance grant.
  19. As the Commission is aware, another prestigious programme taken up by the State is ‘Mission Bhagiratha’ to provide treated and piped drinking water to every household in the State. This will solve the recurring incidence of water borne diseases once and for all. The Mission is nearing completion in a few months from now. The maintenance cost of this Mission is estimated at Rs.10,142 crore in respect of rural component and Rs.2,580 crore for the urban component for the five-year period 2020-25. We request the Commission to provide a grant amounting to Rs.12,722 crore. We are making efforts to put in place a system of levying user charges but it will take time. Therefore, these grants are needed only in the initial five years. I am sure that the Finance Commission will support the State as these are first of its kind projects taken up anywhere in the country.
  20. I am very confident that the Fifteenth Finance Commission under the dynamic and able leadership of N.K.Singh will herald a new era in Indian fiscal federalism, making the States fiscally stronger and thereby enabling them to tap the immense growth potential that the country is bestowed with and make it stand out as a strong and vibrant nation in the world. We are also confident that the Commission’s recommendations will pave the way for bringing about realignment of resources with functional responsibilities.
  21. I profusely thank the Commission for making it convenient to visit the State. I hope all of you will have a comfortable stay in this historic and hospitable city of Hyderabad.


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