Backward Business


Heat has been generated around the Eleventh Finance Commission (EFC) interim recommendation, espeically after some state chief ministers met in New Delhi last month. Andhra Pradesh and Kerala revolted against the EFC award because their share of central revenues have been brought down from 7.98% and 3.4% under the Tenth Finance Commission (TFC) award to 7.13% and 2.83% respectively. Paradoxically, the share of the economically ‘backward’ state of West Bengal has been raised from 6.61% to 8.1%. Andhra Pradesh and Kerala recorded significant performance in recent years measured in terms of growth of state income and percapita income and have achieved significant reduction in the proportion of population below poverty line. Kerala maintained its achievements in the level of total and female literacy, health care and family planning acceptance. Both states made significant progress in democratic decentralisation and devolution of the planning role to panchayets and municipal bodies. No doubt the wisdom of penalising Andhra Pradesh and Kerala through reduction of their respective shares of resource transfer from the centre for their social and economic achievements is open to question. The Constitution of India, article 280, to be precise, provides for a Finance Commission to be appointed after every five years or earlier. The functions of the FC are to recommend the distribution between the Centre and the States of the net proceeds of Income Tax (IT) and Basic Excise Duties (BED), the principles which should govern the grants in aid of revenues to the states out of the consolidated Fund of India, Union loans to States and any other matter concerning financial relations between the Centre and the States which is referred to the FC by the  president of India in the interests of sound finance. In the first FC (1952-57) the horizontal sharing of IT was based on contribution from the state concerned and population and for sharing of BED it was population only. In respect of IT the same criteria continued upto the Seventh FC (1979-84). The criterion of specific Indicators of Backwardness  was introduced with effect from the Second FC

(1957-62) for distribution of BED share among states. In the interest of equity the criteria of percapita income, specific indicators of backwardness, Index of Poverty, Tax Effort and proportion to post-devolution deficits were introduced later, for fixing shares of the sharable pool of IT and BED among States. The Sarkaria Commission on Centre-State relations acknowledged the importance of FC and suggested that terms of reference should be drawn after informal consultation with the States. Central grants are given to the States under provisions made in the Constitution for bridging the gap between revenue and expenditure, for plan projects and for centrally sponsored schemes.


In respect of grants, the Gadgil formula, framed during the fourth five year plan, gave 60% weightage to population, 10% to per cepita income, 10% to major and medium irrigation projects and 10% to special  problems of individual states. The modified Gadgil formula approved by the National Development Council in 1980 gave 60% weightage to population, 20% to states having per capita income below the national average, 10% to per capita tax effort and 10% for social problems. Recent modification of the distribution formula takes into consideration the separate indices of Infrastructure, Social Sector, Law and Order administration, fiscal discipline, affluence etc. and on the basis of overall rank thus obtained by states witholds some grants to forward states and recommends ex-gratia grants to backward States in the interest of equity and balance. Accordingly the EFC awards have gone against fast-track states like Andhra Pradesh, Tamil Nadu, Maharashtra and Karnataka while it favoured backward states like Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh. The most surprising part of the EFC award is the inclusion of West Bengal in the list of favoured and backward States. West Bengal will receive Rs 35219 crore in the next five years, an amount which is significantly higher than that under the TFC award. While the West Bengal finance minister, a high profile Calcutta University teacher of Economics, seems to be happy to 'wrest' more money from the Centre, although by dubious means, the very acceptance of the EFC award is tantamount to official acknowledgement of the slide of West Bengal to backwardness.