Free Press Journal, India plunder – Part II: How tweaked finance commission weightages promote profligacy & irresponsibility

Except for brief periods, much of north Indian history has been one of invasions, and petty infighting. Few empires survived for more than a few hundred years.

This was a far cry from the southern states that had learnt to stay ‘free’ for almost 2,000 years, even though they too were eventually defeated by the British. In fact, it was the south that earned gold for the territory known as India.

The wheel of fortune is turning. States that had not learnt how to govern themselves are now trying to assert their right to govern. For them, access to undeserved funds has become a birthright.

Consequently, money that is earned by states in the south and the west is transferred to the northern states. Guileful legislation often abets this.

Uttar Pradesh (UP), Madhya Pradesh (MP), and Bihar (some improvement is visible here) are the some of the worst performers. Their population growth, gender ratio (female foeticide) and low literacy levels are worse than national averages.

That should have compelled planners to create disincentives. But successive finance commissions (FCs) failed to do this (see table). FCs are created by the Parliament to recommend how government funds should be disbursed.

Normally, two principles are sacrosanct. First, the states that bring in more money should be incentivised to generate even more wealth. Second, needy states should be helped out, but with caveats. Needy states should meet developmental goals –reducing population, improving sex ratio and improving literacy levels. Unfortunately, successive FCs have tweaked rules to favour populism, not good governance.

• First, the condition of fiscal discipline was dropped.

• The weightage for area was increased, giving larger states bigger benefits.

• Population norms were modified.

UP and MP have shown that there is money in the states, but its people remain poor, Per capita income can be artificially kept at low levels, by exploiting farmers.

For instance, UP could easily have encouraged milk cooperatives, thus ensuring that dairy farmers got Rs 26 per litre of milk, instead of Rs18 (or lower) that middlemen offer them currently. The basic cost of maintaining cattle is around Rs 14 a litre. At Rs 18, the farmer gets a surplus of barely Rs 4 a litre. At Rs 26, his income would have trebled. But the farmer’s income is kept low by ensuring that well-managed milk cooperatives do not take roots. Bihar has begun promoting milk cooperatives. Not UP or MP.

Or take sugarcane – Maharashtra and UP account for almost 80 per cent of national sugarcane production. While the sugarcane production is controlled by cooperatives in Maharashtra, it is with the private sector in UP. While Maharashtra’s cooperatives are no paragons of virtue or financial propriety, UP has proved to be the bigger exploiter of farmers. As the 2019-20 sugar season (October-September) draws to a close, around Rs 16,000 crore remains to be paid to farmers for sugarcane purchased. Maharashtra’s arrears are around Rs 5,000 crore. UP’s is around Rs 11,000 crore. What this means is that per capita income can be kept extremely low, if exploitation by politically aligned powerful interests is rampant.

That can also explain why the wealthiest politician-linked scamsters appear to come from these states. The misappropriation of wealth by bureaucrats is quite well-documented in MP. Just do a Duckduckgo.com or google.com search for “MP, IAS men raided”. The list is long.

The crimes of UP are sleazier. They involve politicians who have abused under-age girls in orphanages. The numbers of paedophilia cases may be higher for Maharashtra, but anecdotal information suggests that it is rampant in UP and often goes unreported. As this column has shown in an earlier article ('The plunder of productive states' - September 3, 2020), UP has found ingenious ways to defraud the exchequer to favour politicians and those close to them.

Successive FCs have also changed the baseline for population from the 1971 Census to the 2011 Census. That has benefited UP and MP immensely. This has been compounded by granting a higher weightage even to the 2011 Census baseline.

This is extremely worrisome because within a few years, India will begin work on the reorganisation of Lok Sabha constituencies based on population. Clearly, responsible and wealth-generating states will lose out to UP, Bihar and MP, if the population yardstick is adopted. Unless the courts step in right away to prevent this sleight of hand, India could be plundered once again by invaders from the north.

Obviously, the south and west will protest. If left unchecked, it will worsen the north-south divide. The first stirrings have already begun, with non-BJP states demanding a revision of the centre’s stand on GST. It is no coincidence that most non-BJP states are those in the south and in the west. The polarisation could get worse.

The author is consulting editor with FPJ

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