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Finance panel rightly backs the North-East

The 15th Finance Commission’s interim report has suggested that these States be rewarded for their dense forest cover

The 15th Finance Commission (XVFC) had a delicate task at hand. Faced with strong global headwinds and tepid economic growth at home, it had to meet competing political expectations. The heart of the matter was an elusive formula which would define the apportionment of the divisible pool of taxes amongst the States. The interim report for 2020-21, presented to the Parliament recently, gives a fair indication of the approach for the final report.

The States, particularly those with limited fiscal space, await the verdict. Amongst these are the eight States of the north-eastern region, with a history of neglect and underdevelopment. In spite of remarkable ethnic diversity, these States share some commonality, which is germane to the deliberations of the XVFC. The north-eastern States made the case, individually and collectively, that they suffer a unique fiscal disadvantage owing to a large forest cover, which represents a positive externality. In the quest for preserving these forests, these States forego opportunities of alternate economic development, thereby shrinking fiscal space.

Second, this ecologically fragile region, falling in the highest zone of seismicity, is at significant risk of natural disaster. Each monsoon, Assam floods and massive landslides carry tales of devastation and despair. This negative externality deserves a just compensation to ensure adequate mitigation and relief efforts.

Environmental concerns

The XVFC, in its interim report, has given a fair consideration to these arguments. The formula for vertical devolution between the Centre and States follows the same trajectory as last time, giving greater room for expenditure planning to the latter. In its recommendations for inter se devolution amongst States, it accorded a 10 per cent weightage to forest and ecology, higher than the 7.5 per cent recommended by its predecessor.

However, in a departure from the past, it has wisely dedicated the allocation to overcome disadvantage caused only on account of dense forests (as classified in the State of Forest Report), ignoring open forests. This reflects a progressive approach to incentivising conservation as a larger national goal to deal with climate change. As a result, more than a quarter of the allocation on this count goes to the North-East, the lion’s share with

The response to natural disaster has been disaggregated into mitigation and disaster relief. One-fifth of the allocation at the national and State-level to the National Disaster Risk Management Fund (mitigation plus relief) is apportioned for mitigation, and the rest for disaster response. A sum of 41,373 crore has been suggested for the national and State-level funds, which in case of the north-eastern States would have a 90:10 cost sharing between the Centre and States.

Significantly, in contrast to an ad hoc expenditure capacity-driven methodology for making inter se allocations, this time around, allocations are determined by a host of other factors as well: risk exposure (area and population) and susceptibility to hazard and vulnerability. A perusal of State-wise allocations for disaster relief management show 5 per cent accorded to the North-East, the highest for Assam and Arunachal Pradesh.

A Disaster Risk Index, a composite function of vulnerability to floods, droughts, cyclone, earthquake and other natural disasters, has been devised. A 70 per cent weightage is accorded to natural vulnerability and 30 per cent to poverty. Odisha is the highest on this index at 0.9, followed by Gujarat and Bihar (0.8). In the North-East, Aruanchal Pradesh and Assam have the highest disaster index of 0.7

Civic management

Third, the fragile soil of the mountains in this region is susceptible to frequent landslips during the annual monsoons, spreading over six months. Capital expenditure on road construction gets washed out. In the absence of any provision for maintenance budgets, especially for rural roads constructed under the PM Gram Sadak Yojana (which involves massive earth cutting) village connectivity takes a hit. The XVFC has hinted at an appropriate compensation for this purpose in its final report.

Lastly, a pragmatic view has been taken of the fact that 14 States will still face a revenue deficit even after devolution. A revenue deficit grant of 74.34 crore has been proposed to meet this shortfall, more than a quarter of which has been earmarked for six north-eastern States.

Given the generous allocations recommended for the current year, it is now up to the States to make the most productive use of their scarce resources and not fritter away this opportunity. With greater devolution comes greater flexibility, but also greater responsibility. The Terms of Reference of the XVFC had a provision for performance-based incentives. It may perhaps have been opportune to invoke this clause to infuse an element of competition amongst the States of the region. But, some good things can wait for another time.