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Let States decide fiscal priorities: Chelliah

By Our Special Correspondent

CHENNAI, FEB. 16 . Fiscal expert, Raja J. Chelliah, today called for an end to the "gap-filling approach" adopted by Finance Commissions in deciding devolution of funds to States.

The chairman of the Madras School of Economics said the Centre should stop deciding the revenue, expenditure and Plan priorities of States and instead allow greater autonomy to sub-national governments in fiscal matters. Central assistance or "block transfers" to States should be aimed mainly at making up for the deficiency in fiscal or taxable capacity, tax effort and cost disadvantage to ensure that each State was able to provide average standards of services at an average "tax price" and should not be related to actual or projected expenditure of the State concerned. Once this was done, the States should be free to decide upon their levels of taxes and expenditures, Dr. Chelliah said.

Delivering the fourth Ambirajan Memorial Lecture on "The malady of fiscal imbalance: the impossible quadrangle", organised by the Public Expenditure Round Table (PERT) and the Institute of Economic Education (IEE), Dr. Chelliah said the objective of enabling States to maintain reasonably low levels of fiscal deficits, adopted by successive Finance Commissions, was defeated by three other objectives they had been pursuing along with the Planning Commission.

These included filling the non-plan revenue gap of States by financial transfers recommended by the Finance Commissions (viz, "gap-filling approach"), the policy adopted by the Planning Commission in extending loan "assistance" to States without reference to their repayment capacity and on the same parameters as adopted for grants to States and the policy of revision of real wages of Central and State Government servants without regard to the size of workforce, capacity to pay, per capita incomes and general level of salaries in the States.

The present system of Central funds devolution penalised citizens of States, which managed their finances in a sounder manner, without at the same time strengthening the fiscal capacity of weaker States.

Dr. Chelliah said the Planning Commission should abolish the distinction between Plan and non-Plan expenditure and confine itself mainly to matters relating to government investment as far as expenditures were concerned.

He suggested a write-off of 50 per cent of the Central debt and market borrowing which the States now held while implementing the new approach to federal transfers recommended by him.

K. Venkataraman, chairman of PERT, introduced the theme of the lecture.

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