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Economic notes

February 12, 2019

Economic reforms: Part - XLIV

Opinion

February 12, 2019

The 1997 NFC Award was not too old before another military intervention led to the imposition of emergency in the country and disrupted the work of future NFCs.

A new commission was constituted in 2002 but it failed to reach a consensus before it was succeeded by a new commission in 2005. Even this commission failed to give an award. Note that a democratic government was in office by this time and yet an award could not be agreed upon.

The reason for failure was a lack of agreement among the provinces on horizontal distribution, on the one hand, and their demand for a much higher transfer from the centre, on the other. While the former was centred on bringing additional criteria for inter-provincial transfers, besides population, the latter emanated from a major shortfall in actual transfers to the provinces, compared to projected transfers under the 1997 award.

Before we reflect on these differences, it will be useful to recall that the 1997 award was given by an interim government in haste. It was constituted on December 10, 1996 and by February 2, 1997 it was finalised, within a short period of less than 60 days. The previous commissions had taken significantly more time, not to mention that some awards were late by as much as fifteen years, as between 1975 and 1990.

More importantly, it also introduced a new concept of ‘national resource picture’ which combined all taxation and expenditure as if it was confronted with distribution among some kind of comparable units. The intricacies and subtleties involved in the complex notion of a federation were ignored. To be fair, the origin of this approach could be traced to the 1990 award, which for the first time adopted expenditure as the starting point for NFC deliberations. Undoubtedly, assignment of revenues should closely follow responsibilities assigned under the constitution, but if primacy is given to consideration of the expenditures required for this purpose then there would be an incentive to exaggerate their size by the contending parties.

Revenue, augmented by a prudent increase in public debt (borrowings), has to be the primary basis, with some sources of revenues exclusively reserved for the federal government to ensure its credit worthiness, ability to meet contingencies and to strive for balanced economic development. This was the approach with which the 1935 constitution started the scheme of revenue and which continued until 1975.

It is imperative to keep in view that, from the outset, the constitutional scheme was so designed that the governor general/president had the discretion of including selected taxes for the purpose of sharing with the provinces. If this was not so, a much simpler provision could have been crafted which simply required a periodic review of all taxes and their distribution with and among the provinces. The very construction of Article 161 was so made as to preserve the financial integrity and stability of the federation while making due provisions for sharing some taxes with the provinces.

It would be revealing to point out that the 1974 commission asked the Ministry of Finance to approach the then prime minister with its recommendation to expand the commission’s terms of reference by including some additional excise duties in the scope of its recommendations. The prime minister declined the request and directed that the terms assigned earlier should be adhered to. The technical member from Sindh, P K Shahani, desired that the summary for the prime minister be made part of the proceedings of the commission so that the reasons for the request being declined could be shared with the people of the province. The commission did not agree to this as that matter was not included in its scope of work.

Equally importantly, the commission also refused to take projections of current expenditures as the basis for determining the needs of revenues. It took a deliberate decision to adhere to the approach evolved since 1935, explained earlier. The TORs of the 1995 commission were deliberately confined to a smaller set of taxes compared to what was already admitted in the divisible pool in the 1990 commission. This showed that the constitutional scheme allowed the possibility of reversing previously agreed arrangements.

Returning to the failure of the 2002 commission, the projections made by the 1997 commission were ‘unrealistic and ambitious’, says the 2009 NFC report. It was projected that the provinces would receive Rs1005 billion over the next five years, whereas the actual transfers amounted to Rs604 billion, 40 percent short of the projection. As we said above, making a projection for a five-year horizon for variables, over which one exercises little control, is a hazardous job – both technically as well as in spawning misleading expectations. The provinces took the projections as commitments of transfers irrespective of actual outcomes, or so it seems as they were now demanding a much higher share of divisible pool, which covered all federally imposed taxes. The federal government could not agree to such a demand.

Regarding the use of multiple criteria, this question was agitated from the time of the Niemeyer Award without any significant progress. As we had earlier noted, except for very peculiar reasons related to Bengal, where Neimeyer agreed on the origin of export duties on Jute, his award was essentially based on population. Until East Pakistan was there, a part of sales tax proceeds was also distributed on the basis of origin. Thus departing from population as the sole criteria was not an easy task for agreement.

After the failure of two successive commissions, and in a curious development, the sparring parties approached the then president saying that he should decide the award as they were unable to reach a consensus; that they all trusted him and would agree to his judgement. The president, who was the chief architect of the prevailing political dispensation, happily acceded to the request and announced an (ad-hoc) award which was notified in 2006. In the next part we will discuss the details of this award.

To be continued

The writer is a former finance secretary. Email: [email protected]

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