PROF. PREM KUMAR DHUMAL
ON THE OCCASION OF THE VISIT OF THE THIRTEENTH FINANCE
COMMISSION
AT SHIMLA |
|
|
GOVERNMENT
OF HIMACHAL PRADESH
SPEECH OF
PROF. PREM KUMAR DHUMAL
CHIEF MINISTER, HIMACHAL PRADESH
ON THE OCCASION OF THE
VISIT OF THE
THIRTEENTH FINANCE COMMISSION
AT
SHIMLA
ON
6th JUNE,
2008
Hon'ble Dr. Kelkar, Chairman, 13th Finance Commission, other
distinguished members and officers of the Commission.
On behalf of
the people and Government of Himachal. Pradesh,I extend a warm welcome to all of
you. Your visit comes at a time when inflation and a declining GDP growth rate
pose a challenge to all States and especially to the Special Category States.
1. Chairman Sir, you and
your colleagues, individually and collectively have vast experience in public
finance and policy making. You are well aware that Special Category States like
Himachal Pradesh are critically dependent on the dispensations of the Finance
Commissions. We hope that the 13th Finance Commission will help to further
bridge the gap between
Special
Category States and the fiscally strong States of the country.
2. I would like
to take this opportunity to go back to the rationale for the creation of Special
Category States. Hill States, .located in the Himalayan region of the country
never had a thriving self-reliant economy. Our difficult terrain and h2.rsh
climate rules out scope for any substantial agricultural surplus. Industry and
trade are also marginal. Special Category States were created in recognition of
their special needs and their creation was not based on considerations of fiscal
viability. The need for continued financial support from the Union Government is
thus inherent in the rationale for creation of small States like Himachal
Pradesh. What is also important is that most of the Special Category States have
international borders and their proper development is necessary for the
strategic security of the country.
3. The Special
Category States need additional Central allocations because of their weak fiscal
and infrastructural base. These States have a rural population percentage much
above the national average and the population of the disadvantaged groups of
Scheduled Castes and Tribes are also in larger proportion. These indicators also
highlight the need for preferential treatment in Central devolutions.
4.
From the Seventh Five Year Plan
till the Ninth Plan, our State's economy grew at a higher rate than the national
average. The Eighth Plan and Ninth Plan recorded Himachal's average annual
growth rate at 6.3% and 6.4% respectively, against the national averages of 6.2%
and 5.6%. However, the Tenth Five Year Plan registered an average annual growth
rate of 7.6% which was lower than the national average of 7.8%. This trend has
continued into the first year of the 11 th Plan. This slowing down of our
economic growth as compared to the national average is a matter
of concern because Himachal Pradesh needs to catch up with the other
States in becoming a self-reliant economic unit.
5. In terms of Human development indices the
achievements of Himachal Pradesh are well known. Literacy in the State has
nearly doubled in the last two decades. In the decade since 1991, the gender gap
in literacy rate has also declined from 22.6 percent to 17.5 percent as per the
2001 census. Female literacy in Himachal has thus more than doubled from 31
% in 1981 to 68%
in 2001. Among the youth - both male and female, we now expect universal
literacy.
6. Achievements of our State with regard to
critical health indicatorsare also better than the national averages. Birth rate
at 18.8, Death rate at 6.8 and infant mortality rate at 50 are better than the
national averages of 23.5, 7.5 and 57 respectively. Improving access to safe
drinking water is one of our major priorities for achieving better health
indicators. The decline in sex ratio in the 0-6 years age group between 1991 &
2001 has been a matter of concern.
7. Himachal
Pradesh faces several infrastructure bottlenecks. Though we have
achieved a road density of 53 kilometers per 100 square kilometers of area, yet
this density is half of the all
India
average. More than half of our habitations are still not connected by road. The
per unit cost of building physical infrastructure in the mountains is much
higher than in the plains. Out of the total irrigation potential of 3.35 lakh
hectares, the State Government has created a Culturable Command Area of 2.12
lakh hectares. Because of the difficult terrain, huge investment is required to
realize the remaining irrigation potential. Yet, this needs to be done because
Agriculture and Horticulture will continue to be the prime activity for a
majority of our population.
8. Maintenance
of existing roads poses huge challenges because of climatic factors and
difficult topography. Vulnerability of unstable strata of relatively younger
Himalayas to frequent slips and slides makes maintenance of already existing
physical infrastructure extremely expensive. Thus, our maintenance costs are
very high. The recent phenomenon of frequent cloud bursts has caused loss not
only to human life but also to the existing physical infrastructure and has
further compounded our maintenance costs.
9. Hill States
are characterized by a high proportion of rural
population, poorly developed
infrastructure, remote and mountainous topography with steep slopes. There is
very limited land available for agricultural operations, coupled with non
availability of choices of alternate livelihood strategies. Agriculture tends to
suffer from low productivity. Difficult terrain and high costs involved in
lifting water for irrigation leaves a large proportion of agriculture land
dependent on rainfed cultivation.
10. Despite our
fiscal handicaps and topographical constraints, our government is committed to
inclusive development. Our aim is to excel in governance and to reach out to the
poorest of the poor including the Scheduled Castes, Scheduled Tribes and the
Backward Classes. Our government plans to expand the medical and highest
education infrastructure, including technical education through greater impetus
to Public Private Partnerships. In April 2008 itself, our government has
facilitated .the setting up of two new private universities. We have also
decided to allot hydropower projects above 5 MW to private parties, through a
transparently competitive bidding process.
11. Hon'ble Chairman, the success achieved in our
health care and educational infrastructure imposes high revenue expenditure
costs in our Budget. Our education and health infrastructure has undergone large
expansion over the last two decades. This has necessitated recruitment of a
large number of staff for these institutions. Consequently, most of our salary
expenditure is in these two sectors. In order to sustain the achievements of the
State in the areas of health and education, the Commission is requested to fully
accept our revenue expenditure projections for these sectors, since these are
based on the actual pay revision trends and inflation linked dearness allowance
releases. It is important
that the Commission applies an objective criteria which
correctly assesses the coming pay revision impact as well as the expected
bi-annual dearness allowance releases
which shall be made for an inflation rate of between
70/0 to 8% for the 2010-15
period. Our assessment of this expected inflation rate is based upon the current
trends in price rise, as well as the fact that the coming pay revisions shall
add to the monetary supply in the Indian economy.
12. While assessing
the prosperity and revenue potential of the State, often per capita income is
used as a proxy indicator. Per capita income of Himachal Pradesh has to be
viewed in the context of the high cost of living.
13. Despite our
fiscal handicaps and topographical constraints, our government is committed to
inclusive development. Our aim is to excel in governance and to reach out to the
poorest of the poor including the Scheduled Castes, Scheduled Tribes and the
Backward Classes. Our government plans to expand the medical and higher
education infrastructure, including technical education through greater impetus
to Public Private Partnerships. In April 2008 itself, our government has
facilitated the setting up of two new private universities. We have also decided
to allot hydropower projects above 5 MW to private parties, through a
transparently competitive bidding process.
14. Hon'ble
Chairman, the success achieved in our health care and educational infrastructure
imposes high revenue expenditure costs in our Budget. Our education and health
infrastructure has undergone large expansion over the last two decades. This has
necessitated recruitment of a large number of staff for these institutions.
Consequently, most of our salary expenditure is in these two sectors. In order
to sustain the achievements of the State in the areas of health and education,
the Commission is requested to fully accept our revenue expenditure projections
for these sectors, since these are based on the actual pay revision trends and
inflation linked dearness allowance releases. It is important that the
Commission applies an objective criteria which correctly assesses the coming pay
revision impact as well as the expected bi-annual dearness allowance releases
which shall be made for an inflation rate of between 70/0 to 80/0 for the
2010-15 period. Our assessment of this expected inflation rate is based upon the
current trends in price rise, as well as the fact that the coming pay revisions
shall add to the monetary supply in the Indian economy.
15. While assessing the prosperity and revenue
potential of the State, often per capita income is used as a proxy indicator.
Per capita income of Himachal Pradesh has to be viewed in the context of the
high cost of living in Hill states due to transportation costs to remote areas
and the climatic conditions at high altitudes. Whether it-is clothing, shelter,
fuel or even food, the minimum per capita requirements are far higher than in
the plains. These higher consumption requirements increase the cost of living
and reduce the taxable capacity of the population, thus limiting the scope for
additional resource mobilization through greater taxation.
16. We therefore,
urge the Commission to not mechanically use per capita income as a proxy for
determining the prosperity or revenue potential of the State. The Commission
should rather examine the structure of the economy, decompose the components of
economic growth, look at rural urban composition of population, investment
activity avenues, credit deposit ratios, remoteness from markets, etc. before
coming to any conclusion about taxation potential.
17. Hon'ble
Chairman, the State's revenue receipts have traditionally
been dependent on Central
transfers - ranging from
60% to 71 % of total revenue receipts. For the period 2002-03 to 2006-07, the
State's own tax receipts have increased at a compounded annual growth rate of
17%, which demonstrates the commitment of the State to generate its own
resources. In 2002-03, the non tax revenue was only Rs. 175 crore which was
4.78% of the Total Revenue Receipts. This non tax revenue has increased at a
compound growth
rate of 70% to Rs. 1337 crore and now comprises 17% of the
total Revenue Receipts of the State. Thus, the State is making full efforts to
increase its own receipts to fund its developmental requirements. However, I
would caution here that the past revenue trends cannot be mechanically
extrapolated because the gains made by us in revenue mobilization cannot be
sustained at the same pace. This is because our Non-Tax revenue receipts have
increased due to a newly introduced practice of sale of hydropower on State
Government account and one time upfront premium collected for allotment of
hydropower projects, to the private sector. Thus the hydel receipts will not
exhibit past buoyancies.
18. The total
expenditure increased from Rs. 6029 crore in 2002-03 to Rs. 8780 crore in
2006-07, that is, a compound growth rate of 9.85%. Our revenue expenditure
continues to dominate the total expenditure, constituting 85% of the total
expenditure. The revenue deficit was converted into a surplus in 2005-06 and
2006-07, primarily on the strength of Central transfers and extraordinary
buoyancies in State's own receipts. This Revenue Surplus was very marginal at
0.67% of the GSDP in 2006-07. Unless the 13th Finance Commission makes generous
devolutions to cover the pay revision impacts, Himachal Pradesh shall slide back
into problems of revenue deficits.
19. Till now, the
fiscal improvement on our revenue account has been accompanied by a reduction in
fiscal deficit as percentage of GSDP - from a high of 12.38% in 2002-03 to 3.26%
in 2006-07. However, the very high debt stock which stood at 64% of the GSDP in
2006-07 is a pointer to the precarious nature of the State's finances. The State
also has a very high per capita debt of Rs. 26860 in 2006-07, which is a source
of worry, since it limits the State Government's initiatives to sustain existing
infrastructure or to undertake new developmental initiatives. Substantial
devolutions will be required through the 13th Finance Commission Award, if
Himachal Pradesh is to achieve the optimal national norm of debt to GSDP ratio
of 28%.
20. Our government
is committed to curtailing all non-essential expenditure and observing utmost
economy in the .required delivery of services. We remain committed to filling
only essential and functional posts and these too largely by contractual
appointments. The increase in salary expenditures in 2006-07, 2007-08 and
2008-09 have been necessitated by Union Government linked DA releases, the
cascading effect of Dearness Allowance merger w.e.f. 1-4-2004 on the Central
Government pattern and the Supreme Court and High Court judgments which
necessitated retrospective regularization of more than 14,000 daily wage
workers. For pay revisions the State Government is historically linked to Punjab
ever since it was a Central Government administered Union Territory as also the
merger in 1966 of erstwhile Punjab areas into Himachal Pradesh.
21. I would like
to emphasize that our committed liabilities estimates on account of salaries,
pensions and interest payments should not be reduced by any normative exercise.
The reduction of such liabilities is possible only over the long term. The 6th
Central Pay Commission Report for the Central Government employees has entered
the public domain. Acceptance of these recommendations will have an impact on
the States. Himachal Pradesh cannot therefore remain financially unaffected. We
have conservatively calculated the total salaries and pension liability impact
of the new Pay Commission recommendations at about Rs. 8700 crore w.e.f.
1-1-2006 to 2015. The arrears for the period 2006-10 amount to Rs. 2762 crore
and these need to be included in the revenue expenditure assessment of the
State. Thus, a significant jump will be required in the devolutions for the
first award year of 2010-11.
22. Hon'ble members
of the Commission would agree that the large salary and pension burdens on
account of the Pay Commission recommendations cannot be entirely borne by
fiscally weak States like Himachal Pradesh. The pension liabilities of the State
Government shall also increase due to the rising number of pensioners each year
and greater life span of the retired employees. We therefore earnestly request
the Commission to take into account the entire Pay Commission related
arrears/recurring expenditure.
23. I have already
mentioned the acute debt stress and high interest burden being faced by the
State. The State Government has been able to keep the interest outgo at a fairly
constant level of about Rs. 1700 crore per
annum. This has been possible because of the debt relief scheme recommended by
the previous Commission. However, after various earlier debt swaps, the interest
rates have started hardening due to inflationary expectations. Keeping all these
factors in mind, our government has made a fairly conservative assessment of the
interest liabilities which may be accepted by the Commission while assessing the
State's forecast of revenue expenditure.
23. As already
mentioned earlier, Hill States have special problems in maintenance of roads,
buildings, water supply and irrigation schemes. In the various topic notes
already submitted to the Commission we have explained in detail the norms and
requirement of maintenance funds for the 2010-2015 period. We hope that the
Commission shall -also recognize the special problem being faced by the State on
account of heavy expenditure on electricity energy charges for lifting and
pumping of, water. Such heavy expenses for lifting water over great heights
cannot be fully recovered through user charges. We urge the Commission to take
these factors into account while determining the State's share of devolutions on
account of maintenance of roads, buildings, water supply and irrigation schemes.
24. In our
Memorandum, we have requested for a liberal dispensationfrom the Commission for
the environmental protection of the Himalayan ecology and its potential all
round benefits for the country. The State needs to be adequately compensated for
the revenue loss being borne by it due to ban on green felling of trees. The
issue of co~pensating the State through carbon credits for the environment
benefits being enjoyed by other States, due to forest preservation by Himachal
Pradesh also needs to be given primacy by the Union Government. Until a legal
framework emerges for compensating forest States like Himachal Pradesh, we urge
the Commission to make recommendations for compensating us on this account.
Since, the Union Government has asked the Commission to take into account the
need for addressing issues of sustainable environment and forest protection, we
also request the Commission to sympathetically consider our request for a
liberal forest maintenance and. soil conservation grant, as detailed in our
Memorandum. Overall, in our memorandum, we have given detailed justification for
an environment protection grant of Rs. 10,523 crore to Himachal Pradesh, for the
Commission's award period of 2010-2015.
25. We would
also urge the Commission to
assist us in augmenting
our financial resources by
recommending allocation of 12 percent free power royalty from hydroelectric
projects commissioned before 7th September 1990. The arrears on this account
amount to nearly Rs. 5,000 crore. Our case is that this arbitrary cut-off date
goes against the interest of Himachal Pradesh and we are being unfairly
penalized for projects commissioned in Himachal before this date. We solicit the
Commission to also support our long pending case with the Central government for
levy of a tax on electricity generated within Himachal Pradesh. Under article
288 (2) of the Indian Constitution, such tax can be imposed by a State
Government with the prior consent of the Presfdent of India. This tax was one of
the recommendations in 1993 of the Committee of Experts headed by Dr. Rangarajan
to suggest 'durable solutions for the financial problems being faced by Special
Category States.' We estimate an annual receipt of Rs.250 crore if the central
government assents in our proposal to levy such tax at 10 paise per unit. The
State of Himachal Pradesh also got a raw deal in the distribution of energy
shares and assets following the Punjab Reorganization Act
1966.
We were a Union
Territory
at that time and the Union Government did not correctly protect the State's long
term financial interests during the 1966 reorganization. Details are contained
in our memorandum. The non protection of the legitimate interest of the State
has resulted in large annual revenue losses which necessitate rectification
through Finance Commission awards.
26.
Due to its topography, our
State is susceptible to severe natural calamities. The intensity and magnitude
of these calamities is catastrophic in the case of excessive rains, snow, flash
floods, cloudbursts and earthquakes. The State has suffered enormously in the
past when such natural calamities have wreaked havoc on the physical
infrastructure of the State. We would request the Commission to recommend
doubling of the size of the State's Calamity Relief Fund. For Special Category
States this should come as 100 percent grant from the Central Government. It is
also suggested that the list of approved items of relief expenditure should be
worked out in close consultation with the State Government, to capture local
requirements of relief and rehabilitation.
27. The Commission
shall be designing measures to augment the Consolidated Fund of the States so as
to supplement the resources of the Panchayats and Municipalities. Our government
as a policy initiative has decided to reserve 50% seats for women in Panchayati
Raj and Municipal
Bodies. Under the supervision of the State Election Commission, the State
Government has also regularly held the elections of such institutions.
28. The three State
Finance Commissions have also regularly submitted their reports and their
financial recommendations have been accepted by the Government. Because of the
mismatch between the forecast periods of the 3rd State Finance Commission and
the 12th Finance Commission, we request the 13th Finance Commission to take into
account these committed liabilities, as detailed in our memorandum. Accordingly,
the 13th Finance Commission is requested to provide Rs. 1191 crore to local
bodies of the State as untied and specific purpose grants. Such an award will
help us to strengthen the financial position of these local bodies.
29. Regarding
sharing of taxes between the Centre and the States, our government proposes a
sharp increase in the States' share of the divisible pool of taxes. This is
necessary to provide greater flexibility and autonomy to the States to structure
their developmental paths in tune with local resource endowments and
opportunities. Such measures shall help the States to discharge, their
obligations to the public in a better manner. While the share of all States
needs to be progressively increased to 70% of the divisible pool, this
Commission may recommend that 500/0 of the divisible pool of gross taxes should
be earmarked for the States. All surcharges should be in the divisible pool,
except in the exceptional case of war or major national calamity. While
determining the Horizontal transfer between States, we request the Commission to
increase our State's share to at least 2%. This would be possible if factors
like three dimensional areas of Hill States, forest cover, infrastructure
deficit, private investment deficit, higher operational costs, remoteness from
markets and ports, higher cost of living etc. are factored, while determining
the horizontal distribution of State's share in Central taxes.
30. The terms of
reference for the 13th Finance Commission do not contain any mention of
administrative upgradation and special problem grants. However, in case the
Commission does consider such grants, Himachal's case may also be favorably
considered. I request the Commission to consider funding a Rs. 715 crore Shimla
gravity water supply scheme to meet the long term water requirements of Shimla
capital region. Such a scheme would help in reducing the energy costs of pumping
water from deep valleys and far away rivers to the heights of Shimla. Adequate
availability of water would also boost investment and economic activity
transforming this capital region into a vibrant growth center for our state. Our
other two requests for special purpose grants to meet railway and airport
infrastructure deficit are also detailed in the submitted memorandum.
31. Chairman Sir,
in the 2010-2015. fiscal projections, we have estimated the overall State
receipts to grow at an average of 11.57% per annum. As against this, we have
been very conservative in estimating the Revenue expenditure to grow at 9.02%
per annum, over the base year figure of 2010-11. Because of the dynamics of the
expected pay revisions, we estimate a pre-devolution revenue deficit of Rs.
55,986 crore for the Award period of 2010-15. Including the Environment
protection grant and the other special grants, our memorandum has submitted a
detailed total devolution request for Rs. 69,377 crore to be devolved through a
combination of share in Central taxes and revenue deficit/special grants. It is
our earnest request that the 13th Finance Commission does not underestimate the
committed liabilities revenue deficit through any form of unrealistic normative
assumptions. To do so, would push the State deeper into a debt trap and
jeopardize its entire financial future.
32. With these
words, I once again welcome all the Commission members to this dynamic and
progressive State. We hope that our discussions with all of you shall be
constructive and fruitful. We thank you for your visit to our State and hope
that all of you have a comfortable stay.
33. We look forward
to the 13th Finance Commission partnering the people of Himachal Pradesh in
their quest for peace, progress and financial stability.
Jai Himachal. Jai Hind.
