Dr. Tahseen Mahmood Aslam speaks about a national issue of the NFC Award
The National Finance Commission (NFC) is mandated to deliberate matters relating to the national divisible pool consisting of collection from income tax, sales tax, excise duty, and export duty. NFC issued an award distributing the national financial resources between the federation and the provinces.
The current state of resource distribution has evolved over time and various improvements have been made in the resource-sharing mechanism among the federal and provincial governments. In this context it is often mentioned that in Pakistan fiscal federalism remained a focal issue of confrontation as out of a total of seven commissions, constituted after the 1973 constitution, only four came up with additional parameters to distribute the resources among the federating units.
It is a fact that since its inception the federal government over-centralized and devolved the affairs both from the financing and expenditure side to the lower tier. In the beginning, it was accepted as a necessary policy keeping in view the typical circumstances under which Pakistan came into being.
The policy of over-centralization negatively affected the performance of the national economy and created disincentives for the provincial governments to work efficiently. With the passage of time, the federal government overstretched itself into several matters that are purely provincial subjects increasing both administrative and financial burdens on the center.
These augmented activities include roads, irrigation, some aspects of the agricultural sector, culture and tourism, youth affairs, and rural development. These are the sectors that were required to be transferred to the provinces to save time and money particularly when the government has initiated the devolution of power from central to local government. The federal government generates about 93 percent of resources despite the fact that its share in total expenditure is only 72 percent.
Dependence Of Provinces On The Federation
On the contrary, the provinces are left with only 7 percent of resources although they account for around 28 percent of aggregate expenditure. The argument behind the higher collection by the federation is based on the achievement of equity, efficiency, economy, and the federal government’s ability to levy and collect On the other hand, provincial governments are left with lesser opportunities to generate their own resources because the available resources are already exhausted.
This lopsided policy resulted in the dependence of provinces on the federation for resource transfer. In this context, the fact that NFC Award has remained the only criterion for resource distribution between federal and provincial governments gives an idea about the stagnancy and lack of coordination in policymaking.
Moreover, the basis of the distribution of financial resources according to population followed in Pakistan is not the sole criterion for resource distribution anywhere in the world otherwise as various factors like revenue generation, poverty, population density, income distribution, and backwardness are used to disaggregate the federal tax revenues.
The outcome of such a shortsighted policy is that there is no serious shift in resource distribution among the provinces despite vast differences in the economic conditions of the masses, future prospects, and strategic objectives for different federating units of the country.
The financial resources accumulated in this respect are distributed vertically according to population. Initially, the sharing pattern of the NFC Award was 80 percent of the share going to the federation and 20 percent to the provinces but from the resource transfer side, from 1990 onward, the award has significantly increased the volume of provincial shares in the revenue collected and this process is evolving with time.
NFC Award & Bifurcated Public Expenditures
This increase was due to the inclusion of excise duty on two items i.e. sugar and tobacco in the divisible pool. However, customs duty still remained with the Federal government. Revenue deficits were adopted as the basis for determining the amount of subvention requirement. This step was a move forward towards fiscal decentralization by extending more financial autonomy to the provinces.
For the first time, the province’s right on net hydel profit, development surcharge on gas, and excise duty on crude oil was admitted, and amounts were relocated in the shape of straight transfers to the provinces. In addition to that, royalties on crude oil and net development surcharges on natural gas were also given to the provinces. The incentive of matching grants was introduced, although up to a certain limit, to the provincial governments.
Another development of the NFC award was that it bifurcated public expenditures into priority and non-priority expenditures. The priority expenditures were described as expenses on defense, debt servicing, social sector, and development expenditures while those on general administration, community services, and law and order were termed to be the non-priority expenditures.
This was done to solve the emerging financial and other challenges, and issues and accordingly prioritized the path of development. The drastic shift in provincial shares was based on the optimistic projections of higher GDP growth and desired inflation rate but during the period when the award was going to be exercised.
The provinces were adversely affected due to certain internal and external shocks, and the economy. There is a need for the inclusion of other factors like infrastructure, poverty, backwardness, revenue generation, and environment to be taken into account for justifiable resource distribution. In order to achieve equity.
Resource Distribution Issues
The issue of resource distribution among federal and provincial governments is never a simple issue but looking at the history of NFC, it becomes obvious that the problem of resource distribution is never taken seriously. It gives the impression of a political economy issue wherein from a theoretic perspective the stakeholders bargain over the resource pie, and due to non-consensus, by will or force, they retreat to an invariable criteria-based formula which is not optimal.
The main issue with NFC Award is the frequent lack of consensus resulting in the giving of interim awards that have further complicated the process. There is a serious dearth of systematic approaches to decentralize, capacitate and encourage provinces by incentivizing the generation of their own revenues.
The issue is compounded when it is noticed that smaller provinces have asked for the adoption of a judicious formula with the inclusion of factors such as revenue generation, poverty, and backwardness in the revenue distribution criterion but nothing concrete has taken place.
There is a need to empower the provincial governments by clearly defining the roles of each tier of the government and giving the required resources, both human and financial to them for their planning and development autonomy. This would encourage the provinces to contribute towards the development of the country by streamlining their capabilities by having a better voice and accountability.
A proper systematic approach to decentralize and encourage the provinces for generating their own revenues should be made as it would help to reduce administrative and resource dependency on the federation. There is a need to incorporate provincial grants into their respective resource shares in such a way that the provinces achieve autonomy and become able to devise their indigenous development plans. The Weekender