Revisiting fiscal federalism

Mushtaq Rajpar’s opinion piece on Fiscal Federalism (The News January 1, 2020) is a welcome addition to the debate on the subject. Admittedly, the matter relating to NFC has faced deadlocks for decades, with the last Award in 2010 after a gap of almost two decades. There is, thus a case for a more workable solution.

However, the writer’s proposal to create two separate strands of federal and provincial tax bases, with each retaining its collection, is a violation of the very spirit of a federation. Any union, be it a family or a state, consists of members that are strong and weak and resource-rich and resource-poor. And it is the spirit of the union that the weak and the resource-poor are not left to fend for themselves. The writer’s proposal would lead to just that.

Of the four provinces of the country, Balochistan is not resource-poor, yet the poorest. The irony exists on account the failure to develop the province’s social and economic infrastructure base over the last seven decades. The result is that, unlike Punjab and Sindh, Balochistan does not possess the tax base to generate sufficient revenues to finance its current and development expenditures. The Khyber-Pakhtunkhwa situation is similar, although not as dire.

A snapshot of Balochistan’s gross underdevelopment is provided by the state of its highways. Post-2000, the federal National Highway Authority allocated less that 10 percent of its budget to Balochistan, despite the province accounting for 44 percent of the country’s land mass. Pre-2000, Balochistan’s share in federal highway development budgets can safely assumed to be almost zero. The coastal highway to connect Gwadar to Karachi was built in 2004 – six decades after independence. Prior to its construction, the 500-kilometre journey from Gwadar to Karachi took 3-4 days, with passengers spending intervening nights in the open. Axle damage and tyre burst were common. To date, there is not a single dual carriageway in the 347,000 square kilometre province.

Efficient road networks are important for the economy and for individual businesses and households. Grape farmers in the northern mountain region of Chaman and fisherfolk in the southern Mekran coast complain of grapes and fish at the bottom half of trucks proceeding to the market on pot-holed roads being crushed on account of constant jerks and bumps – leaving them with half the expected income. This state of affairs is particularly painful, given that an amount of Rs. 7 trillion – in 2014 prices – has been transferred in the form of cheap gas from Balochistan to Punjab and Karachi over the period 1969-2014. In the event, for Balochistan to be told to raise and retain its own paltry revenues is adding salt to its wounds.

Most federations in the world – Canada, Germany, India – have resource distribution mechanisms, based primarily on the principle of fiscal equalization. The principle ensures resource transfers from economically strong federating units to economically weak ones. Germany, in particular, has poured millions of Euros generated from its wealthy western states into its underdeveloped eastern states.

That is the essence of a union and without this equity-based resource distribution, weaker units would be left with little incentive to remain in the union. Notably, the balkanization of a country would not stop here. Even if any one of the federating units were to secede, there would remain developed and underdeveloped regions within. And without an equitable resource distribution mechanism, the latter would also seek to secede.

The fact is that the failure for the NFC to perform its constitutional duty is not on account of the inability of the provinces to arrive at a consensus on the basis of give-and-take. The 7th NFC process proved that it is indeed possible. The responsibility for failure lies with Islamabad where the centrist, anti-federalist mindset rules the roost. It is these elements that have not reconciled to the political and fiscal autonomy achieved by the provinces by virtue of the 18th Amendment to the Constitution and the 7th NFC.

The historic 7th NFC Accord was signed in Gwadar in December 2009. Paragraph 12 of the Accord stated that General Sales Tax on Services was a provincial tax by virtue of the Constitution and would be collected by the provinces. However, the federal Finance Ministry Summary that was sent to the President for his signature was without paragraph 12!  Called to the Prime Minister’s office to explain the omission, an additional secretary of the federal Ministry of Finance said that they had omitted it as it was not feasible. Asked what authority they had to decide what was or was not feasible when a constitutional body had made a decision, the officer merely grinned and shrugged his shoulders. That was the audacity of the standard bearers of centralism dominating Islamabad. It goes to the credit of the then President that he exercised his authority to restore paragraph 12.

The writer was a member of the 7th National Finance Commission.

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