Economic reforms: Part XLV

Returning to our series on economic reforms, we now discuss the Musharraf Award of 2006. This was in some ways comparable to the awards given by the government of Liaquat Ali Khan in 1951 (Raisman Award) and the government of Ayub Khan in 1961. In both cases, no NFC was constituted.

In 1951, the Raisman Award was given on the pattern of the 1935 Act, where the NFC was not envisaged, rather Niemeyer was subsequently asked to work out the award. In 1961, in the backdrop of the abrogation of the 1956 constitution – where the notion of the National Finance Commission was introduced for the first time – a committee was appointed by the chief martial law administrator (CMLA), headed by the then finance secretary, which made the recommendations. Curiously, both awards were apolitical as they were not based on parliamentary consultation. Moreover, the Raisman Award was not succeeding an award operative before it. The 1961 Award was succeeding Raisman Award but since martial law was in the field, Ayub Khan could form a committee and seek its recommendations.

In 2006, President Musharraf neither had the powers of the governor general, under the 1935 Act, nor those of the CMLA, as the Emergency was lifted after the promulgation of the Legal Framework Order (LFO), 2002 and subsequent adoption by parliament of the 17th Constitutional Amendment 2003. Thus the question arises as to under what authority he could have given a new award that would replace the 1997 Award?

The answer is provided by Article160 (6) of the constitution which states: “At any time before an Order under clause (4) [which is to give effect to NFCs recommendations] is made, the president may, by order, make such amendments or modifications in the law relating to the distribution of revenues between the federal government and the provincial governments as he may deem necessary or expedient.”

This is a major leeway the framers of the constitution have provided to the president. A closer examination would reveal that this is the way around an impasse in the NFC when no consensus is reached, and when an award is considered essential. Note that this power of the president is not circumscribed with any conditions such as to constitute a committee and act in light of its recommendation. The then president Musharraf exercised this power in view of the consistent failure of two commissions in reaching consensus recommendations.

Previously, this power was exercised on two occasions – in 1983 and 2002 – only to the extent of modifying the horizontal shares after the census results of 1981 and 1998 were notified and population shares of provinces were altered. A similar occasion is at hand at present as the results of the 2017 census have been provisionally announced and final notification is awaited. Once this is done, modification of the award would be required to adjust to the new population ratios.

[Some ministers of the present government have suggested that they would modify the present NFC Award in favour of the federal government. Although it may be tempting to think based on a cursory reading of the law that such a modification may be tenable, a deeper examination would furnish the sensible conclusion that this power cannot be used arbitrarily to improve the relative share of the federal government. In fact, it could be to prevent such a misreading of the law that an explicit provision was added through the 18th Amendment, by inserting a new section 160 (3A) which requires provincial shares not to decline in successive awards.]

The 2006 Award of president Musharraf was quite generous. To start off, the divisible pool was kept as large as was made in 1997, which effectively meant all federally collected taxes were included in the divisible pool. Then, not only was the provincial share in the divisible pool increased from 37.5 percent to 41.5 percent in 2006-07, it was to be gradually increased every year to reach 46.5 percent in 2010-11, the last year of the award.

A new distortion was introduced by making all provinces eligible for grant-in-aid. This was contrary to the notion of grant, from the outset, which was confined to those provinces that were less developed, had a poor taxation base and their share in the divisible pool was meagre. What’s more, the size of the grant was to rise with the rise in the size of the divisible pool. The grants-in-aid were fixed at Rs27.75 billion for the year 2006-07. Grants-in-aid were to be distributed amongst the provinces of Punjab, Sindh, NWFP and Balochistan in the ratio of 11:21:35:33. After including the grants, the overall transfers from the divisible pool would amount to 45 percent in 2006-07 and rising to 50 percent in 2010-11.

Since the political dispensation at the time had assigned a significant role to district governments, the president succeeded in extracting some fiscal space for the newly established local governments. Accordingly, one-sixth of the amounts transferred to provinces in the sales tax were to be earmarked for straight transfer to district governments and cantonment boards. The local bodies law provided for establishment of a provincial finance commission for further allocation of resources to local bodies.

There was no discussion on the borrowing powers of the federal and provincial governments as would invariably be the case when the award was given by the NFC. This meant that borrowings remained a federal domain and provinces were to confine financing of their expenditures from federal transfers and their own resources. Curiously, as more resources were transferred to the provinces, and with hardly any slow-down in federal expenditures, federal government’s dependence on borrowing started rising.

It is significant to note at this point that starting with a share of 12 percent in total tax revenues, the provincial share until this award had climbed to 50 percent. Would it stop here or keep rising? The answer will be found in our review of the 2010 Award.

To be continued

The writer is a former finance secretary. Email: waqarmkn@gmail.com