It’s not the NFC award
HISTORICALLY, the country has been dogged by two intractable problems: civil-military imbalance and unfair distribution of resources between the federation and provinces. The former has bedevilled democracy, the latter, federalism. Yet, no lessons have been learnt from this odyssey of failures. With the induction of the new government, a vociferous campaign has ensued in official circles and the media to review the seventh National Finance Commission (NFC) award. It is contended that the award is ‘skewed’ in favour of the provinces and it has left the federal government with scarce financial resources to discharge its obligations, at home and abroad. But it is a flawed argument.
Economic logic: The entire gamut of reasoning for ‘rebalancing’ the award revolves around misplaced economic logic. It sees the reduction of the provinces’ share from the net proceeds of taxes through the prism of the federal government’s financial and economic contingencies, ignoring the fact that the distribution of resources between the federation and provinces via the National Finance Commission, a constitutional body, is not an isolated economic exercise. It involves realising the constitutional objective of nurturing a healthy federal state.
Therefore, the overall constitutional thrust is directed towards the devolution of powers and decentralisation of authority from the federal to the provincial and local governments. Even in economic terms, the provinces are the mainstay of public, private and corporate activities, besides being saddled with the responsibilities of much of the social sector and public administration — health, education, housing, culture, climate, municipal services, and even security. And more so, after the abolition of the Concurrent Legislative List and the resulting transfer of 17 ministries and 47 ‘residuary’ subjects to the provinces.
Constitutional imperatives: Lest it be ignored, our Constitution is essentially of a federal disposition. It assigns fewer functions to the federal government, confining its role mainly to external security, foreign relations, international trade, communication, currency, and inter-provincial regulations. Thus, the Constitution envisages a smaller federal government that (in peacetime) acts as an enabler, catalyst, facilitator and coordinator, in a federal setting. The government enjoys a wide range of policymaking and executive powers and authority but within its own constitutional orbit. It cannot intrude into or impose its will on the provinces, given the clear division of legislative and administrative powers between the federation and provinces.
Instead of expanding its revenue base, the centre is impoverishing the provinces.
Therefore, the Constitution provides for three key forums — the National Finance Commission, the Council of Common Interests, and National Economic Council — respectively to regulate financial distribution, resolve conflicts, and coordinate the planning and execution of socioeconomic agendas.
Fiscal federalism: It is true that the annals of financial relations between the federation and provinces reveal varying degrees of tension, depending on the nature of the prevailing political system. But the overall thrust of history has been decisively towards strengthening fiscal federalism. Thus, even under the rudimentary form of federal governance introduced in the subcontinent under the Government of India Act, 1935, the provinces collected the entire sales tax, and also received a 50 per cent share in income tax (Niemeyer Award). After the partition, the sales tax was partially federalised, but the provinces retained a 50pc share in the net proceeds of taxes (Raisman Award). This arrangement more or less continued until the early 1970s.
Fiscal federalism, however, found its constitutional moorings in the 1973 Constitution. The first NFC award was announced in 1974. It federalised the sales tax but recompensed the provinces with an enlarged 80pc share in net proceeds, leaving the federal government with only 20pc. It was the result of weeks-long deliberations in parliament. The provinces were accommodated to strengthen federalism, in line with the spirit of the new Constitution that promised provincial autonomy. Moreover, the makers of the award were mindful of the economic injustice and financial disparities that had led to the secession of Pakistan’s eastern wing.
The first award (80:20 sharing) was applied with minor adjustments until 1996 when an unrepresentative caretaker government arbitrarily slashed the provinces’ share to 37.5pc (‘fifth award’). The reduction was justified on similar grounds as being pleaded now, ie, the federal government’s inability to discharge its financial and economic obligations. For the next 12 years, however, no consensus could be reached as to a fresh award, despite the fact that the Constitution mandates the formation of an NFC every five years.
The next seventh award was finally announced by the PPP-led coalition government in 2009 (effective from July 1, 2010). In many ways, the award broke new ground. It consensually enhanced the vertical share of provinces to 57.5pc, but also considerably relieved the federal government’s financial burdens by removing the Concurrent Legislative List, transferring a large number of ministries and residuary subjects to the provinces. More importantly, shunning population as the sole criterion of financial distribution among the provinces (horizontal distribution), a new set of parametric factors was introduced — population (82pc), backwardness (10pc), inverse population density (5pc), and revenue collection (2.7pc). Finally, the insertion of Article 160(3A) in the Constitution barred future governments from reducing the provincial share below that of the previous award.
Policy failures: Evidently, the 18th Amendment and seventh NFC award have considerably assuaged anti-centre/ anti-Punjab sentiments, at least in the financial context. It is, therefore, imperative to further entrench the democratic process of decentralisation and redistribution of resources.
Sadly, efforts are afoot to roll back the benefits of the seventh award and revisit recent constitutional reforms. Instead of expanding its revenue base, the federal government is impoverishing the provinces for its own inefficiencies and failures evident in its misplaced fiscal and foreign policies. Take the current 9.2pc tax-to-GDP ratio. It is even below the average 11pc ratio of emerging economies. The ratio could be enhanced beyond 20pc, with political will and effective taxation. Likewise, three-fourths of our revenue is consumed by defence and debt-servicing. But the government has yet to forge a peaceful and constructive foreign policy, coupled with a conducive legal and security environment, to bring an end to expensive conflicts, attract foreign investments, and create wealth and employment. So fundamentally, it is misplaced state policies and a centrist mindset — not the NFC award!
The writer is a lawyer and an academic.
Published in Dawn, April 6th, 2024