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National Finance Commission (1990) Award.

National Finance Commission (1990) Award

The net result of the Award of the National Finance Commission is anticipated to be substantial. Here, it may be pointed out that in 1990-91 fiscal year, total revenues of the 4 Provinces from their own resources were estimated at Rs. 7.173 billion. In addition, they got about Rs. 43.032 billion from the Centre out of the divisible pool, making the total to Rs. 50.205 billion. In 1991-92, the Provinces will receive additional Rs. 22.594 billion increasing their share in the divisible pool to Rs. 65.626 billion. The impact of the Award on the Provincial resources can be imagined from the fact, that their share in the divisible pool will increase by about 52.5 per cent and total resources by about 45 per cent.

Distribution of fiscal resources between the Centre and the Provincial Governments has two very important aspects. The history of the apportionment of financial resources between the Centre and the Provinces in south Asia is now about 120 years old. This will be mentioned later. Secondly, this step is very important economically and politically. Regional disparities in income and wealth lead to discontentment and political agitations. Separation of East Pakistan from West Pakistan is a historical lesson. Efforts were made by the Centre in 1970 and 1971 to reduce poverty in that region but it was too late and "East Pakistan" changed into "Bangladesh". So the Award of the National Finance Commission (1990) is one of the few instruments to reduce inter-regional disparities of income and wealth and contribute to national integration.

As regards history, before 1871, all financial powers in British India were vested in Government of India which controlled Provincial expenditures to the smallest details. All revenues were paid to Central accounts and Provinces were allotted fixed amounts to meet their expenses. In 1871, the system of "Provincial Settlements" was introduced under which certain heads of local expenditure were handed over to the Provinces, and to finance these fixed annual grants were provided by the Centre. However, this system failed to meet the administrative and economic requirements of the Provinces and periodical adjustments were made.

The first real attempt in this direction was made in 1919, when specific allocation of financial resources were made to Provinces on appreciable scale. In 1935, the 1919 allocations were revised under the Government of India Act, which introduced a system of provincial autonomy in Indo-Pakistan Sub-Continent. Revenues were classified into three categories, namely:

- Purely Provincial sources of revenues; - Purely Federal sources of revenues;

and - Sources to be administered by the

Central Government, but the revenue

receipts therefrom were to be shared

with the Provincial Governments.

In the third category were included income tax, salt duty, Central excise and export duties, property tax, stamp duties, terminal taxes and a few others. The basis of apportionment was decided by Sir Otto Niemeyer, then Director of the Bank of England. Immediately after Independence, the Government of Pakistan, faced with fiscal difficulties, centralized most of the revenues. This led to discontentment in Provinces. In 1951, Sir Jeremy Raisman was appointed to examine the allocation of revenues between the Centre and the Provinces and to recommend changes to ensure their more equitable distribution. The Raisman Award remained valid upto 1955.

Under the 1956 Constitution, a National Finance Commission was set up in 1958 but it could not take any decision as the Constitution was abrogated and Commission dissolved. In 1961, a Zakir Committee was set up which recommended for the setting up of a National Finance Commission under the new Constitution. As a result, a Commission was set up in December 1961 which submitted its report in January 1962. After that several Commissions were set up to examine the question of the distribution of resources between the Centre and Provinces. Most important of these were in 1965, 1970, 1971 and 1975. Since then, two Commissions were set up in 1979 and 1985 but they failed to make any recommendations.

The 1990 Commission

The 1990 Commission constituted in July 1990 and reconstituted in December 1990 gave its recommendations in April 1991. These recommendations are of far reaching importance. In nutshell, the Commission has recommended transfer of substantial resources from the Centre to the Provinces to make them self-reliant. The divisible pool of revenue resources, originally, consisted of three items-income tax, sales tax, and export duty on cotton. To these have been added excise duty on tobacco, tobacco manufactures and sugar. These items will increase the Provincial share of revenues by Rs. 10 billion to Rs. 47.4 billion.

The inter-Provincial distribution of divisible pool in 1991-92 will be on the basis of their respective population according to the 1981 Census. These ratios and the resultant shares are given below:
 Percent Rs.in
 billion
Punjab 57.88 27.435
Sindh 23.28 11.035
N.W.F.P. 13.54 6.418
Balochistan 5.30 2.512


The shares of Provinces will be worked out again when new ratios are adopted after next Census. In addition, a special annual grant of Rs. 700 million shall be given to Sindh during the currency of present award for five years and to Punjab Rs. one billion a year for three years. Also, the net profit on account of generation of hydel power stations located in the Provinces shall be paid to the Provinces in accordance with the decisions of Council of Common Interests made on 12th January 1991. From 1st July 1991, the net proceeds of development surcharge on natural gas will be transferred to Provinces and shall be distributed on production basis at well heads after deducting the collection charges of 2 per cent. In this way, about Rs. 7 billion will go mainly to Sindh and Balochistan.

Besides, royalty on crude oil would be paid to the Provinces. This will be about Rs. 1.3 billion. Subventions at the annual rate of Rs. 200 million will be paid by the Centre to the NWFP and Rs. 100 million a year to Balochistan for three years.

The net result of the Award of the National Finance Commission is anticipated to be substantial. Here, it may be pointed out that in 1990-91 fiscal year, total revenues of the 4 Provinces from their own resources were estimated at Rs. 7.173 billion. In addition, they got about Rs. 43.032 billion from the Centre out of the divisible pool, making the total to Rs. 50.205 billion. In 1991-92, the Provinces will receive additional Rs. 22.594 billion increasing their share in the divisible pool to Rs. 65.626 billion. The impact of the Award on the Provincial resources can be imagined from the fact, that their share in the divisible pool will increase by about 52.5 per cent and total resources by about 45 per cent.

The fiscal relationship between the Centre and the Provinces will change substantially. The Provinces will have fiscal autonomy in current expenditure and to some extent in development expenditure. The Centre will continue to provide resources for development requirements of the Provinces. The system of picking up Provincial deficits, or mopping up of Provincial surpluses by the Federal Government will be discontinued from 1st July 1991. The Provinces will meet themselves their entire current expenditure and debt service payments. Their surpluses over and above the current expenditure will be available to finance some of their development expenditure.

The decisions of the Council of Common Interests and the Award of the National Finance Commission should help the Provinces to implement their programmes of socio-economic requirements more vigorously and independent of the Centre. At this stage one is obliged to advise the Provinces to increase their financial and other investment in human factor. Low literacy rate and lack of science and technology and very small investment in research and development stand in the way of rapid economic growth of the country. Special attention should be paid by the Provinces to education, science and technology.

This does not mean that the Federal Government should reduce her investment in education, science and technology. In fact all - the Federal Government, the Provincial Governments and local bodies should make maximum contribution to this noble cause. The quality of education should be improved and Sciences should be given preference over Arts, although latter cannot be neglected altogether. All foreign scholarships and other educational opportunities should be utilized.

To above may be added the development of health and sanitation. Health services need serious attention and now the Provincial Governments should be able to pay adequate attention to these. A check on population growth rate should also attract the attention of the Federal and Provincial Governments.

To conclude it, there should be tremendous understanding between the Centre and the Provinces and between the Provinces. The development activities should increase, unemployment should be reduced and overall socio-economic atmosphere should improve.

There are doubts that justice will be done to the provinces in the distribution of earnings from Hydel-electricity generation stations. All ad hoc grants probably also for some past years to the province concerned are likely to be deducted. Under the new dispensation Sindh would get 23.28 per cent of Rs. 65.6 billion which comes to Rs. 15.27 billion. Sindh's main cause of complaint is to declare the 1981 census figures as the basis of resource distribution which determines shares at 23.28 per cent. Since 1981 Sindh has been a scene of unending influx of people from Punjab, NWFP and also from outside India, Sri Lanka and Bangladesh. A Special committee of Senate in its report in December 1989 has conceded that population growth rate in Sindh is 3.6 per cent and that of Karachi at 4.9 per cent as against national average population growth rate of 3.1 per cent. Similarly the ratio of population of Punjab is declining. It was imperative that the distribution ratio should have been based on the 1991 population Census.

A recent official report of Immigration has revealed that there were 800,000 illegal settlers from India, Bangladesh and Sri Lanka in Karachi alone. These people has stayed back in Karachi because of the inefficiency and corruption of the federal government agencies. Sindh has to pay the cost of inefficiency and corruption of these agencies by providing all basic facilities.

The Sindh Government, in its official position paper presented before the 1985 NFC had revealed that there were 1.4 million Pathans settled in Karachi who are causing pressure on the limited infrastructure facilities and municipal services. Add to this list the influx of people from other provinces and the total figure goes upto two million at least at a very conservative estimate. The Commission of Enquiry by former Prime Minister Mohammad Khan Junejo in its report in May 1988 had predicted that Sindh's cost of upkeep of the immigrants from outside would go upto Rs. 7,632.80 million in 1992-93. Obviously the grant allocation of Rs. 700 million a year is peanut when compared to actual cost involved in looking after these people.
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Title Annotation:Special Issue: Industrial Relations in Pakistan '91; apportions financial resources between the Centre and the Provinces
Author:Khan, Abdul Majid
Publication:Economic Review
Date:May 1, 1991
Words:1846
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