Was the seventh NFC Award a disaster?

Consensus on the 1973 Constitution, the Eighteenth Amendment and the Seventh National Finance Commission (NFC) Award provide testimony to the collective will of the nation to move forward towards political, social and economic equipoise in a federal structure. An economic consensus is still lacking, but the Seventh NFC is a major step in this direction. Any suggestion to roll it back ought to be viewed with great concern. Chaudhry Shujaat Hussain, the chief political backer of the Pervez Musharraf regime that failed to develop consensus on any issue it touched –– the NFC, Kalabagh, Balochistan, and even the economy –– has proposed to pay power companies out of the provincial share of the divisible pool (The Express Tribune, April 3). Shujaat was only echoing the distaste for the Seventh NFC that economic apologists of the Pervez Musharraf-Shaukat Aziz regime keep showing (The Express Tribune March 29). The line has also been taken by some donors, who are worried about macroeconomic stability without appreciating the political economy of Pakistan.

The case is built around the rising fiscal deficit. It is said that the federal government has frivolously spent its resources without realising the inflexibility of its other expenses. The provinces have been allotted too many resources. One notices a spending spree in the federal government and no expression of fiscal responsibility to help reduce the deficit. However, the cure is worse than the disease. The fiscal deficit was not any lower before the promulgation of the Seventh NFC. Any rollback is unlikely to do much about the deficit. There is only one solution to reduce the gap between revenues and expenditures: a sustained increase in the tax-to-GDP ratio by the federal government. It is, in fact, the federal government that has a gap of Rs515.5 billion between its revenues and expenditure for the period of July-December 2011-12. Only Punjab has posted a deficit. The provinces, as a whole, are in surplus and they should be encouraged to remain more prudent.

Furthermore, there has been a problem of sequencing. The Eighteenth Amendment should have preceded the Seventh NFC. But consensus-building is a complex affair and the outcomes cannot be held hostage to precise sequencing. Once such consensus is achieved, disturbing it can have grave political consequences. The deal was reached with Punjab giving up as much as 5.62 percentage points in its share. This loss became the gain of other provinces: 3.98 percentage points for Balochistan, 0.84 percentage points for Sindh and 0.80 percentage points for Khyber-Pakhtunkhwa. The federal government chipped in to ensure that Punjab did not suffer an absolute decline. If Punjab has been running a deficit in the first six months of the current year, and other provinces have posted surpluses, it is because of the burden it shared by initially supporting the consensus. To entirely blame Punjab for the fiscal deficit is to let macroeconomic fetishism take precedence over inter-provincial harmony, which has been strengthened by the shift from the single criterion of population to multiple indicators –– population, poverty or backwardness, revenue collection or generation and inverse population density. A number of special provisions in favour of smaller provinces are also in addition to these criteria.

Fortunately, those working on building the consensus had anticipated that rollback attempts might be made. The Eighteenth Amendment added a new clause to Article 160 relating to the NFC: “(3A) The share of Provinces in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award.”

Published in The Express Tribune, April 6^th, 2012.