LAHORE, Feb 4: In what is being seen as a move to appease the smaller provinces, the federal government is believed to have indicated to them that it intends to change resource distribution formula of the NFC (by inserting such indicators as backwardness, revenue collection, etc., in addition to population).

"We are given to understand that Finance Minister Shaukat Aziz has reassured the three smaller provinces, particularly Sindh, to replace the existing single indicator based resource distribution formula with a new one based on multiple indicators," the sources privy to recent developments in the NFC negotiations told Dawn recently.

In return, the sources claim, "the federal government may want them to drop the demand for enhancing the provincial share in the divisible pool beyond what they have already been given (2.50 per cent GST apart from the share of 37.50 per cent) and finalize the NFC negotiations by the end-March."

The centre's rejection of provincial projections for next five years and its direction to reduce them by at least 50 per cent is also being viewed in this context.

The new arrangements of resource distribution between the four federating units may prove to be a recipe for disaster for Punjab as it is heavily dependent on transfers from the divisible pool.

"A whimsical change in the existing, population-based resource distribution formula for political expediency will mean punishing Punjab for prudently managing financial resources and curbing the non-development expenditure," economists said.

Currently, provincial share is distributed between them on the basis of population. Sindh wants it to be replaced with "multiple criteria that also include revenue collection, fiscal effort, and area."

On the basis of its population, Punjab should be getting 57.36 per cent share in federal transfers. However, the data pertaining to the past few years amply shows that it is getting about 47 per cent or 10 per cent less than its population share.

Sindh on the other hand is getting 26 per cent compared to its population share of 23.71 per cent, the NWFP about 16 per cent in ratio to its population share of 13.82 per cent, and Balochistan 11 per cent in relation to its population share of 5.11 per cent.

"The centre's own data clearly shows that population isn't the sole basis for sharing the fiscal resources among provinces. Each percentage point loss translates into around Rs2 billion in terms of the rupee. Thus Punjab is already receiving about Rs20 billion less than what it should have been getting if population were the sole criterion of distribution of resources.

Moreover, the fiscal transfers from the centre to the federating units also goes on to prove that Punjab depends heavily on transfers from the divisible pool that isn't the case with other provinces," a former official who has remained involved in the preparation of the 1997 NFC told this reporter.

Historical data goes to prove that the shortfalls in the needs and resources of provinces stemming from population based formula are met through straight transfers or grants as guaranteed in the constitution.

He said the "existing arrangement has worked quite efficiently so far and helped the provinces develop faster than in many other countries. Let us not bulldoze the ongoing NFC negotiations for short-term gains. Let's have a long-term view of the issue."

He said the provinces and the federation should "work together to define backwardness, and assess fiscal needs of the provinces, and analyze the system of revenue collection, if these indicators have to be embodied in the resource distribution formula to avoid any future dispute between them. This cannot be accomplished in two months."

"Although we're a federal country, the fact is that our fiscal system is highly centralized. Compared to several other countries with multiple sharing criteria between sub-states, the percentage of our provinces' own revenue to their total expenditure is about 15 per cent. In other countries, it hovers between 43.40 per cent (India) and 88 per cent (in the US)," a member of the NFC said.

"If you want multiple criteria for resource distribution, then you must also allow the federating units greater fiscal autonomy. Such a formula works in countries where provinces have their own incomes and have little to share with the federal government. You cannot have the cake and eat it too. If the centre wishes to help the smaller provinces, it should do through subventions or grants and not at the expense of Punjab," the member commented.