Advantages of regionalism

IN this space last week, I promoted the idea of developing trade relations with India within the context of a regional arrangement. That could be one way of overcoming the enormous suspicion that exists on both sides of the border. This suspicion cannot be suddenly willed away in a season. Working with India within the regional context may be a good way to start.

Accordingly, in this article I will advance that argument a bit further by listing the advantages a regional trading arrangement could bring to the countries of South Asia. One way of doing this is to estimate the amount of the GDP loss incurred by the South Asian region by assigning in the past such a low priority to economic cooperation and integration. In the late 1950s, when economic development was adopted as a major goal by all developing countries, South Asia and East Asia were at about the same stage of development.

In the early years of the 21st century, the latter region has left the former behind by a very wide margin. In terms of average incomes of the citizens of the two regions, East Asia is about ten times richer than South Asia. Even if we assume that better regional cooperation would have added, on average, one percentage point of growth to the South Asian regional output, the combined GDP of South Asia today would be at least 70 per cent higher. This would have translated into an equivalent increase in per capita income and a considerable decline in the number of people living in poverty. It would not be an exaggeration to say that a significant part of the persistence of poverty in South Asia can be attributed to the lack of economic cooperation among the countries of the region.

Another way of assessing the benefits of closer economic cooperation among the countries in the area is to look at the impact of open trade between India and Pakistan, the region’s two largest economies. A study prepared for the World Bank in 1993 estimated that free exchange of goods and commodities between India and Pakistan would have resulted in a nine-fold increase in the flow of trade between them over a period of five to ten years.

By simply removing the import bans the two countries have placed on their exports to one another could bring enormous gain to both sides. For instance, by granting each other the “most favoured nation” status but still maintaining a 50 per cent tariff would increase the volume of trade between the two countries by a factor of three.

As a member of the World Trade Organization, Pakistan is supposed to grant the “most favoured nation” treatment to India. This has not been done while India has extended this benefit to Pakistan. An MFN status would help to remove some of the distortions that exist in the flow of trade between the two countries. But such a move would still be within the context of bilateral relations. To go beyond that and cast relations within a regional context, policymakers in Islamabad may begin to focus their attention on the areas in which such an arrangement could work.

There are four areas in particular in which regional economic cooperation holds considerable promise. They are information technology, energy, water, and research and development. Let us look at each of these in turn.

India, along with Israel and Ireland — the three “Is” — are now major players in the global IT sector. India’s export earnings from this sector have been increasing at the incredible rate of 50 per cent a year. In 2003, the country is expected to earn $10 billion — or 12 per cent of its total exports - from this sector. It has also become a major “back-office” for the large western corporations, keeping their accounts, providing telephone call services to their clients and, in some cases, also developing proprietary products for a number of large companies.

There are many ways smaller countries of South Asia could benefit from the enormous advances India has made in the IT sector. Institutions providing training in IT could get affiliated with the well-known and highly developed science and technology centre in India. Fledging IT companies in Bangladesh, Pakistan and Sri Lanka could form strategic alliances with the larger companies in India. Even though India has a very large population and thousands of IT graduates are produced by the training centres in the country, there are some labour shortages that could be met by the skilled workforces from other countries. There are many other opportunities in the IT sector that could be exploited.

There are even more opportunities available in the sector of energy. Of all the major economies on the mainland of South Asia, India is the most deficient in energy and the existing gap between demand and supply will expand as the economy continues to grow. What are the options available to India for closing the gap? Currently, oil and gas constitute 63 per cent of India’s primary energy consumption.

According to one estimate, oil demand will increase from 1.9 million barrels per day to 4.9 million by 2020, an annual rate of growth of 4.6 per cent a year, slightly less than the expected rate of increase in the GDP. Two-thirds of oil consumption is now met from imports. This places a very heavy burden on the Indian economy which could be lessened somewhat by importing cheaper electric power and natural gas from a number of countries in the neighbourhood that have deliverable surpluses.

Pakistan is one source of energy India could tap. Both the structure of supply and demand for energy are very different in Pakistan compared to that in India. Gas is by far the most important source of energy supply in the country; 32 per cent of electricity is generated by this fuel. An additional 25 per cent of electricity comes from hydropower.

Pakistan has the potential to increase both the supply of gas and hydel power well beyond even the more optimistic projections of increase in domestic demand. Some 100 undeveloped dam sites have been identified by various groups of experts which could generate an additional 35,000 MW of electricity. The country also has coal reserves of 185 billion tons, the second largest deposit in South Asia. China, which produces significant amounts of electricity from coal and where coal still accounts for 80 per cent of electric power generation, is helping Pakistan to develop coal-powered electric generation in Pakistan. Once developed this would add to the surplus of power Pakistan will have available for sale.

Pakistan, in other words, could become a major supplier of energy to the north-western states of India. This won’t happen unless India and Pakistan shed mutual suspicion. This is more likely to occur in the context of formal agreements for regional cooperation. Such an arrangement could also facilitate the supply of Bangladeshi natural gas to India’s north eastern states and hydel power produced by Nepal to the same parts of India.

It is as a transit country for the gas flowing either from Iran or from Turkmenistan to India that Pakistan could draw the most benefit from a regional arrangement in South Asia. Take the proposed pipeline between Iran and India as an example of the benefits that could accrue to the two countries. A study by Reliance Industries, India’s largest private sector corporation, has concluded that such a pipeline would halve natural gas prices in India while Pakistan could collect as much as $500 million annual fees for allowing and managing the transit of this fuel.

If the countries in the South Asian region mustered enough political will and dispensed with some of the suspicions that have marked the relations among them — in particular between India and Pakistan — it is not beyond the realm of possibility to foresee the development of various kinds of energy grids in the area. Bangladesh, India, Nepal and Pakistan in South Asia along with Afghanistan and the Central Asian states could be connected with one another by a network of electric, gas and oil grids that would bring enormous benefits to all of them.

Water is the third area in which regional cooperation among the countries in South Asia would be enormously beneficial. This is particularly true for Pakistan which receives 40 per cent of its water from outside the country, the highest figure in the region after Bangladesh. Per capita consumption of water in Pakistan is also much more than the regional average. This is because of the extensive use of irrigation for agriculture — Pakistan has the world’s largest contiguous irrigated area in the world.

For this reason, the country is the 14th highest consumer of water in per capita terms in the world and the consumption is likely to increase as population continues to grow, as cities continue to expand and the economy continues to modernize. On the supply side there are now severe limitations on tapping domestic resources. Ground water development is reaching its limit. Tubewells are being dug deeper and deeper, mining the underground reservoir. If this continues for long, the impact on the economy and the environment could be severe.

A new water sharing arrangement with India could help to alleviate some of the problems since Pakistan’s neighbour is also running into the same kinds of shortages and is tempted to exploit the water available in the disputed state of Kashmir.

It is now recognized that without technological growth, economies cannot become efficient and worker productivity cannot increase. Without a significant increase in productivity the incomes earned by the working poor would not grow at a rate significantly high to pull them out of poverty. Are there opportunities available in the various countries of South Asia that could be exploited in order to benefit the entire regional population?

The answer is yes. India has the most developed educational and technological base in the region which could serve other countries in the area. Its science and technology schools have attained world status. But Pakistan also has the capacity to develop institutions specializing in irrigation, engineering, textiles, and health sciences that could benefit India and other countries in the region. Models for such cooperation already exist in other parts of the world.

For instance, the Latin American countries have decided to work with one another to develop specialized institutions they could share among their students, teachers and scientists. South Asia could follow a similar approach. A beginning may have been made by the journey of a two-year-old Pakistani girl who was taken by her parents to Bangalore for complicated open-heart surgery.

There are enough areas in which collaboration could occur among the South Asian countries other than the four we have mentioned above. Could this be achieved within the structure of the South Asian Association for Regional Cooperation, or Saarc? I will return to the role the SAARC could play in this space at a later date.

Defining the core issue

LAST weekend Islamabad was hosting a group of nearly 60 parliamentarians from India. They represented all major political parties of that country — those in power as well as those in the opposition. Two factors would appear to lend considerable significance to this event. One, it came so close to the two nations celebrating their independence days.

The other factor, even more notable, is the fact that India’s prime minister, usually a man of few words, took care to bless the meeting of the parliamentarians of the two countries with a special personal message, putting the stamp of his approval of this development. It also amounted to encouraging contacts between the two countries at what would amount to the highest political level and in a comprehensive fashion, associating the opposition parties with the process.

Observers would not have failed to notice that the president of the main opposition party, the Indian National Congress, Mrs Sonia Gandhi, too, made her contribution. She sent out a message of approval and support to the process, hopefully looking forward to opening the gates for interaction among all significant political elements on both sides.

From the Pakistan side the gesture received complete endorsement and support from President Pervez Musharraf downwards. In the seance at Islamabad all political parties took part and played the roles as one would expect of them. The atmosphere over this gathering of the top crust of the political life of the two countries throughout remained fraternal and cordial. Indeed, one saw virtually rivers of greetings and goodwill flowing. A really heart-warming spectacle it has been. As expected, the charismatic Mr Laloo Prasad drew the most of attention and applause as he declared he felt quite at home in Pakistan. His companions intoned.

Now that hand-shaking and embracing is over, it would be time to assess what are the gains from this event. First of all, let us remember, as former president and senior statesman Farooq Ahmad Leghari pointed out, this Islamabad experience was not the first of its kind. Of course, one would hope it is not the last. But, so far, such effusions of fraternal sentiment have turned out to be some whiffs of passing cool breeze, only to be followed by the usual gusts of hot air.

There was a good deal of vague reference to the problems that undermine good relationship and result in frequent upheavals. How is one to forget that until only a few weeks ago, one million Indian troops were in forward, battle-ready positions on Pakistan’s borders? From that belligerence to this welling up of fraternal sentiment is, no doubt most welcome, yet not so easy to understand. Trust may be too strong a word in this context.

The parliamentarians of both sides felt relief to note that the bus service between Pakistan and India has been restored. Officials on both sides are already pouring over plans to open the train and the civil aviation services. In other words, both sides are working to move in step towards normalization of relations. Not only that, the parliamentarians from India were talking in terms of brotherhood and fraternity. All of this is indeed sweet as honey. But it is something we have tasted before only to be followed by sour fare.

At least one noted Indian parliamentarian spoke about Kashmir. His words amounted to saying that Kashmir was recognized as a problem that needed to be addressed, as also so many other problems that inhibit Pakistan-India relations. This may, or may not be, of any enduring significance. Let us for a moment allow ourselves to be optimistic and see in this some advance. This may mean that, from now on, Kashmir will be on the agenda in some significant form, however subtle or indirect.

On both sides politicians talk of many problems that sour relations between Pakistan and India. It is here that both are under one grave illusion. All the problems they talks of — trade, commerce, travels, etc., — are the distortions emanating from the one and only one problem. We, too, on this side call that the core problem is the Kashmir problem. All this is illusion.

As far as India is concerned, from day one, the problem has been Pakistan. To promote their personal and party political agenda, the leadership in India has ever since depicted Pakistan as the problem. Let us begin at the beginning. The Quaid-i-Azam had accepted the Cabinet Mission Plan that meant an India, independent and united. Pandit Jawaharlal Nehru had also accepted it. But, on second thoughts, he went back on it and, instead opted to put his signature on the Partition document.

Why Pandit Nehru behaved in the manner he did? He did not fancy the concept of sharing power. He wanted the whole of India, that is no Pakistan. As they then thought, it would not be possible for Pakistan to survive. Besides, it lay within the powers of post-August 14, 1947 New Delhi to scuttle Pakistan. This is not a very happy part of history to recall but brushing it under the carpet has given the people of this subcontinent all the heartaches over all these 56 years.

Only a few examples of how Pakistan was to be scuttled would do. Pakistan’s application for the membership of the United Nations drew only one negative vote. That was Kabul’s. Anyone could see the instigation behind that Afghan antic.

Within months of partition, water was cut off from three southern rivers of the Indus system. Vast areas of Pakistan, basically dependent on agriculture, went dry. That was terrible.

On its birth, Pakistan was a baby state that had almost nothing of the state apparatus that sustains a state. Not even a state treasury. At that moment Pandit Jawaharlal Nehru blocked the release of Pakistan’s share of federal finances and the Sterling Balances. It was Mahatama Gandhi who noted what a ghastly misdeed it was. He had to go on protest fast to force New Delhi to render unto Pakistan what was Pakistan’s.

In those early days, Pakistan railway system was coal-based. And coal used to come from the mines in distant eastern Indian state of Bihar. These coal supplies would be interrupted every now and then, throwing Pakistan’s railway system into chaos.

These are only a few glimpses. India is a huge country. Pakistan has no claims on it. But early in post-partition days, India persisted with its effort to guillotine Pakistan. Creation of the Kashmir problem was one of the very first tactics in the programme to undo Pakistan, if it ever came into being.

For Indian leaders from Pandit Nehru, who internationalized the Kashmir dispute, the problem is not Kashmir. It is Pakistan. Open-eyed observers would see what the Indian lobby is doing against Pakistan in the vast ocean of United States politics. The other day Pakistan embassy in Kabul was sacked. Not a repeat of the negative vote in the UN?

What the leadership in Pakistan today should insist New Delhi, regardless of what party is in power, is to demand a straightforward, unambiguous and sincere declaration that India does not resent and oppose Pakistan’s existence and would henceforth cease to act against Pakistan without any provocation. Instead, India will close that chapter here and now and open a new page. India has nothing to fear from Pakistan. This country is in no position to cause any discomfort, let alone damage, to India. Number one: Pakistan cannot; Number two: it is not in Pakistan’s interests to be on any terms with India, except the very best.

Close your eyes, make a wish

LAST week, we observed our Independence Day. Only the very young or the very old celebrate their birthdays and so it is with nations. The day is a holiday, as if to emphasise, to highlight its special importance.

With little else available, hundreds of people in Karachi would flock to the beaches to take in the sea-air, the more adventurous to frolic in the water. This year, because of an oil slick from a stranded tanker carrying crude oil, the beach was closed to the public. In view of the losses due to rains and floods, it was decided that there would be no musical events, stage dramas and illuminations at night.

A novel feature was the running of a special Madar-i-Millat train that would travel to 40 stations of the four provinces as a tribute to Ms Fatima Jinnah, the sister of the Quaid-i-Azam, the circumstances of her death having been made controversial through the misinterpretation of a statement made by that man-for-all- seasons and distinguished lawyer Sharifuddin Pirzada who is a good friend of mine. He had made no disclosure of his own but merely disclosed what had been disclosed to him by sources reportedly close to the Madar-i-Millat. A needless controversy. There seemed no point in disturbing the dead.

Fifty-six years have elapsed since Pakistan came into being and no one could say that the years have not been tumultuous. The vision of the Quaid-i-Azam has long fled. Pakistan, instead, has become a nation with a multiple personality, a political schizophrenic, competing ideological certainties, some wanting to return to the past, others wanting to move on, one step back, one step forward, so there is no clear direction and no defined national identity.

Pakistanis of my generation had different emotions. We saw Pakistan as something of an achievement and, therefore, as an end in itself. That is why, in the early years, we saw Independence Day as a reaffirmation that Pakistan had come to stay, as if haunted by the fear that our enemy (India) was hell-bent on undoing it and had not succeeded. The present generation of Pakistanis, though still fed the staple diet of a predatory neighbour see Pakistan in a positive light and see Independence Day as an audit.

Were the promises made to them by the rulers, whoever they may be, honoured? And in more general terms, are they better off than they were yesterday? The answers to both the questions would have to be in the negative though some will insist (the beneficiaries of the status quo) that things are looking up while others, one would have to say the majority, would not share the optimism. Their lives are too hard and though, Pakistan has a literacy rate that must rank as among the poorest in the world, the people may be uneducated but they are not ignorant.

If half the population does not have safe drinking water, it is not because it is their kismet but because in 56 years no government has given any importance, what to say, priority, to provide basic amenities. This represents a monumental failure, a failure we share with all Third World countries whose leaders have been too wrapped up in their own aggrandisement to do anything about the misery of their own people. But it is no longer possible to ask the people to close their eyes and make a wish.

There is no special significance in the timing of the visit of Indian parliamentarians, media persons and other dignitaries who came to Pakistan so close to our Independence Day and left on the eve of it. Would it have been more symbolic if they had shared the day with us? I don’t think it matters one way or the other. It is symbolic enough that they came at all.

The war in Iraq saw millions, all over the world, take to the streets in anti-war demonstrations. They showed that there was a hunger for peace, that wars only killed innocent people and destroyed countries and made the world an even more dangerous place. There is too a hunger for peace in Pakistan and India but the two countries are too locked in past hatreds and this hatred has been passed from generation to generation and it has become deeply ingrained and it has come to define a national attitude. Worse, it has acquired the bitterness of some long-standing blood feud, as if some injury and insult to family honour has to be avenged.

One does not want to rain on the parade of peace missions because meetings and exchange of views can be useful, small steps as they are and they are the voices of moderation, if not sanity. And no voice is wholly lost. But we need to focus, not on the differences but what we have in common and what we have in common is a deep and measureless poverty. We need to see this in human terms.

So long as there is dedicated hostility between the two countries, the resources of both will be diverted to perceived security needs and because the people have been brainwashed through relentless propaganda, this diversion of resources has been accepted. There is the outstanding problem of Kashmir and no amount of sophistry or juggling will make it disappear. But even if it should be resolved to the complete satisfaction of Pakistan, India and the people of Kashmir, the hostility will not evaporate overnight. It will take years to build trust and unlearn history. The fact that we are neighbours should not mean that we are rivals nor even that we should be friends. Good neighbourliness means a mutual respect and a mutual recognition that each has the right to go its own way. We should not set our sights too high. That too would be closing our eyes and making a wish. Instead, we should open our eyes and say a prayer. Both countries owe it to their people to create such conditions that will make the beating of war-drums an unpatriotic act. Rather than the other way round.

There was a lot of goodwill for the visiting Indian peace mission. But we cannot expect to find answers unless we accept that the settlement of the Kashmir dispute is a prerequisite. And that it will only be a beginning in the long haul. Therein lies the problem. Kashmir is not a territorial dispute. It is not about loaves and fishes. It is about the minds and hearts of the Kashmiri people. It too has to be seen in human terms.

Help for Afghanistan

THE Bush administration’s decision to step up assistance to Afghanistan should give the country a better chance of surviving the critical political and security tests it faces in the coming months.

Even so, its prospects look daunting. After 18 months of a transition government under the pro-Western President Hamid Karzai, much of Afghanistan is still dominated by regional warlords, southeastern provinces are haunted by armed remnants of the former Taliban regime and economic reconstruction has barely begun outside Kabul, the capital.

Yet the political process established for Afghanistan calls for the completion of a new constitution, its ratification by a national assembly, a census and voter registration campaign, and democratic elections for a new government — all by late next year.

Completing those tasks will be next to impossible unless security conditions dramatically improve and Mr. Karzai’s government is able to extend its authority. If the process does not go forward, the half-baked, half-funded and half-hearted nation-building process sponsored so far by the Bush administration may collapse altogether.

The proposed infusion of $1 billion in additional US aid is rightly aimed at showing quick results to as many Afghans as possible. Officials say it will be spent on roads, schools and irrigation projects, as well as on training a new Afghan army.

—The Washington Post

Allocation of revenues to centre, provinces: Finance commissions-V

FOR the first time, after sixteen years of independence, a national finance commission, under a Constitution (1962) was established in March 1964. According to the provisions of the 1962 Constitution, a national finance commission was to make recommendations to the President with respect to distribution between the central government and the provincial government of the proceeds (after deducting the cost of their collection) of the following taxes:

“Taxes on income, including corporation tax, but not including taxes on income consisting of remuneration paid out of the Central Consolidated Fund; (ii) Taxes on sales and purchases; (iii) Export duty on jute and cotton, and such other export duties as may be specified by the President; (iv) Such duties of excise imposed under a central law as may be specified by the President; and (v) Such other taxes as may be specified by the president”. In the Terms of Reference of the Commission, the duties of excise specified by the President were tea, tobacco and betelnuts.

The commission linked the problem of distribution of revenue between the centre and the provinces with considerations mainly relating to the financial viability and budgetary stability of the centre: “(a) A strong and viable Central Budget is essential for sustaining and raising the credit worthiness of the country both at home and abroad. (b) A revenue surplus with the Centre can be more easily conserved for development and made available for financing the development expenditure of both the Provinces and the Centre. (c) There should be sufficient cushion left at the Centre to enable it to render financial assistance to the Provinces in times of unforeseen calamities and also to tide over the requirements of defence in any national emergency. (d) Customs revenue being susceptible to wide fluctuations on account of changes in international trade conditions, there is need to provide a cushion for meeting a possible fall in revenue in bad years”.

The commission recommended that out of the net proceeds of the taxes, referred to in the terms of reference, 65 per cent be assigned to the provinces and 35 per cent retained by the centre. Further, it recommended that the basis for distribution between the two provinces — East and West Pakistan — of the sums so assigned to them, should continue “as at present” i.e. in the case of taxes on income, excise duties and export duties, “East Pakistan shall receive 54 per cent and West Pakistan 46 per cent, while in the case of sales tax, 30 per cent shall be distributed on the basis of collections in each Province and the balance in the same ratio as other taxes”.

In 1970, the martial law regime of Yahya Khan introduced certain administrative changes in West Pakistan. The One Unit was to be dissolved, and the old provinces — the Punjab, Sindh, North-West Frontier Province, and Balochistan were to be recreated with effect from July 1, 1970. The One Unit (Reorganization) Committee, comprising four senior civil servants, representing the four emerging provinces, had to examine the distribution of West Pakistan’s share (46 per cent) in the federal taxes for the purpose of the budgets of the first financial year (1970-71) of the four provinces.

The committee was to act as a midwife for the birth of the four new provinces, and it was also commissioned to make sure that the new provinces could stand on their own legs and were financially viable. The committee took a snap and adhoc decision. In the global context of the distribution of divisible central taxes between East Pakistan and West Pakistan, largely on the basis of population, it would amount to political blasphemy if the committee had gone beyond the population formula. The Committee decided on a provisional redistribution of the 46 per cent share of the province of West Pakistan on population basis — the Punjab 56.5 per cent; Sindh 23.5 per cent; NWFP 15.5 per cent; and Balochistan 4.5 per cent.

When the One Unit (Reorganization) Committee was in the process of working out the horizontal distribution of 46 per cent share of West Pakistan among the four new provinces, the president and chief marshal law administrator appointed, on April 17, 1970, a national finance committee, with the federal finance minister as the chairman, and among others, finance secretaries of West and East Pakistan as members, completely ignoring that the new provinces in West Pakistan would start functioning within two and a half month’s time. However, the situation was rectified towards the end of October 1970, when the finance secretaries of the new provinces were inducted as members of the committee.

A national finance committee, instead of commission, was set up for legal and constitutional reasons, but the terms of reference of the committee were almost the same as were assigned to the national finance commission in 1964-65. The committee was required, among other subjects, to make recommendations as to the distribution between the federal government and provincial governments of the proceeds (after deducting the cost of, their collections) of (a) taxes on income, including corporation tax; (b) taxes on sales and purchases; (c) export duty on jute and cotton; and (iv) duties of excise on tea, tobacco, and betelnuts.

The committee decided that in view of the special circumstances under which the issue of the financial relations between the centre and the provinces were being discussed, a formal report would not be submitted, but it would make recommendations (in a formal record of minutes) to government with respect to various matters referred to it.

As regards the distribution of revenues, the committee’s specific recommendations were that the share of the provinces in the central divisible pool be raised from 65 per cent to preferably 90 per cent but at least 80 per cent, depending on the size of the revenue surplus. (The Distribution of Revenue Order 1971, assigned 80 per cent of the net proceeds of the aforementioned taxes to the provinces.) The committee further recommended that “the existing formula for distribution of divisible pool among the Provinces may be continued for one more year”.

The formula was: “In the case of taxes on income, excise duties and export duties, East Pakistan receives 54 per cent and Provinces in West Pakistan 46 per cent, while in the case of sales tax 30 per cent is distributed on the basis of collection in each Province and the balance in the same ratio as other taxes”. And the share, assigned to West Pakistan, was to be distributed among the four provinces on the same lines as determined by the One Unit (Reorganization) Committee, viz Punjab 56.5 per cent; Sindh 23.5 per cent; NWFP 15.5 per cent; and Balochistan 4.5 per cent.

It will be seen that there was absolutely no difference between the recommendations of the national finance committee, and the decision of the One Unit (Reorganization) Committee. While the former framed its recommendations in the context of the global distribution of revenues between East Pakistan and West Pakistan (and its new provinces), the latter had to confine itself to the new emerging provinces in West Pakistan. The distribution proposed by both the Committees was on the basis of population.

After the creation of Bangladesh in December 1971, the only change brought about in the fiscal arrangements between the centre and the provinces was that the share of federal taxes, payable to the former East Pakistan, was retained by the federal government. The four provinces of Punjab, Sindh, NWFP, and Balochistan continued to receive their share of 46 per cent of the divisible pool in accordance with the percentages prescribed in the Distribution of Revenues Order 1971.

In 1973, the parliament enacted the Constitution of the Islamic Republic of Pakistan. Articles 160 to 163 deal with the distribution of revenues between the federation and the provinces. According to Article 160, within six months of the commencing day, and thereafter at intervals not exceeding five years, “the President shall constitute a National Finance Commission consisting of the Minister of Finance of the Federal Government, and Ministers of Finance of the Provincial Governments, and such other persons as may be appointed by the President after consultation with the Governors of the Provinces”.

The duty of the national finance commission, as laid down in the Constitution, is to make recommendations to the president as to: (a) distribution between the federation and the provinces of the net proceeds of the taxes raised under the authority of the parliament — (i) taxes on income, including corporation tax; (ii) taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed; (iii) export duties on cotton, and such other export duties as may be specified by the president; (iv) such duties of excise as may be specified by the president; and (v) such other taxes as may be specified by the president; (b) the making of grants-in-aid by the federal government to the provincial government; (c) the exercise by the federal and the provincial governments of the borrowing powers conferred by the Constitution; and (d) any other matter relating to finance referred to the commission by the president. This, thus, is the constitutional duty of the national finance commission — nothing more, nothing less.

It is to be remembered that ‘net proceeds’ has been defined in the Constitution as the proceeds, in relation to any tax or duty, thereof, reduced by the cost of collection, as ascertained and certified by the auditor-general. Secondly, the recommendations of the national finance commission have been made binding under the 1973 Constitution: “As soon as may be after receiving the recommendations of the National Finance Commission, the President shall, by Order, specify, in accordance with the recommendations of the National Finance Commission ... the share of the net proceeds of the taxes ... which is to be allocated to each Province, and that share shall be paid to the Government of the Province concerned, and ... shall not from part of the Federal Consolidated Fund”.

Another important provision made in the Constitution is that prior sanction of the president is required to bills affecting taxation in which provinces are interested. The relevant Article 162 reads, “No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression ‘agricultural income’ as defined for the purposes of the enactments relating to income tax or which affects the principles on which under any of the ... provisions of this Chapter moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President”.

There is a parallel provision in Article 174 of the Indian Constitution, except that instead of the words, “previous sanction of the President”, the Indian provision has the words, “on the recommendations of the President”. [Though the Indian words are very weak, as compared to Pakistani words “previous sanction”, the Indian President duly signs a certificate that after having seen the subject matter of the proposed Bill, he recommends to the Lok Sabha the consideration of the Bill. Have we ever followed the provisions of our Constitution, and obtained “previous sanction” of the President for introducing such Bills?]

Then there are two provisions in Article 161 of the Constitution regarding payment to the provinces of net proceeds of federal excise duty on natural gas levied at well-head, and ‘net profits’ from the bulk generation of power at a hydro-electric station. The Article 161 reads, “... the net proceeds of the Federal duty of excise on natural gas levied at well-head and collected by the Federal Government, and of the royalty collected by the Federal Government shall not form part of the Federal Consolidated Fund and shall be paid to the Province in which the well-head of natural gas is situated”.

Regarding net profits from bulk generation of hydro-electric power, the same Article says, “The net profits earned by the Federal Government or any undertaking established or administered by the Federal Government from the bulk generation of power at a hydro-electric station shall be paid to the Province in which the hydro-electric station is situated”.

The “Explanation” in the Article clarifies the point that for the purposes of this clause ‘net profits’ shall be computed by deducting from the revenues accruing from the bulk supply of power from the bus-bars of a hydro-electric station at a rate to be determined by the Council of Common Interests, the operating expenses of the station, which shall include any sums payable as taxes, duties, interests or return on investment, and depreciation, and element of obsolescence, and overheads and provisions for reserves.

These two items, it will be seen, are beyond the jurisdiction of the national finance commission, though many a writer and critic have ‘been expressing their opinion that the commission could deliberate and make recommendations on them.