Following the success of Jana Aandolan II state restructuring has become one of the principal agendas of political discussion. Some political parties, academicians and social activists have already come out with specific suggestions for the Constituent Assembly. A quick review, however, indicates that many of them are guided or influenced by ethnic, geographical, cultural or religious factors while fiscal ramifications have been hardly considered as a

priority. The criteria for resource distribution amongst the states of the new republic may be designed in a way that the resources are evenly distributed amongst the states and the states which lag behind get a major share of resources. However, this may not be a robust approach and compatible with the federal system of government that our political leaders have envisaged.

An important expectation under the federal structure is that, apart from political power, it also guarantees a process of more inclusive,

balanced and accelerated development across the proposedstates. This may not be possible if the variations in

the initial conditions of proposed states in terms of revenue and resource base potentials are wider.

This will be more so if initial developmental status of proposed states is highly uneven. Big developmental gap among states

initially or in the aftermath of federal system has been a major bone of contention and has encouraged separatist movement in many countries. Additionally, if the

number of states is large, the financial obligation to support unproductive or recurring expenses will be enormous, which may be beyond our existing capacity, and pose additional constraints to the development endeavours.

Likewise, how the expenditure responsibility system is divided between the centre and the states will also very much influence the socio-economic development of backward states in general and disadvantaged people in particular. In many countries, absence of fiscal responsibility system among the states has added enormous debt obligations to the centre and hindered the process of mobilising resources, maintaining macroeconomic or price stability and enhancing developmental works.

This demands that fiscal dimension in the form of fiscal federalism should be at least considered on an ex-ante basis in the course of devising criteria for state restructuring and/or inter-state resource sharing, including transfers of resources from

the centre.

It is well known that despite decentralisation initiatives of the past, including enactment of Local Self-Governance Act 1999, we have made little headway in that direction. On the developmental front, the role of

local bodies has been limited to distributing the central grant and utilising local

resources. Worse still, in terms of

revenue generation and government expenditure, the gap between central development region and other regions has

been wide.

At present, central development

region, where capital city is located,

generates almost 80 per cent of total government revenue. Almost the same ratio is spent in this region from the government budget. A majority of districts both in the tarai and hills are not allocated even a fraction of that amount. Moreover, the empowerment index prepared on the basis of

gender, ethnicity, and caste reveals that the inequalities among development regions are enormous.

The gaps are even wider in terms of the quality of land, natural resources, tourism potential, energy generation capacity, city or market centers, road connectivity, agro- and forestry-based industry, development potentials and the quality and quantity of manpower. This reveals that in terms of both revenue and resource base potentials,

which will be essential for expediting

development process in a more equitable manner, the ex-post resource sharing approach may be unable to bring developmental balance among the proposed states even in the long run.

Since the principle of fiscal federalism helps to evolve a system that considers, among others, revenue and resource

base potentials, revenue sharing, expenditure and fiscal responsibility system,

adoption of the fiscal dimension will be the best approach to devise a viable state restructuring model.

This, in turn, will need in-depth assessment of the socio-economic conditions, level of expenditure and resource generating potentials of various districts, zones

and and regions, wider consultations among various constituents and evaluation of successful country experiences, among others. This will make the task of Constituent Assembly easier and facilitate the process of consensus building within the Constituent Assembly. A holistic approach, therefore, will be more appropriate in

order to avoid serious lapses in the state restructuring process.

Khanal is an economist