editorial team: volume 10, track 1-2, october 2014...cbga budget track volume 10, track 1-2, october...

IN THIS ISSUE

Significance of the Finance Commission

The Diminution of the Finance Commission

The 14th Finance Commission: With what porpoise?

Paradigmatic Questions about the Mandate of the FourteenthFinance Commission

Fourteenth Finance Commission in the context of emergingCentre–State Fiscal Relations

How Many Miles Before We Get Fiscal Policy Space Right?

Reduced Fiscal Autonomy in States

Erosion in Governance Capacity at the Sub-national Level

The Political Economy of Absorptive Capacity – Case of theHealth Sector

Panchayat Finances: Issues before the 14th FinanceCommission

Suggestions for the Fourteenth Finance Commission onRenewable Energy

Strengthening Budget Transparency and Participation in Indiathrough the Pre-budget Process

Policy Asks for the 14th Finance Commission on BudgetTransparency

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A Publication by Centre for Budget and Governance Accountability

Volume 10, Track 1-2, October 2014

This document is for private circulation and nota priced publication.

Copyright @ 2014 Centre for Budget andGovernance Accountability.

Reproduction of this publication foreducational or other non-commercial purposesis authorized, without prior writtenpermission, provided the source is fullyacknowledged.

ABOUT BUDGET TRACKA periodical that discusses the budget and

policy priorities of the government.

CREDITSEditorial Team:Praveen Jha, Sona Mitra, Saumya Shrivastava,Subrat Das

CBGA Team:Amar Chanchal, Bhuwan C. Nailwal,Gaurav Singh, Happy Pant,Harsh Singh Rawat, Jawed A. Khan,Jyotsna Goel, Kanika Kaul,Khwaja Mobeen Ur-Rehman, Manzoor Ali,Nilachala Acharya, Pooja Rangaprasad,Priyanka Samy, Protiva Kundu,Rajalakshmi Nair, Richa Chintan,Rohith Jyothish, Saumya Shrivastava, SonaMitra, Sridhar Kundu, Subrat Das,Sumita Gupta, T. K. Shaji

Illustrations:Vikram Nayak

Layout and Design:Mayank Bhatnagar

Printing:Kriti Creative [email protected]#9873249374

ABOUT CBGACentre for Budget and GovernanceAccountability (CBGA) is an independentpolicy research and advocacy organisation basedin New Delhi; it analyses public policies andbudgets in India and advocates for greatertransparency, accountability and scope forpeople’s participation in budgets. Please visitwww.cbgaindia.org to know more aboutCBGA’s work.

CBGA Budget TRACK Volume 10, Track 1-2, October 2014 1

Volume 10, Track 1-2 October 2014

IN THIS ISSUESignificance of the Finance CommissionSona Mitra 3The Diminution of the Finance CommissionPrabhat Patnaik 4The 14th Finance Commission: With whatporpoise?Vinod Vyasulu 6Paradigmatic Questions about the Mandate ofthe Fourteenth Finance CommissionChirashree Das Gupta 9Fourteenth Finance Commission in the contextof emerging Centre–State Fiscal RelationsK. K. George 11How Many Miles Before We Get the FiscalPolicy Space Right?Praveen Jha and Rohith Jyothish 16Reduced Fiscal Autonomy in StatesSona Mitra 20Erosion in Governance Capacity at the Sub-national LevelSubrat Das and Saumya Shrivastava 24The Political Economy of Absorptive Capacity –Case of the Health SectorRavi Duggal 27Panchayat Finances: Issues before the 14thFinance CommissionJawed Alam Khan 29Suggestions for the Fourteenth FinanceCommission on Renewable EnergyJyotsna Goel 33Strengthening Budget Transparency andParticipation in India through the Pre-budgetProcessRavi Duggal and Anjali Garg 36Policy Asks for the 14th Finance Commissionon Budget TransparencyNilachala Acharya 38Summary of States’ Recommendations to theFourteenth Finance CommissionRohith Jyothish and Saumya Shrivastava 41Commitments on Fiscal Federalism andTaxation in Election Manifestos of SelectPolitical Parties for 16th LokSabha ElectionsRohith Jyothish 48Recent Developments in National andInternational Economic PolicyProtiva Kundu 50

This edition of Budget Track focuses on the ‘Issues before the 14th Finance Commission’,which is due to submit its report to the Union Government this year. The FinanceCommission of India, a Constitutional body constituted every five years, facilitates theintergovernmental transfer of resources at the sub-national level of the government andplays an important role in determining the fiscal architecture of the country.

The past few years have witnessed specific changes in the Centre-State fiscal relations. Thishas been reflected in the composition, Terms of Reference and the recommendations ofthe Central Finance Commissions. As the 14th Finance Commission prepares to submit itsreport, there are a number of concerns that need to be brought forth, both before theCommission as well as before other stakeholders. This issue of Budget Track tries tocapture some of the aspects related to the 14th Finance Commission.

This issue begins with a brief note demystifying the role and significance of the FinanceCommission. In the first article, Prabhat Patnaik raises some critical issues about the role,functioning of the Finance Commission and the gradual diminution of this Constitutionalbody over the years. Vinod Vyasulu, in the next article, outlines some key concernsregarding the composition, the division of resources and the terms of reference of the 14th

Finance Commission. Taking forward the concerns raised in the two previous articles,Chirashree Das Gupta questions the ideological base of the assumptions that underlie theTerms of Reference of the Finance Commission and raises some paradigmatic queriesabout its mandate.

The sharing of resources between the Centre and the States has since long been a subjectof contention. K. K. George in the following article deliberates on some of the crucialmatters regarding the 14th Finance Commission and the Centre-State fiscal relations in thecontext of the broader theme of economic governance and budget accountability. PraveenJha and Rohith Jyothish discuss the role of the 14th Finance Commission towardsexpanding the fiscal policy space in India through increasing the tax-GDP ratio. Sona Mitraoutlines the issues before the Commission in the context of the reduced fiscal autonomy ofthe States, leading to the inability of the State Governments to make long-termexpenditure commitments, especially in the social sectors.

In the following piece, Subrat Das and Saumya Shrivastava discuss the key challengespertaining to the acute shortage of human resources in the State Governments, especiallyin the development sectors, in the relatively backward States. Ravi Duggal illustrates thelimitations of the arguments related to the ‘lack of absorptive capacity’ of the States,through a case study of a public healthcare system in Mumbai. Jawed Alam Khan, in thesubsequent article, draws from the experience of a few states in India to highlight the issuesbefore the 14th Finance Commission in the domain of fiscal decentralisation and financesfor the local governments.

Jyotsna Goel enumerates the ways in which the Commission can promote thedevelopment of renewable energy in India, which is crucial for promoting clean energy anda sustainable growth trajectory for the country.

Transparency, accountability and public participation have been widely recognised asimperative for good governance. Ravi Duggal and Anjali Garg, in their article, makespecific recommendations to the 14th Finance Commission for strengthening budgettransparency and participation in India through the Pre-budget process. Nilachala Acharyadiscusses the issue of enhancing budget transparency further. He traces therecommendations of the previous Finance Commissions and the recent key developmentsin this domain; and stresses the need for allocating resources towards strengtheninginstitutional mechanisms to ensure greater budget transparency in the country.

Views expressed in the articles are those of the authorsand not necessarily the position of the organisation.


Rohith Jyothish and Saumya Shrivastava in a note summarise the key demands by thedifferent states for the 14th Finance Commission. A separate note by Rohith Jyothishcaptures the key commitments on fiscal federalism and taxation in the Election Manifestosof select political parties for the 16thLok Sabha elections.

Lastly, Protiva Kundu reviews some major budget and policy developments in the last fewmonths in India as well as globally. She outlines some key legislations and policies in Indiaand traces some important policy developments at global platforms, which have an impacton India.

We hope that this Special Issue of Budget Track, focusing on the different issues before the14th Finance Commission, would help facilitate a greater public understanding andencourage an informed discussion on the same. We may also add here that CBGA hassubmitted most of the policy asks captured here to the office of the 14th FinanceCommission earlier this year.

- Editorial Team

Foreword


The Finance Commission (FC) of India is a body established under Article 280(3) of the Indian Constitution by the Presidentof India. It is formed once every five years to determine the financial relation as well as facilitate the intergovernmental transferof resources between the national and the sub-national governments under the Finance Commission Act of 1951. The Act statesthe terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission. As perthe Constitution, the Commission is appointed every five years and consists of a chairman and four other members. Till date,thirteen FCs have submitted their reports. The FC and its recommendations over the years pertaining to the sharing ofresources between centre, states and local bodies have played a major role in determining the federal fiscal architecture of thecountry.

The Indian State has often been viewed to be characteristically federal with certain ‘unitary features’. It faces problems of verticaland horizontal imbalances between the centre and the states. Vertical imbalances occur due to the expenditure patterns of stateswhich is often disproportionate to the states’ source of revenue, a large part of which flows from the Centre. On the other hand,factors such as geographical location, historical backgrounds and differences in resource endowments are major reasons forhorizontal imbalance within the states. Recognizing the importance of equalisation among states to bring in a parity ofdevelopment across the regions, the Constitution made several provisions to bridge the gap in finances between the Centre andthe States.

Some of the provisions include various Articles in the Constitution like Article 268, which facilitates levy of duties by the Centrebut equips the states to collect and retain the same. Articles 269, 270, 275, 282 and 293 specify ways and means of sharing ofresources between Union and States. And finally the Constitution also provides an institutional framework to facilitate Centre-State Transfers. Article 280 (3) of the Indian Constitution states:

· The President will constitute a Finance Commission within two years from the commencement of the Constitution and thereafter at theend of every fifth year or earlier, as the deemed necessary by him/her, which shall include a chairman and four other members.

· Parliament may by law determine the requisite qualifications for appointment as members of the Commission and the procedure ofselection.

· The Commission is constituted to make recommendations to the President about the distribution of the net proceeds of taxes between theUnion and States and also the allocation of the same amongst the States themselves. It is also under the ambit of the FinanceCommission to define the financial relations between the Union and the States. They also deal with devolution of non-plan revenueresources.

The primary mandate of the FC as laid down by the Constitution can be explicitly stated as:

1. Distribution of net proceeds of taxes between Centre and the States, to be divided as per their respective contributions to the taxes.

2. Determine factors governing Grants-in-Aid to the states and the magnitude of the same.

3. To make recommendations to President as to the measures needed to augment the Consolidated Fund of a State to supplement theresources of the panchayats and municipalities in the state on the basis of the recommendations made by the Finance Commission of thestate.

These functions form the core activities for the FC. Currently the recommendations of the 13th FC are being followed forcentre-state resource sharing. The 14th FC, under the Chairmanship of Shri Y. V. Reddy, former RBI Chairman, is preparing itsreport to be submitted by the end of this year, recommending the method for sharing Central resources between the states forthe period 2015-16 to 2019-20.

Significance of the Finance CommissionSona Mitra*

* Sona Mitra works with the Centre for Budget and Governance Accountability (CBGA), New Delhi


The Finance Commission is one of thegrandest institutions conjured up by theIndian Constitution. Its role is toovercome a basic anomaly in India’sfederal structure, arising from the fact thatwhile the state governments have theresponsibility of carrying out substantialdevelopment expenditure, the revenues attheir command are meagre compared tothose of the Centre. A FinanceCommission therefore is constituted onceevery five years to decide on themagnitude of devolution of resources fromthe Centre to the states and theirdistribution across states.

The job of the Commission being of suchgreat importance, and its position beingone that overarches both the Centre andthe states, the constitution of a FinanceCommission should be front-page news.But that alas is not the case. The settingup of the Fourteenth Finance Commissionscarcely attracted any notice. The reasonfor this diminution of the FinanceCommission lies in the fact that theCentral government has converted itvirtually to a Departmental body entrustedwith the task of imposing neo-liberalpolicies on unwilling state governments, byusing, entirely illegally, the threat ofwithholding resources from them that areConstitutionally their due.

Of course even before the FinanceCommissions were forced to becomepolicemen for the Central government,their importance had got undermined.This was because the Centre had insistedon routinga large chunk of the totaltransfers it made to states through thenon-FC route. The Planning Commissionwhich is a mere Departmental body of the

Central government, with noConstitutionally-sanctified position, wasone route for such transfers, viz. in theform of Plan assistance; and in additionthere were discretionary transfers made atthe whim of the Central government. Thetransfers effected through theConstitutionally-sanctified body, theFinance Commission, accounted for only afraction of the total transfers from theCentre to the states; and this of courseenabled the Centre to indulge in“favouritism”, rewarding “obedient” statesand penalizing “inconvenient” ones.

But at least the plan assistance, no matterhow small and despite being given atusurious interest rates (the term“assistance” was indeed a misnomer),allowed the state governments to decideon their own plan priorities. Of late,however, a new entity has emerged calledCentrally Sponsored Schemes, throughwhich not only does much of the Centre’sdevolution of plan resources to states takeplace, but which actually amount tointerfering in states’ plan priorities.

State governments have to share a part ofthe expenditure on Centrally-SponsoredSchemes, which have not been designedby them, and whose implementation itselfis largely outside their control (oftenentrusted to independent bodies like theSarva Shiksha Abhiyan, or the NRHM).States, when confronted with a CSS, aregiven a “take it or leave it” choice; andnaturally since such Schemes entail somemoney coming from the Centre, there ispressure on them, given their straitenedcircumstances, to “take it”. Their own planresources therefore get partly diverted toCentrally Sponsored Schemes.

But that is not all. After some time, theCentre decides unilaterally to lower itsshare of contribution to the CSS. (Thisunilateralism is so brazen that in the caseof SSA, the Centre went ahead with itsproposed reduction in share despite aunanimous plea to the contrary by all theChief Ministers at an NDC meet). For the

continuation of the schemes therefore thestate governments have to makeproportionately more and more resourcesavailable. They are thus left holdingschemes, over whose designing andinception they had no say whatsoever; andtheir own plan priorities and planconceptions get subverted.

The NDC had decided long ago, in viewof the state governments’ unanimousdemand to this effect, that CSSs should behanded over, together with funds, to thestate governments. But nothing has comeof this decision; on the contrary the scopeof such schemes has got enlarged, and theresources they absorb have increasedmanifold. The fact that successive FinanceCommissions have turned a blind eye tothis travesty of the Constitution is onereason for their diminution of status. Inaddition, however, the FinanceCommission itself has become a tool ofthe Central government.

The reasons for this are obvious. TheCentre unilaterally decides on themembership of the Commissions. It isreasonable to expect that if a body is toadjudicate between the Centre and thestates, then its composition should bedecided not by one of the two partiesunilaterally, but by both, through mutualagreement. There are plenty ofinstitutions, such as the NationalDevelopment Council, or the Inter-StateCouncil, where both the Centre and thestate governments are represented; thesenaturally should be the fora at which thecomposition of the FC should be decided.But despite the fact that this demand hasbeen put forward by the Left parties andthe Left-led governments for long, themembership of the FC to this day isdecided entirely by the Centre, whichnaturally fills it with persons “acceptable”to it.

The Centre also unilaterally decides onthe terms of reference of the FCs. Hereagain, the NDC or the ISC could be usedto get an agreed set of terms of reference,

The Diminution ofthe FinanceCommissionPrabhat Patnaik*

* Prabhat Patnaik is Professor Emeritus with the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.


but this has never happened. In fixing theterms of reference, the Centre alsoensures that the FC, consisting of itshandpicked persons as members, works onthe Centre’s agenda. The terms ofreference of the Fourteenth FinanceCommission for instance include assessingwhat progress the states have made infollowing the “road map for fiscalconsolidation” suggested by the 13th FCand what “incentives” and “disincentives”should be used to make state governmentsconform to this “road map”; this in plainlanguage means compelling the states, bywithholding their resources, to practisefiscal austerity (and enact FiscalResponsibility Legislation).

This obnoxious practice of withholdingresources due to them from the states,unless they satisfied certain“conditionalities” (involving the adoptionof neo-liberal measures) started with theEleventh Finance Commission. The 11th

FC asked for a “package” of measures,which included “reforms” of StateElectricity Boards (involving “unbundling”and “trifurcation”), to be adopted to thesatisfaction of Central government personnel,as a condition for a part of the devolvedresources to be made available to them.

This was clearly un-Constitutional. TheConstitution was explicit that theresources made available to states by theFC were to be made availableunconditionally. This is not surprising sinceit visualized the possibility of differentstate governments being ruled by differentpolitical parties with differentprogrammes, who were electorally chosenby the people; and if this choice was tohave any meaning then these differentstate governments should be allowed tohave their different trajectories ofdevelopment. Since it was neither theCentre’s nor the FC’s job to tell themwhat development strategy to pursue, theresources being made available to themshould be made available unconditionally sothat they could pursue differenttrajectories. But the neo-liberal policy-makers decided to use the institution ofthe FC to ram their favoured measuresdown the throats of the state

governments, no matter what the ideologythat the political parties running thesestate governments subscribed to.

It must be said to the credit of Dr.Amaresh Bagchi, one of the members ofthe 11th FC, that he gave a dissenting noteto the FC’s report, protesting against thisun-Constitutional step of the Commission.What is Constitutionally due to the states,he argued, must be given to themunconditionally. Even though thisobnoxious and un-Constitutional practicehas been followed by all subsequentFinance Commissions, no other memberalas has had the courage or the convictionof Dr.Bagchi to voice a similar protest.

The Twelfth Finance Commission madethe provision of debt relief conditionalupon states passing Fiscal responsibilityLegislation which would provide for anelimination of revenue deficits and limitfiscal deficit to 3 percent of the GrossState Domestic Product. This was not justun-Constitutional and undemocratic,making the provision of assistance to apopularly elected government conditionalupon the pursuit of specific and uniformpolicies which had no Constitutionalsanction; but it was as silly in its content,as it was shallow in its analysis of the causesof state indebtedness.

Through the decade of the nineties statestaken as a whole were better at mobilizingrevenue than the Centre: while the ratioof the Centre’s tax revenue to GDP camedown over the decade, that of the statestaken together did not. And yet the statestaken together had a worsening debtsituation over the decade. A major reasonfor this lay in the exorbitant rates ofinterest charged by the Centre on theloans, including Plan assistance, it madeavailable to states. These rates in manyinstances exceeded in real terms the rateof growth state GSDP, which is a surerecipe for falling into a debt-trap. Havingvirtually pushed the states into a debt trapthe Centre then used the FC to get themto pass “Fiscal Responsibility Legislation”!

And the absurdity of such legislation lies inthe fact that a lot of developmentexpenditures undertaken by state

governments, such as salaries of teachersin government and “aided” schools,salaries of doctors and costs of medicine ingovernment hospitals, plan transfers tolocal bodies, are counted as revenueexpenditure. Zero revenue deficittherefore would mean cutting many ofthese expenditures, which impinge on thelives of the common people. In short, theidea that revenue expenditure is non-developmental, which underlies theprescription for zero revenue deficit, isfundamentally wrong.

The Thirteenth Finance Commissioncontinued with this undemocratic neo-liberal orthodoxy, through its impositionof a “road map for fiscal consolidation”.The case of Tripura illustrates its absurdity.Every state, irrespective of its size andGSDP, has to have a certain minimaladministrative structure in absolute terms.When salaries of state governmentpersonnel have to increase in the wake ofCentral pay increases, as a fall-out ofCentral Pay Commissionrecommendations, a small state has tobear a heavier burden. Instead of takingthis fact into account, the 13th FC usedarbitrary “norms” for administrativeexpenditure, on the basis of which itpenalized states like Tripura for no fault oftheirs. Instead of acting as a Constitutionalbody, the FC had acted as neo-liberalvigilante at the behest of the Centre.

The fact that successive FCs have acted inthis manner is what explains the currentdiminished status of this Constitutionalbody of grand conception.



‘They were obliged to have him with them,’ theMock Turtle said: ‘no wise fish would goanywhere without a porpoise.’

‘Wouldn’t it really?’ said Alice in a tone ofgreat surprise.

‘Of course not,’ said the Mock Turtle: ‘why, ifa fish came to me, and told me he was going ajourney, I should say “With what porpoise?”’

—Lewis Carroll: Alice in Wonderland

1

The Finance Commission (FC) is aconstitutional mechanism for the sharingof funds in India’s federal structure. Thecollection of income and excise and othertaxes is the responsibility of the Union ofIndia, while sales and other indirect taxesare collected by the State governments.Since the largest generators of revenue arewith the Union and the biggestresponsibility for providing social servicesare with the states, a need for equitablesharing of revenues was felt, and has beeninstitutionalised in the FinanceCommission. It is set up every 5 years bythe President, and makesrecommendations on how the totalrevenues of the Indian State are to beshared between the Union governmentand the state governments. By convention,the Union government accepts therecommendations made by a FC in toto.This is an excellent practice. After the 73rd

and 74thAmendments to the Constitution,a similar state level mechanism has alsobeen put in place to share funds with localgovernments.

Over the years, the Union has beguntransferring funds for ‘central schemes’ tothe states. This is done through thePlanning Commission, which is a thinktank of the Government of India headedby the Prime Minister. These transfershave become so important in recent years,that a member of the PlanningCommission is made a part time memberof the FC to ensure ‘co-ordination’. In the14 FC, this position is held by Dr. AbhijitSen, as Member of the PlanningCommission.

The 14 FC has been set up, with Dr Y.Venugopal Reddy, former Governor ofthe Reserve Bank of India, a respectedeconomist and civil servant, as Chairman.

There are some issues with thecomposition of this FC that meritdiscussion.The composition of this FC seems to havedeviated from the requirements of thelaw2, for Section 3 requires that onemember be selected from among thosewho ‘(a) are, or have been, or are qualified tobe appointed asJudges of a High Court’. None of themembers of the 14 FC seem to meet thiscriterion.

In recent years the FC has been made upof government economists, not politiciansor judges. Before Dr. Kelkar, a formerFinance Secretary, who chaired the 13FC, the Chairman of the 12 FC was Dr. CRangarajan, an eminent economist and aformer Governor of the Reserve Bank ofIndia. The Chair of the 11 FC wasProfessor A.M. Khusro, a former memberof the Planning Commission and a well-known economist.

There has been a shift to a technocraticcomposition of the FC. This FC is aformidable collection of economicexpertise and administrative wisdom. Onewonders also if these economists have thepolitical skills of negotiation andcompromise, so essential in a federalinstitution. One further wonders whethereconomists who have been part of thedecision making process in the Uniongovernment over many years will be ableto approach the problems of fiscalfederalism with any fresh insights.

2

What should go into the Divisible Pool?

There have been different definitions ofthe Divisible Pool over the years. Today,given that the Finance Minister has usedcesses and surcharges in the budget, weask:

Should surcharge on income tax remainout of it?

What about the dividends declared by publicsector companies? What about the revenuesfrom disinvestments in the public sector?

These have become very important inrecent years. These are national assetscreated with funds that the Union of Indiacould invest because the total amountgiven to the states, taken together, waskept small in order to facilitate capitalinvestment in industrial enterprises. From2 FC onwards, it has been taken forgranted that the need of the Union forfinds is of special importance because ofthe Mahalonobis Strategy ofindustrialisation which required thesetting of large green field plants in thepublic sector. Today we have SAIL, BHEL,ONGC and so many more—and they areimportant in the Bombay Sensexweightage.

The 14th Finance Commission: With whatporpoise?Vinod Vyasulu*

*1 Vinod Vyasulu is a former Director of the Institute of Public Enterprise, Hyderabad. He advises the Centre for Budget and Governance Accountability (CBGA), New

Delhi and the Centre for Budget and Policy Studies (CBPS), Bangalore.

2 THE FINANCE COMMISSION (MISCELLANEOUS PROVISIONS) ACT, 1951. http://fincomindia.nic.in/ShowContent.aspx?uid1=2&uid2=3&uid3=0&uid4=0.


Now that shares from these enterprises arebeing sold on the market, should not apart of the proceeds go to the states via thedivisible pool? After all, the states havewillingly foregone revenues for many years inorder to make this investment possible innational interest. Now that national interestseems to lie in disinvesting from theseenterprises, should not the states get theirfair share? This is a matter the 14 FCshould examine.

Should not these proceeds be used for capitalinvestments, as they are capital receipts, andnot for current consumption by theUnion?

3

What should be the formula for the verticaldevolution of funds between the Union ofIndia and the states taken together?

From the 2 FC onwards, there has been apronounced bias towards a larger share forthe Union of India, than the States, thanwas warranted by the responsibilities in the7th Schedule. This was then agreed uponby the states taken together.

The last public sector unit that wasestablished by the government of Indiawas NALCO in 1980. Since then theeconomy has moved in a differentdirection. The nature of verticaldevolution has however continued. Fromfunds that were no longer being investedin new Greenfield public sector plants bythe GOI, the Union of India hasintroduced a series of central schemesacross a number of sectors that comedirectly into the State list as given in the7th Schedule. This has also brought thePlanning Commission into the picture asarbiter of funds being transferred to thestates—a situation not envisaged in theConstitution.

There have been many reports that haveraised related issues—how the centralschemes distort state priorities; how theydeflect state funds via the sharing formula;how central schemes deny the states theflexibility they need to meet theirresponsibilities because of the guidelines’in central schemes; and finally of the

tremendous inefficiency with which theseschemes are implemented.

Since new public sector plants are not beingset up now, should not this base for sharing,which gave the majority of funds in thedivisible pool to the Union, be re-examined?Should not vertical devolution be on thebasis of the 7th Schedule and the lists ofresponsibilities of each sphere ofgovernment? This is an important matterthat the FC should examine afresh, notjust tinker with small arbitrarypercentages.

There have been demands that thedistinction between Plan and Non-Planfunds be given up. This is a complexmatter that brings the role—evenexistence of the Planning Commission asit now is—into question. The membersfrom the Planning Commission may facea conflict of interest here. He couldconsider excusing himself from thediscussion on this matter.

There is therefore a case for a re-examination of the basis for a verticaldevolution of funds in the divisible pool.The Union’s needs can be estimated formeeting its constitutional responsibilities,and the balance can be passed on to thestates for their developmental and otherneeds. The Union’s share of the divisiblepool can also include an amount that ismeant for transfer to local governments.Given the constitutional objection raisedby the Chief Minister of Tamil Nadu todirect Union-local body transfers via directbenefit transfers, this is also a matter forthe 14 FC to consider.

For unexpected events, like earthquakes,the states can come to aid of each othervia a constitutional agency like the InterState Council (ISC)—which should be setup in a way different from the currentISC. It is a matter that merits separatedetailed discussion.

4

The horizontal devolution across thestates also merits a fresh look. However,this is a matter that can be examined by

later FCs; the issues raised above are of afundamental nature and too much shouldnot be done in one FC period. Howeverthe nature of State-local body relationshipsand conditions under which Union fundscan beor not be devolved would also beimportant, given the uneven condition offederal deepening in India.

5

The size of the revenues available isestimated by the FC, and the shares of theUnion and states are given in apercentage. When the Union fails tocollect sufficient taxes, and the divisiblepool is smaller than that estimated by theFC, the states suffer an automaticshrinkage in the funds available to them,for no fault of their own. This is unfair.The inefficiency of the Union should notbe passed on to the states. If the Unionfails in collecting sufficient revenue, itshould bear the consequences of theshortfall. The recommendations forsharing the divisible pool should thereforebe given in terms of both a percentage,and an absolute number based on the FC’sestimations, with the proviso that thestates get whichever is larger. This will givethe Union an incentive to collect taxesefficiently.

6

The TORs of the 14 FC include,surprisingly, items that are really of amunicipal nature: ‘the need for insulatingthe pricing of public utility services likedrinking water, irrigation, power andpublic transport from policy fluctuationsthrough statutory provisions’.

These do not come under theconstitutional responsibility of the FC, butare additional items that have beenreferred to it by the Union government.In seeking statutory means to insulatefluctuations in prices of public utilities vialegal means, is not the Union governmenttrying to limit the political freedom of thesucceeding government to make policychanges? Is this not a misuse of the healthyconvention that recommendations of the



Union Finance Commission are acceptedin toto? This is, perhaps, unethical.

Another TOR has to do with long termsissues and is not really a fiscal matter: ‘theneed to balance management of ecology,environment and climate change consistentwith sustainable economic development’.How is the sharing of revenues between theUnion and the states related to climatechange, which is a long term ecologicalissue of a global nature? Is the Unionarrogating to itself responsibility formitigating climate change in 5 yearsthrough some expenditure that the FC mayenable at the expense of the states?

There is also a reference to the proposedGoods and Services Tax: ‘the impact ofthe proposed Goods and Services Tax onthe finances of Centre and states and themechanism for compensation in case of

any revenue loss.’ This would require aconstitutional amendment as it would takeaway the power to tax goods that iscurrently with the states. That this woulddrastically change the federal nature of ourConstitution does not seem to haveoccurred to the Union of India, whichthinks it can buy off the states with‘compensation for revenue loss’. Buttaking away this power would reduce stategovernments from being ‘governments’tomere agents of the Union; and this maywell go against what has been called the‘basic structure of the Constitution’ whichincludes its federal nature. This is a matterthat has consequences far beyond thesharing of revenues between Union andstates for 5 years and should not becasually dealt with by anyone; and I argue,certainly not a Finance Commission with amandate of recommendations for 5 years.

In my own view, the FC should refuse toconsider such items. It is within its powersto do so. As Lewis Carroll so succinctlywrote in Alice in Wonderland:

“You can really have no notion howdelightful it will be

When they take us up and throw us, withthe lobsters, out to sea!”

But the snail replied “Too far, too far!”and gave a look askance—

Said he thanked the whiting kindly, buthe would not join the dance.

Would not, could not, would not, could not,would not join the dance.

Would not, could not, would not, could not,could not join the dance.



The debates on the mandates of FinanceCommission(s) show a welcome de-mystification of the techno-managerialapproach to the question. However, thedominant trend in addressing thisquestion has been to find ways in whichconcerns around social disparity can be‘plugged in’ to the existing devolutionexercise. But such exercises of plugging insocial categories into a pre-determinedpolicy paradigm overlook the paradigmwithin which the TOR of the FinanceCommission (FC) in ensconced. It is aparadigm based on an ideology of fiscalconservatism and a methodologicaldichotomy between equity and efficiencyarrived at through tenuous assumptions,not to mention questionable politicalpriorities. Unless, the debate is opened upto question these bases, aspirations ofsocial justice in FC devolutions will remaina chimera.

Ideological BasisThe eroding role of Finance Commissionsas ‘neutral arbiter’, despite constitutionalprovisions has been of increasing concernleading to the argument that FC TORsshould remain confined to its basicconstitutional mandate.But even if the FCmandates had remained confined to theconstitutional scope, the question of therole of ideology in defining itsmethodological approach remains central.The conflict between inflation-targetingmacroeconomic strategy and‘development’ goals has largely definedthe ideological landscape of policymakingin India in the recent decades. In keepingwith that, inflation-targeting and fiscalconservatism have been at the core of thedevolution principles suggested by FCssince the 1990s.

* Chirashree Das Gupta is Associate Professor of Economics at the Ambedkar University, Delhi

Differentiating between equity andequality, the neoliberal public policyparadigm has grappled with two questions:first, is it possible to have “equity” and“equality” in a system that prioritisesefficiency in resource management oversocial justice, and second, is horizontalequity the most widely accepted principleof equity. Another set of contentions havederived from concerns aroundredistribution andthe undermining of theequity principle since the Tenth FC. Thediscarding of emphasis on redistributionhas been accompanied by a shift towardsfiscal conservatism. This tendency hasbeen entrenching itself precisely at a timewhen sectoral, social and regional disparityhas been widening.

In most of these debates with regard toFinance Commission transfers, disparity,narrowly understood as inter-statedisparity, is a ceteris paribus condition. Theexpertise in the FC has been devoted todesigning closest to optimal allocations inbalancing the competing demands of lowand high income states. In this exercise,the indicators of regional disparity whichonly quantify symptoms have been thebasis of the formula for horizontaldevolution. Yet, the political expectationsaround FC transfers are towards reversingtrends in widening disparity and thusaddressing the cause of widening social,sectoral and regional disparity both withinand across states.

The Constitutional mandate demandsthat the FC be able to raise itself abovedominant economic ideology.Theemphasis on equalisation demands a breakfrom the ceteris paribus assumptions of notjust the equity/efficiency paradigm but

also a departure from the methodologicalapproach of conceptualizing social disparityas an ahistorical given. It also requires abreak with economic orthodoxy that isaverse to high levels of public expenditure.

Political PrioritiesThere is an emphasis in the FFC mandateseeking recommendations on ways toincrease tax-GDP ratios. The TOR alsorecognises non-salary and non-wagerevenue expenditure as an importantcomponent of maintenance of capitalassets. However, the emphasis on only the‘plan’ component of such expendituremisses the point that revenue expenditureis important in the maintenance andupkeep of existing assets and infrastructurein resource constrained economies whichentails emphasis on non-plan revenueexpenditure.

The Commission has been asked to reviewthe fiscal consolidation roadmap that hadbeen suggested by the 13th FC and hasbeen given the room to ‘suggest measuresfor maintaining a stable and sustainablefiscal environment consistent withequitable growth including suggestions toamend the Fiscal Responsibility BudgetManagement (FRBM) Act currently inforce’. This demonstrates recognition thatthe FRBM Act needs to be reconsideredboth in the light of sustainability andrelevance for state-level fiscal policy.However, it still indicates a fear of thefiscal deficit which derives from overtlyideological fiscal conservatism and hasvery little to do with the principles ofeconomic theory. This has been pointedout by many experts since the tenure ofthe 12th FC when the question of the fiscaldeficit gained ascendancy. There are twosets of arguments here. Some expertscontend that while containing the fiscaldeficit is important, there is no need tospecify targets for both revenue and fiscaldeficits. Others argue that the basis ofFRBM Act itself is unnecessary ascontaining the fiscal deficit is not aneconomic priority for countries like India,where unutilized capacities entail ademand generating role to the fiscaldeficit, without necessarily aggravating

Paradigmatic Questions about theMandate of the Fourteenth FinanceCommissionChirashree Das Gupta*


inflation. In fact, the experience of theIndian economy in the period of the 13th

FC shows that bringing down the fiscaldeficit (which most states have done) hasvery little correlation with inflation levels(which have risen in the same period).

The Commission has been given the roomto suggest how much subsidies are requiredfor sustainable and inclusive growth. Thisreflects a shift in approach as subsidies arebeing considered as an unavoidableinstrument for economic development asopposed to the earlier conservativewisdom of being a universal ‘bad’.However, the fact that fiscal conservatismdefined concerns like food and fuel subsidylevels and the FRBM has beeninstitutionalized in the FFC’s TORdemonstrates that the spread of themandate is over-ridden by the neoliberalpriorities of the government in power. Ifsubsidies are indeed to be scrutinised ongrounds of fiscal conservatism, then therevenue foregone due to variousconcessions and tax preferences tocorporates in the form of rebates, whichthe Ministry of Finance has viewed as an‘indirect subsidy to preferred tax payers’needs to be scrutinised first and foremost.Studies have shown that such concessionsare ten percent higher than the currentfiscal deficit of the Union government.

There are further disconcerting features ofthe TOR in blurring the distinguishinglines between the political priorities of theExecutive and the terms of reference of astatutory body like the Finance

Commission. One such feature is theinclusion of defence expenditure prioritiesof the current government as a bindingconstraint on the revenue pool availablefor sharing with the states. One canenvisage an alternate policy paradigm inwhich social expenditure needs would be agiven as opposed to defence. Thisdangerous trend of treating India’sburgeoning defence budget as sacrosanct,at a time when India has emerged as theworld’s single largest buyer ofconventional weapons (accounting for 12percent of global imports), needs to becountered both from concerns aroundmilitarisation and the question of socialpriorities.

Disinvestment in public sector enterprisesis once again a narrow political priority ofthe current executive in keeping with itsneoliberal preoccupations and is waybeyond the constitutional mandate of theFinance Commission. There are strongarguments questioning the rationale fordisinvestment of PSUs based on thedemonstration of the proposition thatreplacing public investment with privateinvestment does not necessarily lead togains in economic efficiency.

Assumption that the Goods and ServicesTax (GST) will be efficient and enforceablein a country like India, where productionand consumption base is highlyheterogeneous, has proved to beunworkable in the last few years. Therationale for GST makes the flawedassumption that all low production states

Paradigmatic Questions about the Mandate of the Fourteenth Finance Commission

are high consumption states. In reality,most low production states are also lowconsumption states and for such statesGST may not necessarily entail muchchange in resource constraints.The entireGST exercise is being propagated on thebasis of assumptions about the purportedexpansion of tax base of states due toimplementation of VAT. However, therehas been no comprehensive assessment ofVAT impact by the previous FCs or theUnion government.

The TOR is significant in its exclusion ofthe current state of the Indian economyand the global context. There is nomention of the global recession, thelinkages between India and the globaleconomy, the intense slowdown inmanufacturing as a result of these linkagesand the protracted crisis of agriculture inIndia which pre-dates the global crisis.

Lastly, ecological sustenance andenvironmental concerns are of primaryimportance and these should be central tothe formulation of policy goals. However,ademand on the Finance Commission toaddress climate change is not necessarily inline with its constitutional mandate.

Thus the TOR leaves little room for theFourteenth FC to keep itself free of theoverriding political and ideologicalpriorities of the government in power inthe consideration of the methods by whichit will decide on questions of resourcemobilization and revenue sharing. Theends will obviously determine the means.


We are discussing the 14th FinanceCommission (FC) and Centre-State fiscalrelations in the context of the broadtheme of Economic Governance andBudget Accountability. It thereforebecomes necessary to start with the roleplayed by Centre-State financial flowsincluding the flows through the FCs in thebudgets of the Central and StateGovernments.

Aggregate Centre-State (CS) transfersaccounted for an average of 44 percent ofthe Union Government revenue duringthe first four years (2010-11 to 2013-14) ofthe award period of the 13th FC. Theyaccounted for an average of 41 percent ofthe revenue of all States put together butthe transfers effected through the FCs(statutory transfers) accounted for only 27percent of the Union revenues and 26percent of the States’ revenue. About37percent of the Central revenues comingto the States are routed through otheragencies like the Planning Commission(PC) and the different Union ministries1.If we take only the grants from theCentre, statutory grants, i.e. grantseffected through the Finance Commissionaccounted for only 16 percent of the totalgrants. These grants are effected by way ofNormal Central Assistance (NCA),Additional Central Assistance (ACA),Centrally Sponsored Schemes (CSS),Special Packages etc. According to theRaghuram Rajan Committee report, FC’stransfers in 2011-12 accounted for 54percent of the Central transfers to Stateswhile plan transfers accounted for 46percent. Of the plan transfers, only 3.8

percent was transferred through thecriteria based NCA route.

From the above discussion, it comes outvery clearly that the FCs, the onlyconstitutional body meant for allocatingCentral funds to the States, has nowbecome a pale shadow of its constitutionalself. A major part of the blame has to beborne by the successive FCs themselveswho became willing accomplices of theCentral Government for eroding theirown role. They seem to have beengradually forgetting to whom they areaccountable. The FC under theConstitution is meant to be arbitersbetween the Central Government (CG)and the State Governments (SGs). Itimplies that they are accountable equallyto the CGs and the SGs. Over the period,FCs has come to assume that they areaccountable primarily to the CG whichappoints them than to the SGs. The CG,a party to the arbitration has adopted anumber of practices to debilitate theindependent role of the FCs. They tookupon the sole responsibility of appointingthe Chairman and the members of theCommission without holding anyconsultation with the States, the otherparty affected by the arbitrationproceedings though there is institutionalmachinery provided for consultation withthe States in the Constitution viz theInter-State Council. There is yet anotherbody, the National Development Council(NDC), though not Constitutional one,which the Centre can consult, if they sodecide.

The quality and independence of theChairmen and other members of thesuccessive FCs seem to be gettingundermined. In the past, we used to havelegal luminaries like K. Santhanam, (amember of the Constituent Assembly) andDr. P. V. Rajamannar, (Chief Justice ofTamilnadu and the author of aCommission on Centre- State relations).Till the 9th FC, there used to be a judicialmember in each Commission.Thatpractice is now dispensed with. In the pastthere used to be Chairmen who hadexperience as both Chief Ministers ofStates and Cabinet ministers at the Centre(Y. B. Chavan and Brahmananda Reddy).There also used to be financialadministrators familiar with the financesof State Governments (B. P. R.Vithal).There used to be independent economistswho were familiar with both the Centraland State finances like Prof. I. S. Gulati.

The composition of the recent FCs showsa definite tilt towards the Centre. TheChairman of the 13th FC was a formerFinance Secretary of the CentralGovernment who was also serving asadviser to the Finance Minister at theCentre. There was yet another memberwho was a former secretary of the UnionFinance Ministry. In the name of betterco-ordination between the FC and the PC,an economist from the PC came to beappointed as a member of recentCommissions. Above all, the otherindependent economists were also drawnfrom the charmed circle of Delhi,connected more with the Centre thanwith the States.

Pro Centre tilt of the Terms ofReference (ToR)Binding the Commissions by everincreasing number of Terms of Reference(ToR) is a measure increasingly adopted bythe Central Government whichundermines the umpiring role of the FCs.The ToRs are framed without consultingthe states. It is as though in addition to

* K. K. George is the Chairman of the Centre for Socio-Economic and Environmental Studies (CSES). Kochi, Kerala

1 Even the above figures are gross under estimates as the data used are based on RBI studies on State finances based on State budgets; these figures do not include Centraltransfers effected directly to local bodies and para-state agencies. Such transfers do not find a place in the budget documents of the State Governments.

Fourteenth Finance Commission in thecontext of emerging Centre–State FiscalRelationsK. K. George*


appointing umpires of its choice the rulesof the game are written by one of theteams in its favour each time. These ToRsare unnecessary as the Constitution itselfhas defined the ToR of the FCs. This bodyis to determine the allocation of Centralrevenues to be transferred to the States byway of sharing Central tax revenue andproviding grants to the States “in need ofassistance”.

From the 11th FC onwards, following the73rd and 74th Constitutional amendments,the FCs are asked to augment theConsolidated Fund of States tosupplement the resources of thePanchayats and the Municipalities in theStates on the basis of therecommendations made by the FinanceCommissions of the States. Of course, thePresident can refer any other matter tothe FCs “in the interests of sound finance”under Article 280. The Thirteenth andthe Fourteenth Finance Commissionswere asked to examine the needs of stateto manage ecology, environment andclimate change consistent with sustainabledevelopment. By no means can this ToRbe treated as “any other matter in theinterest of sound finance”.

More and not less number has been addedto the 14th FC’s ToR. In addition to theConstitutional impropriety, ToRs ofrecent FCs are objectionable as they areloaded heavily in favour of the Centralgovernment. TheToRs give a detailed roadmap on how and in which direction theFCs should proceed, thus limiting thefreedom and flexibility of thisConstitutional body. Besides, given thefact that the FCs in India do not have apermanent secretariat to provideinstitutional memory, the FCs with shortdeadlines for submitting reports cannot dojustice to the ever expanding ToRs.

Tax sharing: FC recommendations andactualsThe Pro-Centre tilt of the FCs broughtabout by their composition and the fettersimposed on them by the ToRs arereflected in the recommendations of therecent FCs. The 10th and 11th FCs fixed theStates’ share in total Central tax revenue

at 29.5 per cent. The 12th FC had steppedup the States’ share marginally to 30.5 percent. The 13th FC raised the state’s shareonly marginally, to 32 per cent. This isdespite the strong plea made by all theStates unanimously to raise their sharesubstantially in view of their vastlyexpanding expenditure commitments incomparison with those of the Centre.What is more, the stipulated 32 per cent isnot that of gross tax revenue but that ofrevenue after excluding Cesses andSurcharges and after deducting the cost ofcollection. Despite fixing the share ofStates in total Central Taxes by the 10th,11th and the 12th Commissions at 29.5 and30.5 percent, the actual share touched thestipulated shares only in one year (1997-98)during the entire 15-year period coveredby their awards. The gap between theactual ratios and the stipulated ratios hasbeen only widening in recent years as maybe seen from column 2 of Table1.

The exclusion of Cesses and Surchargesfrom the shareable pool of Central Taxesand the increasing resort to thesemeasures by the Central government maybe part of the reason for the lower shareof States in the Central tax revenue.According to the 12th FC’s estimate, theshare of Cesses and Surcharges were toincrease to 12 per cent during their awardperiod. The 13th FC had noted that theactual shares devolved to states as per theFinance Accounts have been less than thepercentages recommended by the FinanceCommissions. The Commission foundthat the actual shares devolved to states in2005-06, 2006-07 and 2007-08, the firstthree years of 12th FC award for whichFinance Accounts were then availableamounted to, 29.36, 28.95 and 29.6percent of the net sharable tax revenue ofthe Centre. They also suggested that“there is need for more transparency inthe current procedure to avoid anyinconsistency between the amountreleased to states in any year and therespective percentage shares in net centraltaxes recommended by FinanceCommission for that year”. It becomesnecessary that the 14th FC revisits theamounts actually allotted to the Statesonce the audited accounts are available.

The Commission should make it a pointto compensate the States for shortfalls ifany from the budget estimates of transfersbased on FCs recommended share.

The 13th FC did not take any measure toarrest the increasing tendency of theCentral government to keep a goodportion of Central tax revenue out of thereach of the State governments. In fact,they have assumed the high ratio of 14.9per cent for cost of collection and Cessesand Surcharges during the five years from2010-11, the period of their award, in theirforecast of Central revenue. All that theCommission could do was to exhort theCentral Government that they shouldreview the levy of Cesses and Surchargeswith a view to reducing their share in itsgross tax revenue. It is important that the14thFC take a closer look at the surcharges.The 14th Commission should suggest thatat least those surcharges which arecontinuing after two years must be addedto the divisible pool of the Centre.

Indicative ceilingsThe practice of giving indicative ceiling ofthe aggregate revenue transfers to States(Tax share + all grants including plan andnon-plan grants) from the Centre’s grossrevenue started with the 11th FC. Thereasons for placing such indicative ceilingsare not made clear by the Commissions.Such ceilings are not warranted either bythe Constitution or the ToRs of theCommissions. The 13th Commission fixedthe States’ share at 39.5 per cent, anincrease of just 1.5 per cent from the sharestipulated by the 12th Commission. Therewas a huge shortfall from the ceilingduring the first year of their award period.The ceiling has been crossed during thelast three years possibly due to theproliferation of CSS and resorting to theACA route.

Central deficits and tax collections:FC’s estimates and actualsThe Finance Commissions had beenwielding a big stick for disciplining theStates by limiting the volume of grants justenough to meet their deficits in theirnormative non-plan revenue accounts.There are other carrots and sticks reserved

Fourteenth Finance Commission in the context of emerging Centre–State Fiscal Relations


exclusively for the states in case they donot stick to the road map for fiscalconsolidation fixed by the Commissions.But no such stick is used, for the Centralgovernment when there are deviations,from the 13th FC, or its predecessors. Suchdeviations from stipulated deficits aregiven in Table 2. Increase in budgetdeficits of the Centre leads to inflationarypressures, interest rate hike and othermacro-economic consequences whichaffect the States’ budgets hard. There is astrong case for the States to becompensated for these consequences bysharing the deficits or (the additionalborrowings to cover the deficits) in excessof what is stipulated by the FC. Such anargument was made by (Gulati andGeorge, 1988)a.

Reasons for variations – increasingtax expendituresThe increase in deficits is partly onaccount of the shortfall in tax revenuemobilisation of the Centre. This shortfallin turn is partly on account of the largevolume of revenue foregone by theCentre. The revenue foregone in relationto GDP and total tax revenue collected hasbeen substantial as may be seen fromTable 3.

It is not that we are arguing against a totalban on tax exemptions . What is beingsuggested here is that the FinanceCommission should take an independentlook at the tax breaks to see whether andto what extent these tax breaks can bejustified from the point of view ofincentives or equity. We suggest that the14th Finance Commission should stipulatea limit for the taxes foregone at threepercent of the GDP or 25 percent of thegross tax collections, whichever is lower.

How much the States should get fromthe CentreAlmost all the states had been arguing forraising the states’ share in Centre’s grosstax revenue from the present 32 per centto 50 per cent. We also consider that thereis scope for substantially raising the shareof states in Central taxes. Firstly, theeconomic reforms in the country followedsince 1991 provided for privatisation,

public private participation and foreignparticipation. Economic services are moreamenable than social services, forprivatisation, public private participationand foreign participation. Most of the keyeconomic services are in the domain ofthe Central government, whereas, most ofthe social services are in the states’domain. There is more likelihood ofmarket failures and imperfections in socialservices than in economic services. In viewof the public good character of socialservices, the scope for privatisation andthe public private participation is limitedas compared to economic services.

Secondly, too much funds left with theCentre tempts it to make inroads intoStates’ subjects through the fiscalbackdoor. (Gulati and George, 1988)b. Theproliferation of Centrally SponsoredSchemes (CSS), Additional CentralAssistance and special packages are themeans for the backdoor entry into theStates’ Constitutional domain. In severalmeetings of the National DevelopmentCouncil (NDC), the states had beenarguing for limiting transfers under CSS.But the number of CSS and their outlayshas been going up rather steeply. Recentlythe Chaturvedi Committee hadrecommended a reduction in the numberand outlays on CSS. While the number ofschemes seem to have come down bymergers there appears to be nocorresponding decrease in outlays.

The need for a second look at thecommitted expenditure of theCentral GovernmentAccording to ToR3 (ii), the 14th

Commission shall have regard to thedemands on the resources of the CentralGovernment, in particular, on account ofthe expenditure on civil administration,defence, internal and border security,debt-servicing and other committedexpenditure and liabilities. Since defence,internal and border security are sensitivesubjects, we are not venturing to suggestany reduction in expenditure on theseheads. However, we would suggest to theCommission to explore independentlywhether there is any scope for ensuringdefence, internal and border security in a

more cost effective way. As forexpenditure on civil administration of theCentral Government, in our view, there isconsiderable scope for reduction as mostof the functions are passed on to privateand global participants. Besides, if theCommission decides to reduce the CSSand special packages to individual states,the scope for reduction in the Centre’sexpenditure on civil administration will beenhanced substantially.

Horizontal inequity and the Non-PlanRevenue Surpluses of StatesOur discussion so far shows that therecord of FCs in bringing about verticalequity had not been very commendable. Itappears out that their record in bringingabout horizontal equity too has been lessthan commendable. Given the largedisparities among the states, it is not justenough that the FCs bring about someprogressivity in their aggregate transfers. Ifthe Commissions have to make even asmall dent to the problem of disparities,they will have to provide for progressivityin the non-plan revenue surpluses. Theinfluence of the Finance Commission indetermining the size of the States’ plan isnot often appreciated. It is the balance inthe non-plan revenue account (balance incurrent account) provided by the FCswhich determines inter alia the size of theplan. What is also not realised is that it isthe policy of the Finance Commissionwith regard to tax sharing and grants, thatto a large extent determines this surplus inthe non-plan account.The per-capita nonplan revenue surpluses of states under theaward of the 13th FC and the per-capitaplan expenditure during the first threeyears of the Commission’s award period isgiven in Table 4. The table shows thatsome of the backward states like Bihar,Orissa, Uttar Pradesh, Rajasthan and WestBengal had been left with very limitednon plan surpluses, while the counterpartslike Goa, Haryana, Karnataka and Gujaratare flush with such funds. The implicationis that the less developed states start with amajor handicap with respect to their 12th

plan financing. This is reflected in the per-capita plan outlays of these States.



Annexure

Table 1

Fiscal Transfers from Centre to States (Figures in percentages)Year Ratio of Tax Share of States to Ratio of Total Revenue Transfers

Gross Tax Revenue of Centre to Gross Revenue of Centre

2005-06 25.78 35.10

2006-07 25.73 36.14

2007-08 25.59 34.72

2008-09 26.46 37.97

2009-10 26.39 38.59

2010-11 27.81 38.00

2011-12 28.87 43.89

2012-13* 28.53 48.03

2013-14+ 28.02 45.28

* Revised Estimates+Budget EstimatesSource:1. EPW Research Foundation, “Finances of Government of India”, Economic and Political Weekly (EPW), Different Issues.2. RBI Bulletin, Union Budget- Review and Assessment various years3. Figures of 2006-07 are revised estimates from RBI Union Budget Review and Assessment 2007-08.

Table 2Gross Fiscal Deficits, Revenue Deficits and Tax revenue of the Centre as ratio to GDP

13th Finance Commission’s - Estimates and Actuals

Year Fiscal deficit Revenue Deficit Gross tax revenue

Estimate Actual Estimate Actual Assesment Actuals

2010-11 5.7 4.9 3.2 3.3 11.4 10.2

2011-12 4.8 5.7 2.3 4.4 11.8 10.1

2012-13 (R.E.) 4.2 5.2 1.2 3.9 12.2 10.4

2013-14 (B.E) 3 4.8 0 3.3 12.7 10.6

Source: For Estimates, Report of the 13th Finance Commission; For Actuals, Union Budget documents

Table 3Revenue foregone by the Centre as a Percentage of GDP/tax revenue collected(Figures in Percentage)

Year as % of GDP as % of tax revenue collected

Corporate Personalincome income

tax tax Excise Customs Total Percentage to total tax revenue

2010-11 0.8 0.5 2.5 2.3 6 58.42

2011-12 0.7 0.4 2.2 2.6 5.9 60.01

2012-13 0.7 0.5 2.1 2.5 5.7 55.26

Source: Compiled by Centre for Budget and Government Accountability (March 2013) New Delhi



Table 4

Non-plan Revenue Surpluses@ and the Plan Outlays of States

States Post-Tax Total Total Per-capita Per-capitaTransfers Grants Non-Plan Non-Plan PlanDevolution in Aid revenue Surplus Revenue OutlaysNon-Plan (Rs. crores) /Deficit after SurplusesRevenue all Statutory (Rs.)Surplus (+) Transfers/ Deficit (Rs. crores)(-) (Rs. crores)

1 2 3 (1+2) 4 5

Andhra Pradesh 116092 13532.3 129624.3 15310 20458

Bihar 69177 14602.8 83779.8 8071 9038

Chhattisgarh 42796 6175.5 48971.5 19174 32807

Goa 8462 516.2 8978.2 61591 105987

Gujarat 120339 9682.9 130021.9 21533 29478

Haryana 109652 4270.8 113922.8 44935 35782

Jharkhand 34140 7238.4 41378.4 12552 16553

Karnataka 146665 11601.4 158266.4 25890 25882

Kerala 17113 6371.5 23484.5 7034 15889

Madhya Pradesh 85456 13324.5 98780.5 13607 14532

Maharashtra 189862 16302.8 206164.8 18346 18280

Orissa 41032 9658.8 50690.8 12084 14065

Punjab 20828 5540.3 26368.3 9518 18257

Rajasthan 78157 12949.8 91106.8 13277 18301

Tamil Nadu 117939 11366.9 129305.9 17925 15074

Uttar Pradesh 201782 26742.9 228524.9 11450 9937

West Bengal 49385 12638.7 62023.7 6790 10555

All States * 1450802 258581 1709383 14125

* All States include special category States also.@ after all Statutory Transfers by the 13FCSource: 1.Report of the 13th Finance Commission 2010-15 2. Plan Outlay figures from RBI State FinancesNote: Population figures of 2011 Census are used for per capita calculations.

References

a) “Centre-State Resource Transfers, 1951-84” in Essays In Federal Financial Relations, Centre for Development Studies, Trivandrum, 1988.b) “Central Inroads Into State Subjects”,ibid



Despite high growth for over four decades,persistent and pervasive developmentdeficits like hunger, malnutrition, poverty,lack of drinking water supply andinadequate sanitation facilities havecontinued to plague India. In such ascenario, the role of the state assumescentre-stage in all policy dialogues.

Need for Expanding the Fiscal PolicySpace in India through a Higher Tax-GDP Ratio

With regard to the total magnitude ofgovernment spending in India ascompared to the size of the country’seconomy, we need to recognize that thesame has been much higher in most of thedeveloped countries as well as in some of

the other developing countries like Braziland South Africa. For instance, for theyear 2010, total government spending as aproportion of the country’s GrossDomestic Product (GDP) was 27.2 percentfor India, while it was a much higher 39.9percent for Brazil and 46.3 percent for theOrganisation of Economic Co-operationand Development (OECD) countries onan average (see Chart 1).

A comparison of total governmentexpenditure to GDP ratios across theBRICSAM countries (presented in Table 1aand 1b) indicates that China, South Africa,Mexico and Brazil have expanded theirfiscal policy space over the decade from2001 to 2012, while that has not happenedin India. Also, a comparison of per capita

government revenues and expenditures (inpurchasing power parity US dollars and atcurrent prices) in India, other BRICSCountries and OECD Average (presentedin Table 2) shows that that the level of percapita government expenditure in India isfar short of the OECD average, Russia,Brazil, South Africa and even China. Itseems the level of per capita governmentspending in China has improvedconsiderably during 2001 to 2011, as aresult of which the gap between Chinaand India in this regard has widened overthe last decade.

In passing, we may also note that figuresfor China may as well be an underestimateas substantial expenditure is by localgovernments.

When the quantum of governmentspending is higher (as a proportion of theGDP of the country), the governmentdoes get a larger fiscal policy space; thisallows the government to carry outsubstantive public provisioning of essentialservices (like, education, health, drinkingwater and sanitation etc.) and otherdevelopment interventions for the people.The limited fiscal policy space in India hasled to low magnitudes of governmentspending on a range of social sectorswhere the vulnerable sections of thecountry’s population are likely to bedependent significantly on publicprovisioning. As a result of inadequacy ofbudgetary resources, public provisioning insocial sectors and social securityprogrammes in India seem to havesuffered from the problems of inadequatecoverage and unsatisfactory quality. Thepath of fiscal consolidation followed inIndia over the last decade has not allowedmuch space for expansionary fiscalpolicies; however, the low tax-GDP ratio inIndia could be improved in order toacquire larger space to increase publicexpenditure on development sectors. Theoverall magnitude of public resourcesavailable to the government in India has

* Praveen Jha is a Professor of Economics at the Jawaharlal Nehru University (JNU), New Delhi. He is also the Economic Advisor to CBGA.Rohith Jyothish works with the Centre for Budget and Governance Accountability (CBGA), New Delhi

How Many Miles Before We Get the FiscalPolicy Space Right?Praveen Jha and Rohith Jyothish*

Source: Compiled by CBGA from (i) IMF (2014), “World Economic Outlook - Recovery Strengthens, Remains Uneven”, April 2014 (ii) OECD (2014), OECD Fact book2014: Economic, Environmental and Social Statistics, OECD Publishing (iii) Government of India (2013), “Indian Public Finance Statistics 2012-13”, Ministry of Finance.

Chart 1 A Comparison of Tax-GDP Ratio and Total Government Spending as Percent ofGDP: India, Brazil and OECD Average (as of 2010)


Raising Innovative Funds for Development: An Alternate ViewHow Many Miles Before We Get the Fiscal Policy Space Right?

Table 1 Expenditure and Revenue to GDP Ratios for BRICSAM Countries

a. Expenditure-GDP Ratio (in %)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Brazil 36.1 39.2 39.0 36.1 37.7 38.0 38.4 38.3 38.1 39.9 39.2 40.4

Russia 33.7 36.3 34.9 31.7 32.8 31.1 33.1 34.3 41.4 38.0 35.9 37.5

India 26.8 27.5 28.5 27.2 26.2 26.5 26.4 29.7 28.3 27.2 26.7 26.9

China 17.9 18.9 18.6 18.1 18.6 18.9 18.9 20.4 23.2 22.8 23.9 24.8

South Africa 25.9 25.8 26.5 26.5 26.9 28.2 28.4 30.1 33.0 32.4 31.9 32.6

Mexico 21.2 22.1 22.5 20.3 21.7 22.6 22.8 25.6 27.2 26.7 26.3 27.2

Note: Total expenditure consists of total expense and the net acquisition of non-financial assets. Apart from being on an accrual basis, total expenditure differsfrom the GFSM 1986 definition of total expenditure in the sense that it also takes the disposals of nonfinancial assets into account.

Source: Compiled by CBGA from International Monetary Fund, World Economic Outlook Database, April 2014

b. Revenue- GDP Ratio (in %)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Brazil 33.5 34.7 33.8 33.2 34.1 34.4 35.6 36.7 34.8 37.1 36.6 37.7

Russia 36.9 37.0 36.4 36.6 41.0 39.5 39.9 39.2 35.0 34.6 37.5 37.9

India 16.9 17.7 18.2 18.9 19.1 20.3 22.0 19.7 18.5 18.8 18.7 19.5

China 15.1 15.9 16.2 16.6 17.2 18.2 19.8 19.7 20.2 21.3 22.6 22.6

South Africa 24.7 24.7 24.6 25.3 26.5 28.9 29.7 29.6 28.1 27.5 27.9 28.3

Mexico 18.2 18.8 20.2 19.1 20.4 21.6 21.7 24.7 22.1 22.4 22.9 23.5

Note: Revenue consists of taxes, social contributions, grants receivable, and other revenue. Revenue increases government’s net worth, which is the difference betweenits assets and liabilities. Transactions that merely change the composition of the balance sheet do not change the net worth position, for example, proceeds from salesof nonfinancial and financial assets or incurrence of liabilities.Source: Compiled by CBGA from International Monetary Fund, World Economic Outlook Database, April 2014

been inadequate in comparison to severalother countries, mainly owing to the lowmagnitude of tax revenue collected in thecountry; at around 17 percent of the GDP,India’s tax-GDP ratio constrains the fiscalpolicy space available to the government.

Within India’s total tax revenue, two-thirds come from indirect taxes and onlyone-third comes from direct taxes (pleasesee Table 3), which makes it moreregressive compared to that of many othercountries (that collect a much higherproportion of tax revenue from direct

taxes). India’s direct tax revenue as aproportion of total tax revenue at 37.7percent (for the year 2010-11) is far belowthe G20 average of almost 50 percent.Even developing countries such as SouthAfrica (57.5 percent), Indonesia (55.85percent) and Russia (41.3 percent) have amore progressive tax structure. Propertyrelated taxes (which include tax on wealth,tax on immovable property and estate,inheritance and gift tax) constitutes only0.40 percent of total tax revenue of thecountry as opposed to 4.85 percent for theBRICS average and 7.60 percent for G20

average. Hence, there is a need forexploring the possibility of stepping uprevenue collected from property relatedtaxes in India.

In this context, we should also note thatthe recent Union Budgets have notincorporated any strong proposal towardsreducing the significant amount of taxrevenue forgone due to the plethora ofexemptions in the central tax system(please see Table 4). Even the proposedtransition to Goods and Services Tax andDirect Taxes Code would bring in stability


Table 2 Per Capita Government Revenues and Expenditures: India, Other BRICS Countries and OECD Average

General Government Revenues Per Capita General Government Expenditures Per Capita(in US dollars, at current prices and PPPs) (in US dollars, at current prices and PPPs)

2001 2011 2001 2011

OECD Average 10751 15419 10716 16548

Russia 3341 7706 3395 7917

Brazil 2450 4272 2638 4564

South Africa 1704 3098 1784 3537

China 395 1897 469 2004

India 274 688 422 997

Source: Compiled by CBGA from OECD (2014), “General government expenditures and revenues per capita”, in OECD Factbook 2014: Economic,Environmental and Social Statistics, OECD Publishing. (http://dx.doi.org/10.1787/factbook-2014-87-en)

on stepping up the direct tax to GDP ratiofor the country over the next five years.

RecommendationsThere are certain measures that the Statecan take to enhance the tax-GDP ratio:

· Compared with other G20 countries,India has a very narrow tax base anda regressive tax structure. Thecontribution of Direct Taxes to totaltax revenue and of Property Taxeswithin Direct Taxes is low too. Betterproperty taxation which includes taxon wealth, on immovable propertyand estate, Inheritance and Gift Taxcan raise significant revenues.

· Staff shortages across various agencies(such as CBDT, CBEC and ED) thatare involved in tax collection andadministration has been estimated tobe around 30,000. Strengthening thetax administrative apparatus willensure better compliance.

· As per the Union Budget 2014-15, taxexemptions/concessions/incentives/deductions were at 5.0 percent ofGDP in 2013-14. Although some ofthem are justified, there is a need toreview of these clauses to understandwhich of them have sound economicand social rationale and which do

Table 3 Magnitude of Total Tax Revenue in India as % of GDP

Direct Tax as Indirect Tax as Total Tax% of GDP % of GDP Revenue as %

of GDP

1990-91 2.09 12.87 14.96

2000-01 3.31 10.77 14.08

2004-05 4.23 11.02 15.25

2005-06 4.54 11.37 15.91

2006-07 5.39 11.77 17.15

2007-08 6.39 11.06 17.45

2008-09 5.83 10.43 16.26

2009-10 5.82 9.63 15.45

2010-11 5.78 10.53 16.31

2011-12 5.57 10.73 16.29

2012-13 (RE) 5.73 11.49 17.22

2013-14 (BE) 5.97 11.9 17.87

Note: RE refers to Revised Estimates; BE refers to Budget Estimates; these figures can change in theActuals.Source: Compiled by CBGA from the data given in Government of India (2014), “Indian Public FinanceStatistics 2013-14”, Ministry of Finance.

How Many Miles Before We Get the Fiscal Policy Space Right?

in the tax laws as demanded for by theprivate investors but they might not helpthe government much in stepping up thecountry’s tax-GDP ratio.

Hence, the Fourteenth FinanceCommission should consider giving policydirections towards expanding the fiscalpolicy space in India, mainly through ahigher tax-GDP ratio, focusing specifically


Table 4 Estimated Figures for Revenue Foregone due to Exemptions in the Central Tax System

Revenue Corporate Personal Excise Customs Total Less Grandforegone as Income Income Duty Duty Export Total% of GDP Tax Tax Credit (Total-

related ExportCredit

Related)

2005-06 0.9 0.4 1.8 3.5 6.6 1.0 5.6

2006-07 1.2 0.4 2.3 2.9 6.7 1.3 5.5

2007-08 1.2 0.8 1.8 3.1 6.8 1.1 5.7

2008-09 1.2 0.7 2.3 4.0 8.2 0.8 7.4

2009-10 1.1 0.7 2.6 3.0 7.4 - 7.4

2010-11 0.8 0.5 2.5 2.3 6.0 - 6.0

2012-13 0.7 0.3 2.1 2.5 5.6 - 5.6

2013-14 0.7 0.4 1.7 2.3 5.0 - 5.0(projected)

Note: (1) 2005-06 figures are Provisional

(2) 2006-07 Figures are Estimated

(3) For 2005-06 and 2006-07, Cooperative Sector exemptions figures are also available. However, this has not been included for comparability of four categories ofexemptions, namely Corporate Income Tax (CIT), personal Income Tax (PIT), Excise Duty and Customs Duty for all years.

(4) Since 2009-10, Export Credit Related items are adjusted against the Custom Duty Exemptions figures, and adjusted data are provided under the heading‘Customs Duty’. Hence, since then separate data for ‘Less Export Credit related’ are not available.

(5) The ratios to GDP at current market prices (CMP) are based on the Central Statistics Office’s (CSO) National Accounts 2004-5 series

Source: Statement of Revenue forgone, Union Budget 2005-06 to 2014-15 (July 2014), Govt. of India.

not. This could augment therevenue mobilization.

· A comprehensive review of allDouble Taxation Avoidance Treaties(DTATs) to curb round tripping ofblack money, enhance financialtransparency and increase revenuemobilization.

· Tax amount raised but not realizedwas Rs. 4,92,637 crore at the end offinancial year 2012-13. Out of this,Rs. 82,360 crore were not underdispute, while Rs. 4,10,277 crore wereunder dispute. Tax arrears related tocorporate taxes amounted to Rs.1,52,456 crore and other incometaxes to Rs. 2,61,430 crore. The

Raising Innovative Funds for Development: An Alternate ViewHow Many Miles Before We Get the Fiscal Policy Space Right?

Supreme Court had effectivelyslammed the Union Finance and Lawministries in 2012 about the laxity infiling appeals by the government’slitigation machinery. Under thesecircumstances it is imperative that thegovernment addresses this.


Reduced Fiscal Autonomy in StatesSona Mitra*

Intergovernmental transfer of resourcesbetween national and sub-nationalgovernments has been a contentious issuein the domain of India’s fiscalarchitecture. To facilitate the mechanismof such transfers, the Constitutionprovides for an institution, the FinanceCommission (FC), in the Article 280 (3).The FC is formed once every five years,and, currently the 14th FC has takencharge with its Terms of Reference in thepublic domain.The Indian Constitution is

characteristically federal with certain‘unitary features’; however, the last twodecades have witnessed a reversedtendency of accentuated powers with theCentre and reduced fiscal autonomy,along with a roadmap of stringent fiscalconsolidation, at the sub-national level.Growing role of the PlanningCommission, rise in the number ofCentrally Sponsored Schemes and transferof resources to States tied to the broad /specific objectives of the Central Ministries

* Sona Mitra works with the Centre for Budget and Governance Accountability (CBGA), New Delhi

Table 1: Allocation of Grants by Finance Commissions for Non-Core Functions

Finance Heads of Non Amount Total Non-Core Non-Core FunctionCommission -Core Function (in Rs. Crore) Function Allocation as

Allocation % of Total(in Rs. Crore) Grants (FC + PC$)

to States

10th (1995-96 Upgradation 1362.5 2608.5 2.15to 1999-2000) Special problems 1246.0

11th(2000-01 Upgradation 3843.63 4972.63 2.12to 2004-05) Special problems 1129

12th(2005-06 Health 5887.08 44783.73 7.77to 2009-10) Maintenance of Education 10171.65

Maintenance of roads and bridges 15000Maintenance of Buildings 5000Conservation of forest 1000Heritage Conservation 625State specific needs 7100

13th(2010-11 Fiscal Performance Incentive 1500 102889 13.39*to 2014-15) Elementary Education 24068

Improvement in Performanceof Specific Union GovernanceInitiatives 9446Environment related 10000Maintenance of roads and bridges 19930State-specific needs 27945Renewable energy 5000Reducing IMR 5000

Source: Calculated by CBGA based on different Finance Commission reports*Percentage calculated against grants between 2010-11 and 2013-14, $ Planning Commission

have been the basis for regular criticism ofthe Central Government. In such abackdrop, the Finance Commission hasbeen looked upon by the States as themain source of untied transfers comprisingthe States’ share in central taxes andstatutory Grants-in-aid.

Reduced Fiscal Autonomy at the Sub-National LevelThe Terms of Reference (TOR) of the 14th

FC, in tandem with the previousCommissions, includes the three clausesadhering to its Constitutional mandate ofmaking recommendations, which are:

a) Extent of vertical and horizontaldistribution (between the Union andthe States) of net proceeds of taxes,


b) Principles which should govern thegrants-in-aid of revenue of the Statesout of the Consolidated Fund ofIndia, and

c) Measures needed to augment theConsolidated Funds of the States tosupplement the resources of the localbodies.

While the above recommendationsconstitute the core mandate of the FC,other items have also been included in theTORs of previous Commissions pertainingto State specific needs. The point ofconcern with successive FCs, specificallysince the 12th FC, has been related to thenature of devolution of grants-in-aid underspecific heads.

The grants-in-aid, which are over andabove the FC recommendation of sharinga specific proportion of the divisible poolof central taxes with States, have also beenperceived by the States as untied resources.However, in the recommendations of theFCs over the last decade, grants for core-mandate (or core functions) have beenreplaced by grants for certain non-corefunctions. The upgradation grant receivedby States through FC since the 7th FC hasbeen one of the non-core function grants.The upgradation grants were also allocatedby specific sectoral requirements of States.The 10th FC introduced the special problemsgrant in addition to the upgradation grant.In the 12th and 13th FCs, the heads fornon-core function grants to states havebecome more specific (Table1 on page 20).The upgradation devolution does notfeature; instead there are newer heads ofnon-core function grants, which show anincreasing share in total grants to States.

Increasing ‘Non-core mandate’ Issuesreflected in TOR of 14th FCIn this context it is important to note thatthe TOR of the 14th FC also soughtrecommendations on ‘any other matterreferred to the Commission by thePresident of India’. So long as the ‘otheritems’ pertain to the issue of maintaininga sustainable fiscal environment, it is aptfor the 14th FC. However, a list of 11‘consideration items’ have been includedin the TOR of the 14th FC, some of which

do not seem to be strictly related to theinterests of sound finances of the Unionor the States. These include issues such as,

i) The level of subsidies that arerequired, having regard to the needfor sustainable and inclusive growth,and equitable sharing of subsidiesbetween the Union Government andState Governments;

ii) The need for insulating the pricing ofpublic utility services like drinkingwater, irrigation, power and publictransport from policy fluctuationsthrough statutory provisions;

iii) The need for making the publicsector enterprises competitive andmarket oriented; listing anddisinvestment; and relinquishing ofnon-priority enterprises; and

iv) The need to balance management ofecology, environment and climatechange consistent with sustainableeconomic development.

These inclusions appear to be motivatedby the requirements to provide agovernmental position on the ongoingdebates on subsidies, cost recovery,environmental misuse and disinvestmentrather than by the requirements of theConstitutional mandate for the FinanceCommission and, therefore, constitute the‘non-core mandate’ for the 14th FC. Thus,it remains up to the 14th FC to decidewhether or not to ‘consider’ these items

for making recommendations in itsreport.

In the context of the ‘non-core mandate’for the 14th FC, some of the issuesconfronting the State Governments havebeen dealt with effectively, in therecommendations made by the B. K.Chaturvedi Committee (of the PlanningCommission, pertaining to restructuringof the Centrally Sponsored Schemes inthe Twelfth Five Year Plan) and thePunchhi Commission. These have beensupported by most States and the 14th FCcould take a position on whether itendorses any of these recommendations.

Also, some of the ‘non-core mandate’items for consideration of the 14th FC,such as, ‘pricing of public utilities’, couldbe best left to be dealt with by respectivesectoral policymakers and regulators.

Tied versus Untied Transfer ofResourcesThe concern here is whether the nature oftransfers made to the States are actuallyfree from conditionalities. It is importantto note that given an increase in the non-core function grants by the FinanceCommission (FC), rising tendencies ofcentralization, have not been restrictedonly to transfers made by the PlanningCommission. The broader trends indevolutions from Centre to States showthat the ratio between Non-plan grantsand Plan grants has declined substantially,indicating the increase in the tied nature

Chart 1: Ratio of Non-plan Grants to Plan Grants (in %)

Source: Calculated by CBGA from Budget documents of several years



Source: calculated by CBGA from Budget documents, RBI Finance Accounts and NAS estimates of several years

Chart 3: Transfers to States as Percentage of GDPof fund transfers to States (Chart 1). Thesudden peak reflected for 2005-06 in chart1 is mainly due to the withdrawal of theloan component of Central AssistanceforState & UT Plans, which wasrecommended by the 12th FC. Despitesuch changes, the ratio shows a somewhatdeclining trend over subsequent years.

The trends of central transfers to Statesshow that while total grants as aproportion of Gross Devolution andTransfers (GDT) have increased slightlyover the last two decades, Non-plan grantsas a proportion of both total grants as wellas GDT shows stagnation. While Plangrants have been increasing during thisperiod, the Non-plan grants, which form amajor part of the untied transfers toStates, have declined thus imposingrestrictions on States in their expendituredecisions. The share of States in grosscentral tax revenue, which is devolvedaccording to FC recommendations,hasalso followed the same pattern and doesnot show significant variations (Chart 2).

Similarly, when we look at GDT, totalgrants and non-plan grants to States asproportions of GDP, the trends do notexhibit much change (Chart 3). However,States’ share in gross central taxes aspercentage of GDP shows a marginal

Chart 2: Centre-state Resource Transfers: 2000-01 to 2013-14

* Gross Central Tax Revenue, inclusive of collections from Cesses, Surcharges, and taxes collected by UTsSource: Calculated by CBGA from Union Budget documents and RBI’s “State Finances”, several years


increase. That is also due to the increase inthe total tax revenue, as is evident fromthe increased tax-GDP ratio (Chart 3).This stagnation in fund devolution toStates as proportions to GDP has becomea cause of concern especially over the lastfew years. Between 2005-06 and 2009-10,the rate of GDP growth in India has beenin the range of moderate to high (7-8percent per annum). It was expected thatthe gains from faster GDP growth andbuoyancy of central taxes would trickledown to the States. But the transfers to

States, as evident from the tables below,have belied such expectations. Added tothese trends, Chart 3 also shows anincrease in the share of plan transfers toStates as percentage of GDP, thuscorroborating the argument of increasedconditionalities on resources transferred tothe States.

Given this caveat, one of the majorchallenges confronting the 14thFC wouldbe to address the need for increasinguntied transfers to the States so that theyhave greater autonomy in their spendingdecisions. Meanwhile, curbing States’power in order to maintain fiscal disciplinehas resulted in a number of problems forthe States, as the State governments haverefrained from making any long-termexpenditure commitments, especially insocial service departments, in order tomaintain fiscal discipline. Apart fromother problems, a major consequence ofsuch disciplining has resulted in theproblem of shortage of staff in the regularcadres of several State Governmentdepartments (this issue has been discussedseparately in another article in this issue ofBudget Track. This article limits itself to amere mention of the problem).

However, such tendencies are in tandemwith the kind of ‘fiscal consolidation’strategies that the State Governmentshave followed over the last decade. Intheir attempt to eliminate the Revenue


Source: calculated by CBGA from Budget documents, RBI Finance Accounts and NAS estimates of several years

Chart 4: Plan and Non-Plan Expenditure in Social Services as Percentage of GDP

Deficit, many States seem to have checkedtheir Non-Plan spending, particularly inSocial Services. This is also evident if welook at the Non-Plan expenditure patternson Social Service as percentage of GDP(Chart 4). The chart below clearlyillustrates that between 2000 and 2007,Non-plan expenditure on Social Servicesexperienced a sharp decline. The twopeaks, prior to 2000 and post 2007 aredue to the impact of the 5th and 6th PayCommissions respectively, which increasedthe salary component of the Non-Planexpenditure in Social Services. Freezingthe recruitments in regular cadres of theirdepartments for more than a decade now,and thus embarking upon a policy of fiscalconsolidation via decreased salary/wagecomponent of the Non-Plan expenditurehas become an easy tool for most states toachieve the mandated targets of fiscal andrevenue deficits.

The policies in the domain of Centre-Statesharing of resources over the last one andhalf decades seem to have neglected the


need for greater magnitudes of untiedresources being transferred to StateGovernments.The transfers of resourcestied to the conditionalities / objectives ofthe Centre (such as, those in the Centralschemes, Additional Central Assistance forState Plans and Special Central Assistancefor State Plans) have gone up. Suchtransfers essentially have an ad-hocapproach and do not enable the StateGovernments to increase, or even sustainthe existing levels of long-termexpenditure commitments. In this context,the Finance Commission is the onlyinstitution, which can address the problemof inability and/or unwillingness of theState Governments to make long-termexpenditure commitments. It is thusexpected that the recommendations ofthe14th FC would give sufficient attentionto this problem and explore the possibleremedies in the domain of sharing ofuntied resources with State Governmentsas well as provide incentives to the Statesto engage in long term commitmentstowards social sectors.


A view which has been propagated themost in the last few years with regard tothe public spending in India, is that under-utilisation and ineffective use of budgetaryresources is the biggest challenge in thisdomain; not the inadequacy of budgetaryresources for the social sectors. It is truethat in many sectors, the availablebudgetary resources are not being utilizedvery well and some amount of resourcesare also remaining unspent in theschemes. However, research studies byCentre for Budget and GovernanceAccountability and other civil societyorganisations have shown that – staffshortages in different functions(programme management, finance andaccounts, and most importantly service

providers) are among the principal factorscausing under-utilisation of budgetaryresources in the social sector schemes.An important issue for the 14th FinanceCommission is to address these keychallenges pertaining to the acute shortageof human resources (HR) in the StateGovernments, especially in thedevelopment sectors, in the relativelybackward States. The problem is rootedin the inadequacy of resources with theState Governments and theirunwillingness to fill up the staff vacancies.It has been argued that shortage of staff,especially in the regular cadres of the StateGovernment departments in sectors likeeducation, health, water and sanitation,rural development and agriculture, among

Erosion in Governance Capacity at the Sub-national LevelSubrat Das and Saumya Shrivastava*

* Subrat Das and Saumya Shrivastava work with the Centre for Budget and Governance Accountability (CBGA), New Delhi.

Table 1 Public Sector Employment across select countries

Government Staff as percentage of population

Country 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Brazil NA NA NA 5.3 5.3 5.6 5.7 5.8 5.9 NA

Canada 9.8 9.8 10.0 10.0 10.0 10.2 10.3 10.5 10.6 10.6

France 10.8 10.9 11.0 10.8 10.6 10.6 NA NA NA NA

Germany 7.5 7.4 7.4 7.2 7.0 7.1 7.1 7.1 7.2 7.3

India 1.8 1.7 1.7 1.6 1.6 NA NA NA NA NA

Mexico 4.6 4.5 3.9 3.9 3.9 3.9 3.9 3.9 3.9 NA

Russia Federation 16.6 16.6 16.5 16.4 15.7 15.2 15.1 1.5 14.6 NA

South Africa 3.2 3.1 3.1 3.1 2.4 3.3 NA NA NA NA

UK 9.5 9.6 9.9 10.0 10.1 10.0 9.8 9.7 10.1 10.0

Source: Compiled by CBGA from http://laborsta.ilo.org/STP/guest for data on Government Employees and http://databank.worldbank.org/ for data on Population

Notes: (1) The Public Sector is composed of a general government sector and a public corporation sector. This includes employment of general government sector as definedby the System of National Accounts (1993) plus employment of publicly owned enterprises and companies, resident and operating at Central, State (or regional) and locallevels of government.

(2) The general government sector is the total employment of all government units, social security funds and non-market Non Profit Institutions (NPIs).

(3) The employment of publicly owned enterprises and companies is the employment of all units producing goods or services for the market and which are mainly owned /or controlled by government units.

(4) Total population is based on the de-facto definition of population, which counts all residents regardless of legal status or citizenship—except for refugees not permanentlysettled in the country of asylum, who are generally considered part of the population of their country of origin. The values shown are mid-year estimates

others, is one of the main factors affectingthe coverage as well as quality ofgovernment interventions in these crucialsectors, across many States.

The available evidence indicates that Indiahas only 1.6 government personnel forevery 100 residents (including thepersonnel in the Union Government,Indian Railways, State Governments,Urban and Rural Local Governments andPublic Sector Undertakings) as comparedto much higher figures of 3.3 in SouthAfrica, 3.9 in Mexico, 5.9 in Brazil, 7.2 inGermany, 10.1 in the UK and 10.6government personnel for every 100residents in Canada (please see Table 1below).


How Low is India's Tax-GDP Ratio?

If we exclude the personnel under theUnion Government and central PSUs andlook at government personnel for every100 residents in various StateGovernments, we find that the figurevaries from 0.9 in Gujarat to 1.5 in Kerala(please see Tables 2 to 8 below).

In terms of the shortage of governmentpersonnel at the sub-national level inIndia, the sectors that have been worstaffected are mostly the developmentsectors, like, education, health, water andsanitation, rural development andagriculture, among others. It is importantto note here that, in these developmentsectors, the total number of governmentpersonnel available at present includes asignificant proportion of ‘contractual’ staff(hired on a contract basis for a few monthsor at the most a couple of years, who areusually less qualified and much less paid

Table 2 Number of GovernmentEmployees in Odisha

2006-07 2009-10 2011-12

TotalGovernmentStaff Strength 467517 442294 464179StatePopulationin Absolutenumbers 38887000* 40025000* 41974218GovernmentEmployeePer 100Persons 1.20 1.11 1.11

Source: Compiled by CBGA from Statement Presentedalong with the Annual State Budget under the OrissaFiscal Responsibility & Budget Management Rules,2005; various years* Population Projections as per ‘Population Projectionsfor India And States 2001-2026’, Report of theTechnical Group on Population ProjectionsConstituted by the National Commission onPopulation; May 2006

Table 4 Number of Government Employees in Gujarat

Previous Previous Ensuing YearYear 2011-12 Year 2012-13 RE 2013-14 BE

Total Government Employees** 540145 539881 539881

State Population in 2011 60,439,692

Government employee per 100 persons 0.894 0.893 0.893

Source : Statements Under The Gujarat Fiscal Responsibility Act, 2005; February 2013 FinanceDepartment, Govt. of Gujarat and Census of India 2011, GoI** Includes employees in Panchayats*Includes employees in Government Departments, Aided Institutions, PSUs, Panchayats and Urban localbodies

Table 5 Number of Government Employees in Andhra Pradesh (As on 31st March 2012)

Total Government Employees 1176609


Government employee per 100 persons 1.39

Source: Statement of Fiscal Policy to be laid on the table of the A.P. State Legislature in March 2013 andCensus of India 2011, GoI*Includes employees in Government Departments, Aided Institutions, PSUs, Panchayats and Urban localbodies

Table 6 Number of Government Employees in Madhya Pradesh (As on 31st March 2012)

Total Government Employees 736313


Government employee per 100 persons 1.01

Source: FRBM Statement of Madhya Pradesh 2013-14; Finance Department, Govt. of Madhya Pradeshand Census of India 2011, GoI*Includes employees in Government Departments, Aided Institutions, PSUs, Panchayats and Urban localbodies

Table 7 Number of Government Employees in Rajasthan

Number of government employees PreviousYear Current Year2011-12 2011-12 RE

Total Government Employees 847000 887000

State Population in 2011 68548437.0

Government employee per 100 persons 1.24 1.29

Source: FRBM Statement 2013-14, Department of Finance, Govt. of Rajasthan and Census of India2011, GoI*Includes employees in Government Departments, Aided Institutions, PSUs, Panchayats and Urban localbodies

Table 8 Number of Government Employees in Haryana

Previous CurrentYear 2012-13 2013-14 RE(Actual)

Total Government Employees 402916 387227


Government employees per 100 persons 1.59 1.53

Source: FRBM Statement 2014-15; Department of Finance, Govt. of Haryana and Census of India 2011,GoI*Includes employees in Government Departments, Aided Institutions, PSUs, Panchayats and Urban localbodies

Table 3 Number of Government Employees inKerala

2011-12 2013-14TotalGovernmentemployees 49956 502557

State Populationin 2011 33,406,061

GovernmentEmployeePer 100Persons 1.50 1.50Source: Appendix I to the Detailed BudgetEstimates of the Government of Kerala, VariousYears And Census of India, 2011




than those recruited as regular orpermanent cadre employees).

The evidence compiled by some of thethink tanks and civil society organisationsindicate that the problem of staff shortagehas grown into a crisis in governance ofthe country. For instance, severalnewspaper reports and micro-studiescommissioned by government andindependent organisations have pointedout that the shortages in quality humanresources is one of the major challengesfaced by the public delivery of services inIndia. Recently a report submitted byPublic Health Foundation of India to theMinistry of Health and Family Welfarereported that, in the healthcare sector ofthe country, shortages of skilled /technical professionals are far greatercompared to those of non-technical staffand that the overall shortage amounts tomore than 64 lakhs in absolute numbers.Several newspaper reports have quotedthe magnitude of shortage of healthprofessionals in different states. Jharkhandreported a shortage of 7000 doctors andMaharashtra reported at least 60 percentvacancies in its health sector. Even thestate of Kerala, where health indicators

Chart 1: Shortages of Staff in Madhya Pradesh (MP) and Odisha in Selected Sectors(in State Government Departments), 2012

Source: *Compiled from - Vikas Samvad (2012), Status of Maternal and Child Health Services in MP: A SituationAnalysis, Bhopal, MP, ** Calculated from - Govt. of Odisha (2012), FRBM Special Statement, State Budget ofOdisha for 2012-13 and information provided at www.icds.gov.in

are comparable to the Europeanstandards, also reports almost 50 percentvacancies in the health department.

Similarly for education, several studies andnews reports have pointed out major gapsin HR. Uttar Pradesh (UP) alone accountsfor a shortage of 3 lakh school teachers,followed closely by Bihar at 2.6 lakh, WestBengal (WB) at 1 lakh and Rajasthan at70,000. In Jharkhand almost two-thirdsand in Odisha 57.7 percent of thesanctioned posts for primary schoolteachers are vacant. Information based onsome civil society study reports andgovernment documents, also indicatesimilar shortages of staff in differentsectors in the relatively backward States(Chart 1).

It is important to note here that theproblem of staff shortage is likely to bemore acute in skilled / technical staffpositions (including all three kinds of suchstaff, viz. programme managerial staff,finance and accounts staff, and skilledservice providers) than the unskilled /support staff positions. Moreover, theextent of shortages is with reference to thenumbers of posts sanctioned in different

States, which are likely to be outdated inmany cases.

The consequence of the problem of acuteshortage of staff (in the governmentapparatus at subnational level) with regardto inadequate coverage and poor quality ofgovernment interventions in thedevelopment sectors in the country is notdifficult to visualize, but anotherwidespread manifestation of the same inthe last decade has been the poor resourceabsorption (or fund utilization) capacity ofStates in the development programmes inmany sectors.

Centre for Budget and GovernanceAccountability (CBGA)’s studies on someof the Plan schemes in the social sectors(in UP and Chhattisgarh) have revealedthat shortage of staff has weakened theState Government apparatus in thesesectors, which, as a result, has not beenable to utilize effectively the Plan fundsprovided by the Centre in the flagshipschemes. Shortage of staff is also one ofthe main reasons behind weakenforcement of several important centrallegislations (like, the PWDV Act, SC/STPrevention of Atrocities Act etc.). Themain cause for this problem of shortage ofstaff in the States seems to be rooted inthe kind of ‘fiscal consolidation’ strategiesthat the State Governments have followedover the last decade. In their attempt toeliminate the Revenue Deficit in theirbudgets (and even show a RevenueSurplus, in some cases), many States seemto have checked their long-termexpenditure commitments (particularly indevelopment sectors) by freezing therecruitments in regular cadres of theirdepartments for more than a decade now.

In order to address this serious challenge,the 14th FC needs to give clear policydirections to the states that they shouldnot approch fiscal consolidation on thebasis of compressing long-term, publicexpenditure commitments in developmentsectors.


Resource distribution between Centre andStates is determined by the provisions in theConstitution. The subjects are dividedbetween the Centre and States, and post73rd/74th Amendment, also further devolvedto districts, municipalities and panchayats.There is a constant tussle between theCentre and States for a fair share of theresources and the mandate to determine thisis given to the Finance Commission underArticle 280. Each five years the FinanceCommission defines the envelope of theshare between the Centre and States as wellas determines the broad parameters forsectoral allocations which states receive fromthe Centre’s share (Article 275) through thePlanning Commission and/or CentrallySponsored Schemes. The Centre, underArticle 282, can also give discretionarygrants as per its own prerogative.

On the state’s part they want a larger sharein the overall envelope so that they canautonomously design their own policies andprograms. At present, states feel constrainedin terms of resources earmarked as theirdirect share from the national kitty. Theyget only about 32 percent directly as theirown share and the remaining from thecentral pool. From the latter, the states getabout half the share through policies andprograms that is determined by the Centremostly via the Planning Commission.

Politics of Fiscal FederalismBeing a federal country the states areperhaps right in their assertion that theshare they get directly as their own resourcesis quite meagre and inadequate for them toplan boldly, especially for key social sectorallocations like health, education, socialwelfare, rural development etc., which areall primarily state subjects. In reality, thestates get only about one-third share of therevenues but share the burden of over two-thirds of the expenditure. This imbalance ofspending with limited resource generation

The Political Economy of Absorptive Capacity – Case of theHealth SectorRavi Duggal* sources, since the Centre appropriates the

main sources of revenues under its control,reduces state’s capacity to develop on its ownfree will. Given this asymmetrical fiscalfederalism, the politics within the states hasbeen changing over time with regionalparties becoming dominant and nationalparties increasingly becoming dependent onthe regional parties in coalitiongovernments. This political scenario is nowexerting pressure on liberalizing the fiscalfederalism towards a much larger share forstates but such a demand for increasedregional hegemony is often construed by theCentre as being “anti-national” andweakening the unified integrity of theIndian nation state.

The Centre’s logic is that if states get a largershare directly or they are given morelucrative revenue raising options under theircontrol there would be unhealthy rivalryamongst states leading to unnecessaryconflicts which would be a burden for theCentre to manage. Further the hugeregional imbalances of resources andcapacities across different states,backwardness in development etc. may getexacerbated if the Centre has less controlover distribution of resources. Also thestates’ fiscal management capacities arequestioned given that their ability to manageexisting resources is weak and an increasedvolume of resources may be beyond their“capacity to absorb”.

The Quest for Fiscal DevolutionPolitically the trend over the last two decadeshas been greater decentralization whereinmore powers and subject devolution hasmoved from Centre to States and fromStates to the local governments.Representative governance has beendevolved, administrative devolution hashappened but there is strong reluctance bythe Centre for fiscal devolution. Asmentioned earlier politics andadministration has regionalized and goodgovernance is not possible without adequatecontrol over fiscal resources. So the new

battle-ground in Centre–State relations isgoing to be greater fiscal devolution and thetask of the 14th and subsequent FinanceCommission is going to be achieving a moreacceptable balance in resource distributionboth between Centre and States as well asacross sectors, especially the share for socialsectors like health, education, social security,employment guarantee, food security, socialwelfare, dalit and adivasi development etc.,given that many of these entitlements arebeing legislated into rights.

During the UPA decade under the flagshipprograms such entitlements had increasedand have raised demand expectations.Resource commitments by the Centre tothese flagships have also seen an increase;but most of these programs being statesubjects, one has not seen in most states anysubstantial increases in state budgetcommitments. While allocations may haveincreased, gross underspending happens,and for this the Centre blames the states forlack of absorptive capacity. Is this allegationby the Centre correct? The story is not assimple as it is made out to be. The politicaleconomy of absorptive capacity is quitedevious. I will illustrate this through theexample of the health sector.

Absorptive Capacity Issue – the case ofthe Health SectorTo begin with I want to give the example ofhow underfunding destroyed one of the besthealthcare systems in India, the healthservices run by the Municipal Corporationof Greater Mumbai (MCGM). Rightthrough the sixties, seventies and eightiesbetween one-fourth and one-third of theMCGM core budget was committed topublic health and healthcare services.Almost everyone in Mumbai, especially forhospital care, utilized these services eventhough there was overcrowding and waitingin long queues. At the turn of the nineties,under structural adjustment reform policiesthe MCGM too came under its impact andsocial sector expenditures were compressedand a declining trend emerged. From 25

* Ravi Duggal works as the Country Coordinator for India with the International Budget Partnership.


percent of its budget for healthcare in 1991to 15 percent by 1996 and down to anabysmal 9 percent in 2014,2 the public healthservices of MCGM were starved of resourcesresulting in crippling them.

The first impact was on consumables likemedicines and diagnostic inputs for whichprescriptions were provided to procureprivately. Next was maintenance of facilitiesand equipment which created frustrationamongst staff and patients. The consequencewas that the middle class patients desertedthe system and opted for the emergenthealth insurance option, often withemployer support, for treatment in privatehospitals. This was a tremendous loss to thepublic health system as the voice of thesystem that kept it on its heels was snuffedout. As though this was not enough, theMCGM introduced user fees from 1999 andthis was the proverbial last straw that brokethe camel’s back. Next, a lot of the dedicatedhealth professionals left, new recruitmentsstopped and the public health system, from auniversal access system, became a system forthe poor, and consequently it became a poorand underfinanced system.This is reflectedin declining budget commitments over thelast two decades and which is at its lowesttoday.

Why I have narrated the Mumbai story isbecause there is an important message in itfor the Finance Commission to reflect upon- running any service delivery system requiresa reasonable amount of resources whichneed to be costed properly. The failure to doso in India has wasted huge resources in thesocial sectors, especially health andeducation. Health centres and hospitals,schools and colleges are set up withoutproper determination of unit cost of theseservices for the population it is supposed toserve. Budget allocations are made in an ad-hoc manner and consequently they do notresult in effective services and benefits thatreach people. For instance according toWHO, to run a robust comprehensiveprimary health care system with adequatesupport of secondary and tertiary services, acountry on average would need to invest

about 5% of its GDP. In India’s case weare still hovering around 1% of GDPdespite the UPA’s promise of upto 3%GDP commitment before the end of itsterm. Without such a volume of rationallyallocated resources, the healthcare systemwill continue to remain a targeted andselective health system which wouldprevent any significant progress towardsbetter health outcomes. The FinanceCommission needs to consider this veryseriously and push for budgetaryallocations which have a rational costbasis. The absence of the latter is whatbrings to the fore the question aboutabsorptive capacity.

To illustrate the problem of absorptivecapacity let us look at how resources areallocated. A Primary Health Centre is setup, staff sanctions are made and most staffrecruited, medicines, diagnostics etc. areprovided. But if we look at allocations theyare not adequate to meet the needs of thePHC which has to cater to 20,000 to30,000 population. Studies for instanceshow that medicine requirement foroutpatient care is Rs. 50 to 60 per capitaper year whereas the average PHC getsonly Rs. 8 to 10 per capita annually formedicines. Naturally this reducescredibility of the PHC and only the verypoor come to it. So there is clearlyunderfunding in the PHC budget. Furtherbecause of the poor conditions of thePHCs, it is difficult to find doctors andnurses, the key professionals, to work atthe PHC. So because sanctioned posts arenot filled, there is underspending. Thestory for rural, district and teachinghospitals is the same – underfundedbudgets, leading to loss of credibility, poorquality, frustration, sanctioned posts notfilled up, leading to underspending. Thisunderfunding and underspendingviciousness is the root cause of poor servicedelivery and this can certainly not betermed as lack of absorptive capacity at theservice delivery level.

The problem therefore is not theabsorption capacity but the bureaucracy

itself which does not have the capacity toplan and budget in a way that servicedelivery is appropriately structured andfinanced so it can meet the demands of thepeople. Further, the central and statebureaucracies are unwilling to let lose theircontrol over the healthcare delivery system,despite a lot of talk about decentralization.They may allow decentralized planningthrough the panchayats and even providesome untied funds for the directuse by thelatter, but they will never transfer fiscal,governance and management autonomyand control to units who directly provideservices and have to face the direct flak ofpeople day-in and day-out for inadequate andpoor quality services. This is where theproblem lies in resource allocation and use.Those who deliver care, who understandand know the situation and hence can planand budget the resources, have no role indecision making and those who governfrom the state and national capitals take alldecisions without having a clue to what theground realities are3.

To conclude, the question of absorptivecapacity is a convenient tool which thebureaucracy uses to circumvent real issuesthat are a cause of the underfinancing andunderspending of social sector budgets. Thelack of bottom up planning and budgetingthat is based on expressed needs anddemands of the community for whichservices are being provided, and the lack ofdecision-making power and autonomy togovern and manage the provider institutionsare the main causes for poor servicedelivery. This needs to be remediedimmediately if resources invested in publicservices have to realise the policy goals. The14th Finance Commission must engage withthese concerns and suggest mechanismswhich will strengthen local capacities to takecharge of fiscal management and determinetheir own budgetary requirements to fulfildemands of its communities.

The Political Economy of Absorptive Capacity – Case of the Health Sector

2 Budget documents of various years of the MCGM; also see DNA Mumbai edition 25-09-2013 Minimum Healthcare for Maximum City (pg 4) and Ravi Duggal: Anincrease in healthcare budget to 1991 levels is urgent need DNA 25-09-2013 (pg 4)3 Ravi Duggal: Sinking Flagships and Health Budgets in India, Economic and Political Weekly, Vol XLIV No 33, Aug 15 2009


The 73rd Constitutional Amendment Act(CAA), legislated in 1992, has been amilestone in establishing the “Institutionsof Local Self-Government” with theprimary task of providing autonomy to thePanchayati Raj Institutions (PRIs) forpreparing the local plans and projectsrelated to economic development andsocial justice. Through the CAA, PRIshave been given more politicallysupported, appropriate platform for ownresource mobilisation, decentralisedplanning and participatory budgeting.PRIs receive funds mainly from CentrallySponsored Schemes (CSSs), State PlanFund, and Grants-in-aid as perrecommendations of the State FinanceCommissions (SFCs) and Central FinanceCommissions (CFC), and Own SourceRevenue (OSR).

The own revenue collection of PRIs as apercent of Centre and State revenuescombined has declined to 0.27 percent in2007-08 from 0.33 percent in 1990-91.The data reflects that the PRIs are heavilydependent on the transfers from Centreand States. Looking at the finances ofPRIs in states such as Uttar Pradesh andRajasthan, the major sources of funds forthe PRIs have been the CSSs; they receivegrants from SFC and CFC, out of whichCSS comprises the lion’s share (roughly 75percent of the total receipt). The OSR isalmost negligible.

The CSS funds are essentially tied fundswhere PRIs do not have the discretion todecide their own expenditure priorities.In Kerala, however, major shares of fundsto local bodies are received as Grants-in-aidfrom SFC, CFC and State Plan Funds. InKerala nearly 40 percent of plan grants aretransferred to local bodies as untied fundsover which they have complete discretion.Further, it is also found that low revenue

Panchayat Finances: Issues before 14th

Finance CommissionJawed Alam Khan*

raising efforts by the PRIs are mainly dueto less delegation of power to collect taxes,lack of revenue potential of taxes or feesassigned to them and inefficient taxadministration for collection. There arealso problems in defining and demarcatingtax jurisdictions as per revenue generatingpotential.

Role of CFCs in augmenting theFinances of PRIsOne of the main objectives of CFC is torecommend measures to supplement theresources of the Panchayats andMunicipalities by augmenting theconsolidated funds of individual States,taking into account the recommendationsof the respective SFCs. But CFCs wereunable to adopt the SFC reports for itsrecommendation due to several problemssuch as lack of synchronisation in theaward periods of the CFC and SFCs, non-availability and poor quality of SFC reportsand lack of clarity with respect toassignment of power, authority andresponsibilities to local governments. Thefunds from CFC are being utilised by thelocal bodies for maintenance of core civicservices such as lighting, water supply andsanitation etc. and can’t be used for wagesand salaries by PRIs.

Many State governments are averse to thefiscal decentralisation process to PRIsbecause implementation of FRBM Act bythe States squeezes their total expenditure.State governments are already facingvertical imbalances in sharing of resourcesbetween Centre and States. There is ahigh proportion of committedexpenditure (like salary, pension andinterest payments) in the States’ budgets.Initiatives should therefore rest (to a greatextent) with the CFC to explore means ofaugmenting the resources of Stategovernments and also to deliberate on the

share of local bodies in the Centralgovernment finances.

13th Finance CommissionAs per the recommendation of 13th FC,along with the Basic Grant, the States areeligible to draw their allocations fromperformance grants, if they comply withthe certain conditions. These conditionsinclude Supplement Budget to the LocalBodies in the State budgets,comprehensive audit and maintenance ofaccounts of PRIs, appointment ofindependent Local Body Ombudsman,transfer of Local Body Grants (e-Transfer)within five days, prescribing qualificationfor appointment of SFC members, levyingproperty tax and other taxes to raise theincome of PRIs and specifying thestandard for delivery of basic services byPRIs.

Neither the budget documents nor thefinance accounts of most of the Stategovernments give details relating to theexpenditure incurred by PRIs (detailedheads or object heads wise). So far twelveStates (Assam, Bihar, Chhattisgarh,Gujarat, Karnataka, Kerala, Manipur,Madhya Pradesh, Maharashtra, Sikkim,West Bengal and Rajasthan) have openedPanchayat window in their State budgets.However, the efficacy of the system differsfrom State to State and a mismatchbetween functional assignments and fiscaltransfers continues to exist in almost allStates, except in Kerala. The Stategovernments should, therefore, makedistinct budget provisions for local bodiesin the State budget documents, and theexpenditures relating to PRIs should bereported in the finance accounts. TheComptroller and Auditor General of India(CAG) has prescribed a format in whichlocal bodies should prepare their budgetsand maintain accounts but the adoption ofthese formats in many States (like UttarPradesh, Rajasthan and Kerala) is still adistant dream .

As far as utilisation of overall grants by thethree previous FCs is concerned, it wasfound to be quite low. During first threeyears of 13th FC period, only 25 per cent ofthe total grants have been released to thePRIs. The PRIs have to draw theremaining 75 percent of the amount in*Jawed Alam Khan works with the Centre for Budget and Governance Accountability (CBGA), New Delhi


Key issues before the 14th FCOne of the major issues pertaining to localbody finances is proper decentralisation offinances and timely availability of funds toPRIs. Absence of proper and timelydevolution has a negative impact on thefunctioning of the PRIs, in terms ofcapacity of service delivery and executingthe plans for economic development andsocial justice. It is found that PRIs faceshortage of staff, poor infrastructurefacilities like office infrastructure(Panchayat Bhawan, furniture, computers,and electricity) and transportation facilityat all the three tiers. At present, the CFCgrant is being provided to the local bodiesonly for operation and maintenance ofwater and sanitation and there is arestriction imposed by the States that sucha grant should not be spent onestablishment cost. Such has led todifficulties in implementation of schemesby the PRIs. It has been observed thatPRIs are implementing a large number ofCentral schemes without adequateadministrative cost and core support forstaff, which is posing a major problem foreffective service delivery.

In terms of infrastructure for the GPs, it isfound that many GPs do not have theirown building (around 30 percent GPs werewithout building in 2008). Wherever thereis Panchayat secretariat, most of themhave just one room without otherfacilities. There are limited staff at alllevels of PRIs in many States and also mostof the staff are on deputation from (andhence controlled by) the line departments.All these have an impact on fundutilisation patterns resulting in lowutilisations as observed in UP, Rajasthanand Kerala. Most of the States lackaccurate and quality data/information onthe financial and operational performanceof local bodies.

Centre for Budget and GovernanceAccountability’s ongoing research in thisarea has revealed that in States like UttarPradesh (Barabanki and Balrampurdistricts), Rajasthan (Alwar district) andKerala (Trivandrum, Trissur), the problemof staff shortage in the District Panchayatsas well as in the relevant StateGovernment departments is acute. In theBarabanki district of UP the percentage of

Panchayat Finances: Issues before 14th Finance Commission

Table 1: Fund allocated by FCs and Amount Drawn(Amount in Rs. Crore)

Amount Allocated Amount Drawn Amount not Drawn

Commission PRIs ULBs PRIs PRIs

10th FC (1995-2000) 4380.93* 1000 3576.4 (66.5 %) 804.6 (33.5 %)

11th FC(2000-05) 8000 2000 6601.9 (82.5 %) 1398.2 (17.5 %)

12th FC**(2005-09) 18000 4500 16664.7 (92.6%) 1335.2 (7.4%)

13th FC*(2010-15) 63, 053 24466 15962.3 (25 %) *** 47091 (75 %)

Source: 13th FC report and Ministry of Panchayati Raj, GoINote: * Rs. 100 per capita of rural population,** from 1 April 2005 to 6 November, 2009,*** Up to 2012-13

next two years. The instances of low utilisation of funds were found in case of Kerala,Rajasthan and Uttar Pradesh. A major hurdle in this process has been the delay insubmission of utilisation certificates and delays in the release of funds to the States and thePRIs (Table 1).

Table 2: Utilisation of CFC Grants by PRIs in Kerala from 2010-11 to 2013-14(Amount in Rs. Crore)

Year Total Receipt Expenditure % offrom CFC reported by PRIs Utilisation

2010-11 Nil Nil Nil

2011-12 288.5 223 77.3

2012-13 414.9 379.7 91.5

2013-14* 490.7 239.5 48.8

Source: Data collected through RTI from Directorate of Panchayats, Kerala*Upto January 2014

PRIs in Kerala did not receive any fund from the 13th FC in the year 2010-11. With regardto utilisation of funds, the Table shows that the PRIs were not able to fully utilise funds inthe years 2011-12, 2012-13 and 2013-14. The percentage of utilisation was 77, 92 and 49percent respectively for these years (Table 2).

Table 3: Release of Grant to PRIs by Rajasthan Government in 2010-11(Amount in Rs. Crore)

Head Grants released by Grants released byCentre to States States to PRIs

Amount Date Amount Date

Central Basic Grant I 183.34 21.07.10 183.34 28.7.10

General Basic Grant II 183.34 25.01.11 183.34 31.01.11

Special Area Basic Grant I 1.69 21.07.10 1.69 29.07.10

Special Area Basic Grant II 1.73 25.01.11 1.73 31.01.11

Total 370.1 370.1

Source: Compiled by CBGA from http://www.cag.gov.in/html/localbodies.htm

In terms of fund flow mechanisms, States should make necessary arrangements forelectronically transferring Local Body Grants (e-Transfer) within five days of receipt fromCentral Government. Looking at the situation of fund releases in Uttar Pradesh,Rajasthan, West Bengal and Kerala, it is found that funds have been transferred on timein Uttar Pradesh and Rajasthan and delays for more than 15 days has been observed incase of West Bengal and Kerala. In UP and Rajasthan, funds are directly transferred toPRIs from Panchayat directorate. However in Kerala, money comes from the FinanceDepartment and flows to Department of LSGIs. It is then sent to Deputy DirectorPanchayat i.e. the GPs.


SCSP Implementation in Madhya Pradesh

vacancies against sanctioned post in PRIs, Rural Development accounts, Zilla Panchayat and District Rural Development Agency, amountsto 34, 19, 42 and 46 percent respectively. While looking at the percentage of vacancies against sanctioned post in Alwar district, the tableshows that percentage of vacancy is 26 (Table 5).

Table 4: Release of Grant to PRIs by WB Government to PRIs during the period 2010 to 2014(Amount in Rs. Crore)

Year Instalment Date of receipt Amount of Date of releases Total Receiptamounts of the Instalments Instalments to Panchayats

from Finance released toDepartment Panchayats

2010-11 129.93 19.07.2010 129.93 29.07.2010 130.73

0.8 10.09.2010 0.8 25.02.2011

2011-12 189.07 04.04.2011 189.07 08.04.2011 432.28

241.61 21.10.2011 241.61 11.11.2011

0.8 21.10.2011 0.8 25.11.2011

0.8 25.02.2012 0.8 27.03.2012

2012-13 246.73 11.07.2012 246.73 24.08.2012 533.03

24.01 21.08.2012 24.01 24.08.2012

0.8 20.02.2013 0.8 28.09.2012/26.03.2013

261.49 20.02.2013 261.49 05.03.2013

2013-14 188.28 15.05.2013 188.28 30.05.2013 477.05

288.77 06.03.2014 288.77 19.03.2014

Source: Data collected through RTI from Directorate of Panchayats, West Bengal

Table 5: Status of Vacancies in Uttar Pradesh (Barabanki district) and Rajasthan (Alwar district) in 2012-13

No. Sanctioned Post No. Filled Post No. Vacant Post % Vacancies

Barabanki (UP)

Panchayati Raj Department 158 114 54 34.2 %

Rural Development Department 389 315 74 19.0%

Zilla Panchayat 158 92 66 41.7%

District Rural development Agency 37 20 17 45.9%

Alwar (Rajasthan)

Zilla Panchayat 72 52 19 26.4%

Source: Compiled by CBGA from the respective departments in Barabanki and Alwar.

Table 6: Staff Position of Gainsari Block, Blarampur, Uttar Pradesh

Position Sanctioned Post Filled Vacant % of Vacancies

Block DevelopmentOfficer(BDO) 1 0 1 100

Additional Development Officer (ADO) 6 3 3 50

Gram Panchayat Officer 13 6 7 54

Rural Development Officer 11 2 9 82

Accountants 3 1 2 67

Clerks 2 1 1 50

Engineers 2 2 0 0

Total 38 15 22 58

Source: Compiled by CBGA from the Block office.

In some States, GPs have, at best, one Panchayat Secretary/Rural Development Officer per Panchayat. In two blocks (Gainsari andPuchperwa) of district Balrampur of Uttar Pradesh, for instance, one Panchayat Secretary has to look after 5 to 6 Gram Panchayats andvacancies for the post of Secretary/Rural Development Officer are more than 50 percent against the total sanctioned posts. Similarly, thevacancies for the post of Additional Development Officers, accountant and clerks have been found to be around 50 percent (Table 6).



The representatives of PRIs are engaged inthe implementation of a large numbers offlagship programmes of ruraldevelopment and education on a full timebasis and are often overworked. They arebeing paid a meagre honorarium.InKerala, the District Panchayat Presidentgets Rs. 7900; Block Panchayat Presidentwill get Rs. 7300 and Gram PanchayatPresident gets Rs. 6600 as honorarium permonth. Apart from this, there has beenan increased thrust to complete thephysical infrastructure (roads, schools,AWCs, health centres, water andsanitation etc.) in GPs through CSS.Additionally, there is a need to focus onoperation and maintenance of assetscreated by GPs. This would requiredevolution of a large quantum of untiedfund flow to GPs so that they can

maintain these assets. Therefore theburden of both maintenance of assets andhuman capacity has fallen on the localbodies. Given the restriction onexpenditure of funds, revenue situationfor local bodies are quite vulnerable.

Concluding RemarksThere is a need for restructuring the fiscalassignment to PRIs in a more equitableand efficient manner to achieve sociallyinclusive development of rural areas. Itwould be significant if the 14th FC couldfocus on improving functioning of thePRIs in terms of enhanced capacity forbetter service delivery and executing theplans for economic development andsocial justice. This could be achieved onlythrough increased powers of planning,expenditure and decision-making by the

PRIs. It would also require an augmentedrevenue situation for the PRIs to meetexpenses of staff, infrastructure facilities atall three tiers in terms of officeinfrastructure (Panchayat Bhawan,furniture, computers, and electricity) andtransportation facility. Additionally, it isalso advisable to remove the restrictionson the use of the Finance Commissiongrant by the rural local bodies to enablethe PRIs to hire the required core staff notonly for improving the service delivery butalso for maintenance of office accountsand local level data bank. In sum, giventhe persistence of deep-rooted problems inthe domain of fund devolution and staffshortage at the lower levels, especially inthe Gram Panchayats, in most States thisremains a specific challenge for the 14th

FC that needs urgent attention.



The Terms of Reference (ToR) of theFourteenth Finance Commission (FFC)includes that the Commission shall takeinto consideration “the need to manageecology, environment and climate changethat will be consistent with sustainabledevelopment” while making itsrecommendations. In the fiscalarchitecture of India, grants from financecommission are of immense importancefor states which need grant assistance tocater their environmental and climatechange concerns.

Taking into account the need formanaging ecology, environment andclimate change, the previous commissionthat is, the Thirteenth FinanceCommission with period ending in 2014-15, recommended incentive grants of Rs.5000 crore each for – Water SectorManagement, Forest Protection, andPromotion of Renewable Energy (See Note1). The Union Budget 2014-15 wasexpected, therefore, to set aside someresources (if not the entire Rs. 5000 crore)to be shared with the deserving States thisyear; but no such allocations have beenreported in the Union Budget, though themain budget for 2014-15 was presented inJuly and hence there was some time (i.e.during April to June this year) with theUnion Ministry of Finance to take stock ofthe situation. The Thirteenth FinanceCommission recommended grants-in-aidfor Environment and Forest sector havebeen provided for in the Union Budget,while there is no provision for the grants-in-aid meant for Renewable Energy (RE)(See Note 2). This was clearly a loss ofopportunity for states to benefit from therecommended financial grants to addressclimate change concerns throughmitigation efforts, at a time when Power

utilities often facing financial barriers indevelopment of Renewable Energy andinfusion of clean energy in power sector(which has share of 43 per cent in GHG’semissions in the country) is important toreinforce the states’ efforts for climatechange mitigation.

An analysis was carried out on the currentlevels of spending by various states onrenewable energy; from funds transferreddirectly from the Center to the States andthrough various Union Governmentschemes. Our analysis shows that there islack of adequate funds with states toimplement the renewable energy projects.Besides this, it was found that the statelevel spending needs to be more focusedon key priority areas for development ofRE.

Below are some suggestions to encouragefaster inclusion of RE into the powersector in the country, which could beconsidered by the FFC.

1. Need to release at least a part ofthe Renewable Energy incentivegrants to States upfrontThe recommendation of the ThirteenthFinance Commission on RE was aperformance based incentive grant, to bereleased to deserving States in 2014-15after installation of RE capacity by them.This could have proven to be a deterrentfor power utilities in the States as many ofthese have been in poor financial health.A detailed analysis of budgetary spendingby States on Renewable Energy during2010-11 to 2012-13 shows that several ofthe States with high levels of unachievedRE potential (such as, Jammu andKashmir, Odisha, Assam, Haryana andPunjab) have spent small amounts on this

sector (See Note 3). Given this scenario ofinadequate spending by the States on RE,it could have been difficult for cashstrapped power utilities to acceleratedevelopment of RE capacity (whichrequires high capital investment).

Hence, the Fourteenth FinanceCommission should consider releasing atleast a part of the incentive grant upfrontfor enabling the power utilities in theStates to meet the financial requirementsfor installation of the RE capacity; Statescould be asked to submit Work Plans forthe release of a part of the grants in thefirst year of the Commission’srecommendation period (i.e. 2015-16).

2. Including Off-Grid Applications ofRenewable Energy with installationof Micro-GridsInequities in energy access have beenwidening across States as well as betweenurban and rural areas within States. Outof the 29 States in the country, only nineStates had achieved 100 percent ‘villageelectrification’ as on 31st of August 2013,(See Note 4). However, as per the newdefinition of ‘electrified villages’, a villageis deemed electrified if at least 10 percentof all the households of the village haveelectricity access and electricity is providedto public buildings such as schools,panchayat offices, health centres,community centres and dispensaries.Clearly, the new definition of ‘electrifiedvillages’ is not comprehensive. Moreover,a large proportion of the country’spopulation living in remote areas does nothave access to grids and faces deficiency ofelectricity for economic activities.

In such a scenario, off-grid application ofRE offers a scalable and distributedsolution. Installation of micro-grids canprovide adequate grid connectivity to theRE generated through off-gridapplications. Analysis of budgetaryspending by States on Renewable Energyduring 2010-11 to 2012-13 shows thatStates with large numbers of un-electrifiedhouses, such as Arunachal Pradesh,Nagaland, Odisha and Tripura, have spent

Suggestions for the Fourteenth FinanceCommission on Renewable EnergyJyotsna Goel*

* Jyotsna Goel works with the Centre for Budget and Governance Accountability (CBGA), New Delhi


less than Rs. 10 crore in the these threeyears (See Note 5).

States can lead the investments in off-gridapplications as part of meeting theirelectrification targets; however, the grantrecommended by the Thirteenth FinanceCommission was meant only for gridinteractive RE. The Fourteenth FinanceCommission should considerincentivisation for off-grid applications ofRE with installation of micro-grids.

3. Incentive for Creation of RenewableEnergy Evacuation InfrastructurePresently, the responsibility of distributionof the power generated lies mainly withthe State Governments. Although theprivate sector developers currently own asmuch as 86 percent of the installed REcapacity in the country, they depend onthe State Governments for adequateevacuation infrastructure and gridconnectivity for the RE generated.

The development of evacuationinfrastructure and provisioning ofmeasures for grid connectivity for REsources is considered the responsibility ofthe State Transmission Utility (STU) orState Electricity Board (SEB). It has beenobserved that barring few of the Stateutilities, such as Maharashtra StateElectricity Transmission Company Ltd.,Rajasthan Vidyut Prasaran Nigam, andHimachal Pradesh State Electricity Board,the utilities in other States have notincluded evacuation infrastructure for REas part of their overall transmission ordistribution capital expenditure plans. (SeeNote 6). Even for those State utilities thathave better capital expenditure plans, lackof funds was found to be a majorchallenge in realization of their plans.Some of the critical challenges faced bySTUs in integrating RE with grid are –lack of evacuation infrastructure, need forreserves/energy storage to deal withintermittency in RE generation, and needfor robust communication systems totransmit real time RE generation data.(See Note 7). Capital expenditure,therefore, is a prerequisite for therequired infrastructure for RE. However,the analysis of budgetary spending byStates on Renewable Energy during 2010-

11 to 2012-13 shows that merely threeStates, viz. Andhra Pradesh, Assam andArunachal Pradesh, showed some amountsof Capital Expenditure on RE (See Note 8).

Given that RE generation requires largeamounts of capital expenditure; the FFCcould consider prioritizing the grants forthe capital expenditure plans of StateTransmission Utilities for installingevacuation infrastructure and gridconnectivity for the RE generated.

4. Incentives to States for achievingtheir targets on Renewable EnergyPurchase ObligationThe State Governments have mandatorytargets for meeting Renewable EnergyPurchase Obligation (RPO). Section 86 (1)(e) of the Electricity Act, 2003 initiated thepractice of RPO at the State level, whichmandates the power distributingauthorities to purchase a fixed percentageof power from RE sources. In terms of theprogress made by various States in meetingtheir respective RPO targets, it has beenreported that 22 out of 29 States havefailed to meet their RPO targets as of2012. (See Note 9)

The incentives proposed by theThirteenth Finance Commission werefocused on RE capacity addition across allStates without any reference either to theRPOs set by the SERCs or to the nationaltargets set by the National Action Plan onClimate Change. The Fourteenth FinanceCommission can help accelerate REcapacity addition by States by incentivizingthose States that meet their RPO targets;this could facilitate revenue generation byStates by selling the RE generated underthe existing mechanism of RenewableEnergy Certificates.

5. Strengthening of the State NodalAgencies for Renewable EnergySince the actual implementation of theprogrammes of the Union Ministry ofNew and Renewable Energy is taking placethrough the State nodal agencies, it isimportant that these agencies arestrengthened adequately in terms ofhuman resources and skills. There is aneed to facilitate the strengthening of theState nodal agencies for RE in the areas of

Suggestions for the Fourteenth Finance Commission on Renewable Energy

– assessment of RE sources, databasemanagement, their local administrativesetup and getting local self-governmentinstitutions (such as local Panchayats andMunicipalities) involved in planning andimplementation of RE projects.

The FFC could consider incentivizing thestrengthening of the State nodal agenciesfor RE in terms of their human resourcesand technical skills.

ConclusionIt is important to increase grants-in-aids tostates to promote RE development foraddressing issue of energy security andclimate change concerns at the local level.Given the fact that state level spending onRenewable Energy is poor, it is important,to financially strengthen stategovernments for RE development byadding grants-in-aid from the FourteenthFinance Commission over and aboveallocation by the Union Government.Intervention focus for FFC grants oninstallation of off–grid technologies inremote areas and strengthening of REevacuation infrastructure where REinitiatives already been taken-up.

Explanatory Notes1. The Thirteenth Finance Commission

had recommended the incentivegrant of Rs. 5000 crore for grid-connected RE based on the States’achievement in RE capacity additionover the first four years of theCommission’s recommendationperiod, i.e. from 1st April 2010 to 31st

March 2014. This performance basedincentive grant was supposed to bereleased by the Union FinanceMinistry to the deserving States in2014-15 based on States’ achievementin RE capacity addition during thefour years 2010-11 to 2013-14. (Source: Report of the 13th Finance Commission)

2. The Union Budget 2014-15 wasexpected, therefore, to set aside someresources (if not the entire Rs. 5000crore) to be shared with the deservingStates this year; but no suchallocations have been reported in theUnion Budget 2014-15 for RenewableEnergy. Source : Union Budget 2014-15,


Expenditure Budget Volume –II, Ministryof Finance, Grant-in-aid Transfers tostates, Demand No. 36

3. Total budgetary expenditure on RE inthe States, has been compiled bytaking into account both theexpenditures made through the StateBudgets and the direct transfers ofCentral resources for RE to State-level agencies that bypassed the StateBudgets. It is observed that thatseveral of the States with high levelsof unachieved RE potential, such as,Jammu and Kashmir, Odisha, Assam,Haryana and Punjab, have spentsmall amounts on this sector during2010-11 to 2012-13 (the period overwhich the States were beingincentivized by the ThirteenthFinance Commission to step up theirefforts for RE capacity installation).These estimates on spending by statesdo not include loans provided bycentral financing agency, IREDA forRE development with engagement ofproject developers. Unachievedpotential is estimated based on figuresof total estimated RE potential ofStates and installed capacity of RE ason 31.02.2013

Source for Budgetary Expenditure Data:State Finance Accounts for various years,Comptroller and Auditor General ofIndia, GoI and, Source for Data onUnacihieved Potential of RE: Annexure-I referred to in reply by MNRE to part (c)of Lok Sabha Starred Question No.31 for06.12.2013 regarding Power Generationfrom various Renewable Energy Sources.Available at http://164.100.47.132/Annexture/lsq15/15/as31.htm.

4. As per the Census 2011 figures onHousehold Amenities, the totalnumber of households in the countrywithout electricity has decreasedmarginally from 78 million to 75million. Even after the launch of theRajiv Gandhi Grameen VidyutikaranYojana, only nine States have achieved100 percent village electrificationeven on the basis of the newdefinition of ‘electrified villages’,which is far from being

comprehensive (a village is deemedelectrified if at least 10 percent of allthe households of the village haveelectricity access and electricity isprovided to public buildings such asschools, panchayat offices, healthcentres, community centres anddispensaries. (Source: Central ElectricityAuthority, Progress Report of VillageElectrification as on 31.01.2014.)

5. A close look at the budgetaryexpenditure by States on off-gridapplications, during 2010-11 to 2012-13, shows that States with poorcoverage of village electrification(such as Arunachal Pradesh,Nagaland, Odisha and Tripura) havespent less than Rs. 10 crore on RuralApplications of RE in the last threeyears. This estimates on spending bystates do not include loans providedby central financing agency IREDAfor RE development withengagement of project developers.(Source: State Finance Accounts ofvarious years, Comptroller and AuditorGeneral of India, GoI)

6. A Discussion Paper on barriers todevelopment of renewable energy inIndia, IDFC Ltd., February 2010.Available at http://www.idfc.com/pdf/publications/Discussion-paper-on-Renewable-Energy.pdf

7. Integrating renewable energy andenergy efficiency in the transmissionand distribution grids of Tamil Naduand Karnataka by New Venture India,2013.

8. Currently, the private sectordevelopers own as much as 86 percentof the installed RE capacity in thecountry; however, they depend on theState Governments for adequateevacuation infrastructure and gridconnectivity for the RE generated.States with high percent ofunachieved RE potential, such as,Kerala, Assam, Jammu & Kashmir,Manipur, Meghalaya and Nagaland,show relatively lower levels ofparticipation by the private sector as

of now. (Source: Central ElectricityAuthority Annual Report 2012-13)

9. Subsequent to the Electricity Act (EA)2003, the National Action Plan onClimate Change (NAPCC) aims toderive 15 percent of India’s energyrequirements from renewable energysources (non-solar) by the year 2020.The National Solar Mission requiresSERCs to set solar RPO targetsrequirement increasing from 0.25percent in the beginning of 2012-13to 3 percent by 2022.

“Indian States miss renewable energytargets: Greenpeace”. Article available at:http://www.thehindu.com/news/national/indian-states-miss-renewable-energy-targets-greenpeace/article4666827.ece

Suggestions for the Fourteenth Finance Commission on Renewable Energy


The hallmark of a vibrant democracy isthe strength and quality of participation byits citizens. Electing representatives toParliament and State legislatures every fiveyears is not enough. The real measure ofparticipation is the extent to which citizensare actively engaged in the political processduring those five years. Citizens shouldquestion representatives continuously andhold them to account. This is where ourdemocracy has failed, as the vast majorityof citizens vote but then withdraw, evenaftervoting for “a change.” It’s only few“activists” or CSOs who in a small wayengage with the system to monitor anddemand accountability.But this by itselfhas a very limited impact because it isspread too thin.

Public participation in the budget processis especially important, as budgets thatreflect the needs and priorities of acountry and its people are fundamental tothe success of any public policy, particularlypolicies related to service delivery. To helpensure that services respond to citizensneeds’ and are of good quality, citizens–the recipients of services – must engageeffectively throughout the budget process– from formulation to budgeting toimplementation to auditing.

Publication of a Pre-BudgetStatementParticipation during the formulation stageof the budget cycle is particularlyimportant, because it is here that strategicinterventions can help shape the budgetthat is finally placed in Parliament forapproval. Once placed in Parliament, theexecutive fiat prevents any significantchanges from taking place. Thus, if thebudget is to be representative of the needsand demands of citizens, the pre-budget

process must include extensiveengagement of civil society as well aslegislative members.

In our country, however, the executivedominates the formulation stage of thebudget process, limiting the extent andquality of the pre-budget discussion. Thepartisan spirit of legislative debates,together with the threat that thegovernment will collapse if the budget failsto pass, stifles a vigorous debate of thegovernment’s policies and priorities. Inthis context, the production of a Pre-Budget Statement – which sets out thegovernment’s budget strategy for thecoming year and is released atleast 3 to 4months ahead of the draft budget– iscritical to ensuring that a space exists,where civil society and legislators caninfluence budget priorities.

Yet, of the eight key budget documentsassessed by the International BudgetPartnership’s Open Budget Index, the Pre-Budget Statement is the only documentthat India fails to produce. Countries suchas Brazil, South Africa, and several ofIndia’s neighbors – including Afghanistan,Cambodia, and Indonesia – produce andpublish this important document. Activedissemination of a Pre-Budget Statementwould help generate public debate onpolicies and resource allocation, whichwould strengthen democracy,accountability, and ultimately, governancein the country.

Within our government, some may bewary that the publication of the Pre-Budget Statement, ahead of the tabling ofthe draft budget in Parliament, may resultin the disclosure of information – such aschanges in tax policy, which some

institutions might exploit and profit from.However, while the Pre-Budget Statementshould include the government’s fiscalobjectives over the medium-term, broadsectoral allocations, and expectations forbroad categories of taxes and revenues, itneed not get into the details of tax policy.

Quality of budget information at thesub-national levelIn India, the limited civil societyengagement with budgets happens mostlyduring the implementation stage andmostly as expenditure tracking,monitoring and social audit of programimplementation at the micro level, and asa critical analysis/assessment of budgetallocations and expenditures at the macrolevel. At the state and sub-state level this isconstrained because of inadequate and/orpoor quality budget information accessiblein public domain: often CSOs have tostruggle to get even the very minimalbudget and expenditure data to facilitatebudget/expenditure tracking andmonitoring.

Further in the budget approval stage alsowe do see some engagement by CSObudget groups, both to influence selectlegislators to raise questions as well as toget the media to engage with variouscritical budget issues. However, strongcitizen, CSO and legislative engagement inthe formulation and audit stages of thebudget process are the critical missing linksin budget accountability in India.The CAGmakes available all audit reports in publicdomain, but both civil society andlegislators have failed to use the auditreports effectively to demand appropriateaccountability. The use of audit reports inrecent years to expose and bring to justicevarious scams has demonstrated the huge

* Ravi Duggal works as the Country Coordinator for India with the International Budget Partnership.* Anjali Garg works as a Program Officer with the International Budget Partnership ’s Open Budget Initiative.

Strengthening Budget Transparency and Participation inIndia through the Pre-budget ProcessRavi Duggal and Anjali Garg*


potential for civil society and legislators touse audit reports to demand improvedaccountability.

In the last two decades, post the Right toInformation Act as well as significantefforts of the 12th and 13th FinanceCommissions, substantial progress hasbeen made to increase budgettransparency at all levels. There are a fewstates like Maharashtra, Odisha andAndhra Pradesh, where online budget andexpenditure data is available in publicdomain, even at the district andinstitutional levels through thekoshwahini / treasury accounting systems.A few other states also provide substantialinformation, but overall there is a longway to go to reach a level of transparencyand access that makes it easy for ordinarycitizens or the local CSOs confidentenough to participate in a significant wayin the budget process.

Civil society participation in planningand budgeting (e.g. ProgramImplementation Plans)Further, the devolution of governance hasalso created participatory spaces for citizenand CSO engagement, especially at thedistrict and sub-district levels. The PeoplesPlanning initiative in Kerala, whereinplanning and budgeting for about 40percent of the development budget isdone directly by gram sabhas and othercitizen committees is one good example. InNagaland, the VDCs engage directly withlocal development and budget allocations.But, these are exceptions.

There are also other opportunities forcitizen participation like the ProgramImplementation Plans (PIPs) underNRHM or monitoring committees forvarious untied funds given to panchayatsand to service delivery institutions. But,these opportunities have not been seized,partly for the lack of citizen politicization,but mostly because of inadequate budgettransparency during the formulationphase of the budget. For instance, ifcitizens could effectively engage with thePIPs and develop need-based plans andbudgets, as it happened in Kerala orNagaland, the budget formulation process

would be injected with vital insights andenergy which would result in a budgetstatement that would truly reflect theneeds of the citizens and wouldconsequently strengthen service deliveryand impact governance.

Recommendations for the 14th FinanceCommissionThe 14th Finance Commission is wellwithin its agenda to facilitate thestrengthening of pre-budget transparencyand participation through itsrecommendations. Also the 14th FC isperched on a historic moment, whereacross the length and breadth of thecountry, there is demand for improvedaccountability and governance,elimination of corruption, reduction in taxexemptions to corporates, significantlygreater allocations for social sectors likehealth, education, food security, SC andST welfare and social security. The 14th FCalso has an opportunity to be the Changeit wants to see in fiscal transparency andaccountability.

A few suggested recommendations for the14th Finance Commission to strengthenbudget transparency, accountability andparticipation:

· Recommending the publication of aPre-Budget Statement and relatedbudget information that will increasecivil society and legislativeparticipation in formulation ofbudgets

· Further strengthening the quality ofbudget information in line withSundaramoorthy Committee reportrecommendations

· Developing a rational basis forincreased and effective allocation ofresources to the social sectors so thatthe objectives of the programs areeffectively achieved.

· Institutionalized mechanisms forbetter access to quality budgetinformation at subnational level,especially district and sub-district level

· Making mandatory civil societyparticipation for planning andbudgeting (like PIPs, untied funds etc.)for programs which directly benefitcitizens through service delivery andbenefits.

Strengthening Budget Transparency and Participation in India through the Pre-budget Process


Transparency, accountability and publicparticipation have been recognized widelyas the pillars of good governance; andarguments in favour of transparent andaccountable governance through publicparticipation have been well establishedsince long. Further, issues pertaining totransparency and greater publicparticipation in development process havebeen widely discussed. It is understood thata transparent and accountablegovernment can lead to better socio-economic development of a nation.

Bringing transparency in all the activitiesof the government, particularly in policiesrelating to budgets, and in the overallfiscal domain i.e., from formulation toenactment to implementation of budgets,is quite important as it deals with publicmoney. Hence, public has every right toknow what the governments have beendoing with the money collected throughtaxes and otherwise. In a structure of fiscalfederalism like ours the ultimate burdenof revenue augmentation policies of theUnion or the state governments is borneby the public in the form of taxes.However, under the tax laws of this land,public cannot claim benefits equivalent tothe amount she/he pays as tax. In therecent past, serious concerns have beenraised on the issues relating to howgovernments have been prioritizing theirexpenditures in the annual budgets, whatare the mechanisms in place to ensurebudget transparency and accountabilityetc. Although at the Union level, India isfairly transparent with respect to itsbudgets and some opportunities do existfor the public (or organisationsrepresenting sections of population) toparticipate in the budget processes, a lotmore would be required to strengthenthese existing transparency mechanisms.

One would hardly object to the fact thatincreased public participation in thebudget process is fundamental to thesuccess of policies relating to servicedelivery. Public participation in the budgetprocess is highly important, as it reflectsthe needs and priorities of a country. Inorder to ensure quality services whichrespond to citizens’ needs, citizens mustengage throughout the budget process. Ithas been observed that because ofinadequate and/or poor quality budgetinformation available in the publicdomain at the sub-national level, even civilsociety organisations engaged in analysingbudgets have to struggle to get theminimal information about budgets.Further, disaggregated budget informationat the district and sub district levels isoften not shared in the public domain.This hinders citizens’ engagement in widerdebates and discussions on budgets and itspriorities. Although there has been anincreased demand by the community thatdata collected using public funds should bemade available more readily, and on time,to all for enabling policy debates andparticipation in the decision-makingprocess so that service delivery, itsaccountability and governance can beimproved upon. However, in the lastcouple of decades, especially post Right toInformation Act as well as significantefforts of various Union FinanceCommissions, substantial progress hasbeen made in increasing budgettransparency in the country.

Treasuries are the nodal offices for allfinancial transactions of the StateGovernment at respective district levels.They are the key authorities formaintenances of management accountingat the district levels. The Sub-Treasurieswork as an extension of the DistrictTreasuries at a local level within the

district. With the expansion of the scopeof the government over the years, therehas been a substantial increase in theannual budgets for each year (both for theUnion and State governments). In thisregard, until mid of nineties, the treasurieswere playing a crucial role in terms ofmaintaining accounts of the State,financial transactions and flows etc., as allthe monetary transactions used to happenthrough treasuries. Of late, with thegrowing nature of Centrally SponsoredSchemes (CSSs), the flow of funds fromthe Central government to the States andDistricts were by-passing the statetreasuries and directly routing throughstate and district autonomous societies.However, for improving transparency ingovernment accounts, time to time, theCentral Finance Commission have beenproviding certain sum of grants (as part ofAdministrative Upgradation grants) to theStates. Hence, computerisation oftreasuries was part of the Upgradationgrants of the Central FinanceCommission.

This process of computerisation oftreasuries dates back with the upgradationof Standards of Administration under theSixth Finance Commission (1974-79)recommendation. For the upgradation ofthe Fiscal Services and Treasury andAccounts, the Seventh FinanceCommission (1979-84) recommended forcapital expenditure through grants-in-aidunder Article 275 of the Constitution ofIndia to the tune of Rs. 5.86 crore to theStates of Himachal Pradesh, MadhyaPradesh, Bihar, Rajasthan, Tripura andUttar Pradesh. The Eighth FinanceCommission (1984-89) also recommendeda grant to the tune of Rs. 208.18 crore forthe establishment of additional sub-treasuries, structural additions andinfrastructure developments and stafftrainings. The Ninth Finance Commission(1989-95) recommended Rs. 140.77 crorefor the upgradation of the treasuries andaccounts administration. In the similarspirit, the Tenth Finance Commissionassessed a requirement of Rs. 23.10 crores,at an average unit cost of Rs. 10 lakh per

* Nilachala Acharya works with the Centre for Budget and Governance Accountability (CBGA), New Delhi

Policy Asks for the 14th FinanceCommission on Budget TransparencyNilachala Acharya*


treasury and also recommended explicitgrant for computerisation and automationof treasuries in various states. TheEleventh Finance Commission providedan amount of Rs. 200 crore forcomputerisation of the treasuries(procurements of computers, installationof hardware and software and relatedtraining expenses), along with other thingsunder the broad head grants for FiscalAdministration in 25 states of India.However, the demand for such grants bythe states was Rs. 2,087 crore.

As part of the Twelfth FinanceCommission grant, the State governmentof Arunachal Pradesh was given anassistance of Rs.10 crore for theconstruction of its treasury buildings.Similarly, under the e-Governance project,Bihar had received Rs. 40 crore forcollecting and using on-line data relatingto commercial taxes, registration,treasuries and sub-treasuries and theDirectorate of Provident Fund, with thedata centre located in the financedepartment. The project covered not onlyinternal computerisation of the aboveoffices, but also their district level officesacross the state. Further, the ThirteenthFinance Commission had alsorecommended a sum of Rs. 616 crore tostrengthen the data base at state, districtsand local level. In line with therecommendation of the ThirteenthFinance Commission (a mission modeproject for computerisation of StateTreasuries in the country), Government ofIndia had approved a project under thenew e-treasury scheme, with an allocationof Rs. 625 crore to bring abouttransparency and to enhance efficiency ofthe public delivery system. The schemewas supposed to be implemented in aboutthree years beginning 2010-11 fiscal, with aview to support States and UnionTerritories to fill the existing gap in theirtreasury computerisation, upgradation,expansion, and interface requirements,apart from supporting basiccomputerisation facility. The treasurycomputerisation project was expected tomake budgeting processes more efficient,improve cash flow management, promotereal-time reconciliation of accounts,strengthen Management Information

Systems (MIS), improve accuracy andtimeliness in accounts preparation, bringabout transparency and efficiency in publicdelivery systems, better financialmanagement along with improved qualityof governance in States and UnionsTerritories. The project essentially had twoobjectives. One is to computerise theexisting treasury system and other one islinking this treasury system with the web(online) so that it can facilitate interfacewith various stakeholders and atransparent system can be established,especially with regard to financialoperations.

As noted earlier, until very recently, flowof funds from the Union government tothe states and districts were bypassing thestate treasuries and directly getting routedthrough state and district autonomoussocieties. When funds are not flowingthrough the Treasury system at the stateutilisation of the same does not fall underregular audits by the office of theComptroller & Auditor General (C &AG) of India. Performance and FinancialAudits of expenditure in such cases werelargely carried out by independentempaneled chartered accountants. Thisflexibility with regard to auditing of theexpenditures in the CSS has given rise tostrong criticisms pertaining to weakeningof the transparency and accountabilitymechanisms from many quarters,including the C & AG of India. Further,several other concerns have also beenraised when the central funds bypass thestate budgets as this undermines theoversight role of the state legislature in thesphere of public expenditure.

In consideration with the persistentcriticisms of the proliferation of CSSs, acommittee headed by B. K. Chaturvedihad suggested a roadmap forstrengthening of institutional mechanismsof transparency for implementing these.The Committee had suggested doing awaycompletely with the practice of centralfunds bypassing the state budgets.Following the recommendation, theUnion Budget 2014-15 proposed that thecentral funds should be reflected in thestate budgets under all CSSs, instead ofany such amount being sent directly to the

autonomous bank accounts of the societies/ scheme implementing agencies. Thiscertainly is a significant step towardsenhancing institutional mechanisms oftransparency in the CSS.

Towards enhancing budget transparencyin the country, the Central FinanceCommission has been playing a crucialrole since long. In this context, we wouldurge the 14th Finance Commission torecommend appropriate amount of grantsfor strengthening institutionalmechanisms to ensure greater budgettransparency in the country.

Key expectations from the 14th FinanceCommission:

1. Strengthening the existingmechanisms of ‘Treasury System’in the States and providing userfriendly public access to treasuryinformation.

An important institutional mechanismthat exists in the country is ‘onlinetreasury management system’, which hassubstantial disaggregated informationrelevant to the common citizen. However,the treasury information is neithercompletely accessible by the commoncitizen nor is it provided in a user friendlymanner. There have been attempts by theprevious Finance Commissions tostrengthen the online treasurymanagement system in the country. Forinstance, the Thirteenth FinanceCommission had recommended grants tostrengthen the database at state, districtand local levels. As mentioned earlier,subsequent to this recommendation, amission mode project for computerisationof state treasuries in the country wasimplemented to bring about transparencyand to enhance efficiency of the publicdelivery system. However, little progresshas been made so far in this regard.Although most of the States have linkedtheir treasury with the web, very few stateshave been providing general access to thisinformation in a user friendly manner.Hence, in order to make available oftreasury information in the publicdomain, with easy access, grants to sub-

Policy Asks for the 14th Finance Commission on Budget Transparency


national governments would be urgentlyrequired.

2. Giving policy directions to StateGovernments as well as LocalGovernments to create budgetinformation database at theBlock-level and promote publicaccess to such database; whichwould enhance budgettransparency at the grassrootslevel.

Effective public engagement in the budgetprocess depends on the availability and

Policy Asks for the 14th Finance Commission on Budget Transparency

citizens’ access to timely and locallyrelevant budgetary information. In thisregard, strengthening mechanisms ofbudget transparency at various levels ofgovernance, particularly at the sub-national levels, have drawn considerableattention of the policy makers. Creatingbudget information database at the blocklevel (as block has been chosen as a unit ofdevelopment by the Twelfth Five YearPlan) and wide access to that informationwill not only help greater engagement ofpublic in planning and budgeting process,but also promote budget transparency. Weare suggesting that the budget informationdatabase should contain at least fourthings, along with other things. These are:

a) amount of funds sanctioned andreleased under different developmentprogrammes and schemes; b) timeline ofsuch fund sanctions and releases; c)implementing authorities/agencies of suchprogrammes and schemes; and d) list ofbeneficiaries. In order to make thisinformation available to the public forgreater engagement in the planning andbudgeting process, the appropriateauthorities should take steps to publicisethe same through writing on the noticeboards, writingon the walls of the publicinstitutions, stand posts at the work /project sites, uploading on the websites,preparation of glossaries and updatingthese in timely manner etc.


Summary of States’ Recommendations to the Fourteenth FinanceCommission*

State

Compiled by Rohith Jyothish and Saumya Shrivastava. Authors work with the Centre for Budget and Governance Accountability (CBGA), New Delhi.

Share in (Divisible Poolof) Central Taxes to beDevolved to States

Grants-in-aid for States Specific Purpose Grantfor States

Parameters in theDevolution Formula(for State-wisedistribution of CentralTaxes devolved toStates)

Andhra Pradesh(Undivided State)

40 per cent of thedivisible pool

· Grants equivalent toat least 4 per cent ofthe Central taxes berecommended for thelocal bodies

· Central share indisaster relief fund beenhanced to 90 percent from the present75 per cent

Grants to the tune ofRs.30,425 crore forvarious sectors likeeducation, health,irrigation, publicdistribution system,forests, women &children, developmentof backward andscheduled areas to plugcritical gaps

Area and the year1971 populationmay be assignedweights of 30 and20 per centrespectively

· 50 per cent of thedivisible pool

· Include all cesses,surcharges andwindfalls

Bihar · Non-core grants(other than Non-PlanRevenue DeficitGrant, Local Bodiesand Disaster ReliefGrants) should bedispensed with

· State Disaster ReliefFunds (SDRFs) shouldbe based on Hazard-Vulnerability-Riskprofiles

· Share of Bihar localbodies in total localbodies grant is 11 percent.

20 per centweightage topopulation, 70 percent to incomedistance and 10 percent to fiscaldiscipline


Gujarat Distribute at least 50 percent of the divisible poolof central taxes, cess andsurcharges

Conditionalitiesattendant to the grantsshould be reduced andthe release of the grants,which should have pan-India relevance, must berelated to performanceand outcomes

Allocate a 90 per centgrant for the NarmadaYojana under theAccelerated IrrigationBenefit Program

2011 population may betaken into account witha 25 per cent weightagefor resource allocationamong the states

Jharkhand Raise divisible pool to 36per cent

· Rs 5,186.61 crore forpanchayats forbuilding and staff, Rs7,040 crore for ULBs

· Indicative benchmarkcovering all transfersto be increased to 45per cent.

Rs 1,42,098 crore asspecific purpose grants

10 per cent weightage toa simple headcount ofpopulation and 5 percent to average growthrate of populationbetween 1971 and 2011,at least 5 percentweights should beassigned to the share ofSC/ST in thepopulation

· Raise divisible pool to50 per cent

· Target ‘revenueforegone’ throughexemptions anddeductions for bettermanaging size ofdivisible pool of taxes

· Surcharges and cesseslevied for more thantwo years should beshareable

Grants should bedisbursed as percentagesfrom gross tax revenuesof the Centre and not asfixed amounts. Theyshould be sector-specificand purpose-based sothat they benefit Stateslagging in social andeconomic indicators

Rs 7,339.34 crore forregistration, policedepartment, prisons,maintenance ofirrigation works, planfunding for upliftmentof adivasi groups,National Food SecurityAct, Fisheries Sector,Health Sector, StateDisability Initiative,National University forDisability andRehabilitation Sciences,Elder care in the state, e-citizens services ofvarious departments andmitigation of man-animal conflict

Kerala

Summary of States’ Recommendations to the Fourteenth Finance Commission

State Share in (Divisible Poolof) Central Taxes to beDevolved to States




Madhya Pradesh · Raise divisible pool to50 per cent

· 50 per cent share incesses, surcharge,telecom license fee,spectrum auction andpetroleum mininglicence fee

Fiscal deficit should becompensated throughthe state’s share ofgrants and central taxes.

· Narmada Action Plan

· No more CentrallySponsored Schemes

2011 census instead ofthe 1971

Odisha · An increase in thestate’s share fromcentral revenue from32 to 50 per cent

· A guaranteed floorlevel of tax devolutionof at least 90 per centof the projectedamount

· Rs 4.6 lakh crore

· Modify the sharingpattern of SDRFbetween the Centreand the state to aratio of 90:10

· In order to augmentthe consolidated fundof the state tosupplement theresources of the localbodies, the existingshare of central taxesshould be increased to5 per cent

· Conditions attachedto specific grantsshould be kept to theminimum so thatstate can avail thesegrants easily

· Fiscal discipline maybe given a weightageof 20 per cent inorder to balance ofthe overall approachof equity withefficiency

· The area factor assuggested by theGovernment shouldbe defined asscheduled area plusthe low populationdensity with a weightof 10 per cent

· 1971 populationshould be adoptedand the share of SC/ST population shouldbe taken into accountin a compositepopulation factor witha weightage of 20 percent






Punjab Share of states at 50 percent

· Sought debt reliefgrant of Rs. 24,813crore to overcomefinancial challengesand achieve stablegrowth

· Rs. 8,775 crore foragriculturediversification

· Rs. 24,813 crore asDebt Relief Granttowards outstandingSmall Savings andGovernment of India(GoI)

State specific grant ofRs. 9,639 crore

· Demanded weightageof 15 per cent indevolution criteria forwelfare of SC/STcommunities

· The weightage of theareas must beincreased fromexisting 10 per cent to15 per cent in thedevolution criteria tomeet the higheradministrative costs todeliver similar level ofpublic service acrossthe country

Vertical devolutionshould be enhanced to50 per cent of thedivisible pool of thecentral taxes

· Allocation of 5 percent of the divisiblepool for local bodies

· An additional grant ofRs. 17,927 crore wassought for the roadand buildings sector

Rajasthan On horizontaldistribution, it wassuggested thatpopulation basis be 1971with a weight of 25 percent on the basis ofcomposite index of sixfactors, fiscal capacitydistance 40 per cent,fiscal discipline 10 percent and area 25 percent weighted by theinverse of the density ofthe population.

Proposals relating toState Specific Grantsmainly in drinkingwater, health and solarprojects amounting toRs. 26,562 crore weremade






Tamil Nadu · Vertical devolutionshould be 50 per centof the divisible pool ofthe central taxes

· Overall transfersshould be substantiallyincreased by bringingall Cesses&Surcharges into theshareable pool

· Higher proportion offund flow from theCentre to statesshould be on the basisof therecommendations ofthe constitutionallymandated FinanceCommission ratherthan through othermechanisms. TheCalamity Relief Fundshould be fully fundedby Union and if not,at least to the extentof 90 per cent with anannual increment of10 per cent

· The State alsorecommendedallocation ofrequested to allocate 5per cent of thedivisible pool for localbodies with greaterweightage for urbanlocal bodiesproportional to thedegree of urbanisationin each state

For horizontaldistribution amongstStates, it was suggestedthat 1971 populationmay be assigned a weightof 33.3 per cent, fiscalcapacity distance 33.3per cent and fiscaldiscipline 33.3 per cent






Shareable pool of taxesshould be raised to 40per cent

· No conditionalitiesfor grantsrecommended forthe functioning ofthe Local Bodies asthey became difficultto fulfill and thelocal bodies couldnot avail of thegrants recommendedby 13th FinanceCommission

Uttarakhand Incorporate forest coveras an additionalcriterion for horizontaldevolution, with anassigned weightage of 10per cent.

· 14th FinanceCommission wasrequested to continuewith the plan andnon-plan financing ofSpecial CategoryStates even if theyshow better results onhuman developmentindices, as thesemountainous statesforming a class byitself have largerexpenditurerequirements onaccount of theirtopography

· State specific ‘specialproblems’ and ‘up-gradation of standardsof services’ wasprojected atRs.2,910.38 crore

· ‘Green Bonus’ of Rs2,000 crore






Uttar Pradesh Share of central taxes tothe States as part ofvertical devolution beraised from 32 per centto 36 per cent

· Special assistance hasbeen sought for theState to tide over thedifficult financialsituation accentuatedby theimplementation ofthe FinancialRestructuringProgramme of theDISCOMs

· Demanded thatinflation factor betaken into accountby the Commissionfor recommendinggrants

· Proposed to increasethe allocation for theLocal bodies to 5 percent of the divisiblepool

Horizontal sharing ofthe divisible pool forallocation of sharesamongst States be madeon the basis ofweightage of 25 per centfor 2011 population, 5per cent for area, 50 percent for fiscal capacityindex and 20 per centfor fiscal discipline

Rs 2,55,000 crore forfive years (2015-20) toimprove the state’sphysical and socialinfrastructure andvarious developmentworks

Special Purpose Grant of

Rs 51,000 crore for

servicing the stock of

National Small Scale

Fund (NSSF) loans

outstanding as on March

31, 2013

West Bangal






Commitments on Fiscal Federalism and Taxationin Election Manifestos of Select Political

Parties for 16thLok Sabha Elections

FiscalFederalismand 14th

FinanceCommission

- Substantialincrease inuntiedfunds;

- Encourage-ment toPanchayatsto raise theirownresources sothat theycan consultgram andward sabhasand decidehow andwhat tospendmoney on;

- Strengthe-ning gramsabhas.

Create‘RegionalCouncils ofStates’, withcommonproblems andconcerns,with a view toseekingsolutions thatare applicableacross a groupof states.

-Swaraj Bill to devolvepower to gram sabhasand mohalla sabhas;-Gram and mohallasabhas to be givenuntied funds to use itaccording to theirown needs andpriorities;

-Amending Articles 355 and356 to prevent theirmisuse;-Review the Terms ofReference of 14th FinanceCommission and seekapproval of the same fromthe Inter-State Council;-Devolving 50 per cent ofthe total pool of collectionof Central taxes to theStates;-Raising States’ share ofmarket borrowing to 50 percent; -Make non-tax revenues ofCentral government a partof the divisible pool andintroduce constitutionalamendment for this; -States to have a say in thecomposition and terms ofreference of the FinanceCommissions;- Transferring CentrallySponsored Schemes underthe State subject with fundsto the States;-Setting a target minimumlevel of Local Self-Government expenditureto GDP; funds devolved tothe local bodies to berouted through the StateGovernments.

-A more transparentrelease of non-conditional grants tostates;-Limit the share ofgrants under Article275 which is at thediscretion of Centralgovernment to 7 percent and ensure thatmore resource transfersoccur through theFinance Commissionrecommended taxdevolution route;- Transfer of subsidiesburden to the states willbe followed by adequateresource transfers aswell;-Reject RaghuramRajan Reportparticularly withreference to resourceallocation based onindex ofunderdevelopment;-5 per cent of theshareable Central Poolwill be allocated to localbodies.

IndianNationalCongress(INC)

BharatiyaJanata Party(BJP)

Aam Admi Party(AAP)CPI (M) All India Anna

Dravida MunnetraKazhagam(AIADMK)

Compiled by Rohith Jyothish. Rohith works with the Centre for Budget and Governance Accountability (CBGA), New Delhi.


IndianNationalCongress(INC)

BharatiyaJanata Party(BJP )

Aam Admi Party(AAP)

CPI (M) All India AnnaDravida MunnetraKazhagam(AIADMK)

Taxation -Enactment ofGST and DTCwithin a year;-Ensureavoiding theunpredictablerisk ofretroactivetaxation;-All taxes,Centre andState, that gointo anexportedproduct mustbe waived orrebated;-Clear policy ontax treatmentof foreign firmsand Mergers &Acquisitions(M&A)transactionswhile ensuringthat taxes arepaid by MNCsin thejurisdiction inwhich theprofits areearned.

-Provide anon-adversarialandconducive taxenvironment;-Rationalizeand simplifythe taxregime-Overhaul thedisputeresolutionmechanisms;-Bring onboard allStategovernmentsin adoptingGST,addressing alltheirconcerns;-Provide taxincentives forinvestmentsin researchanddevelopment,gearedtowardsindigenizationof technologyandinnovation.

-Simple,progressive andstable tax structureto raise tax-GDPratio;-No more routinetax amnestyprogrammes andstringent measuresto recover taxesfrom evaders

-Tax speculative gains byrestoring Long TermCapital Gains Tax andincreasing SecuritiesTransaction Tax;- Increase wealth tax forthe super-rich andintroduce inheritance tax;-Plug the Mauritius routethrough the Double TaxAvoidance Agreement;-Corporate profit taxshould be increased byincreasing statutory ratesso that effective tax ratesare not low causing hugeloss of revenue;-Taxation of capital gainsfrom the internationaltransfer of shares inforeign company withunderlying assets in India;-GST to be implementedonly after ensuring ahigher rate for the statesso as to at least partiallycorrect the present fiscalimbalance;-Amending SEZ Act andRules to do away withmyriad tax concessions andregulate land-use.

-Review of DoubleTaxation AvoidanceAgreements (DTAA) todeal with laundering ofblack money;-Loopholes in theTransfer Pricing Policyare being exploited toevade tax;-Enhance tax revenuesby eliminatingloopholes;-The Finance Bill 2013amended Section 40 ofthe Income Tax Act toprovide that anyamount paid by way offee, charge, etc. whichis levied exclusively ona State GovernmentUndertaking, by theState Government,shall not be allowed asdeduction for thepurposes ofcomputation of incomeof such undertakings.This provision has hurtthe non-tax revenuesof Tamil Naduconsiderably. GoI willearn additional incometax in the process. Theprovision also does notapply to Central PSUs.This Amendment willbe withdrawn;-Raise income taxexemption limit to Rs5 lakh p.a.;-Cesses and surchargesto be shared withStates


Introduction:

This note is an attempt to analyse some ofthe key legislations and policydevelopments that came to fore in pastfew months in India. It also discusses somerecent international events and policydialogues development, some of whichmay have crucial implications for India.The article is divided in three sections.Section I talks about three legislationspassed in the past year. Section II outlinessome draft development policy measuresthat were approved by the Union Cabinet.Section III describes some major globalpolicy developments in recent times.

I. Key Legislations:

Last year in the monsoon session of theParliament (5th August to 7th September,2013) three landmark legislations relatingto food security, land acquisition anderadication of manual scavenging werepassed.

The National Food Security Act, 2013

The National Food Security Act receivedthe assent of the President on 10th

September, 2013. The Act seeks ‘to providefor food and nutritional security in human lifecycle approach, by ensuring access to adequatequantity of quality food at affordable prices topeople to live a life with dignity and for mattersconnected therewith or incidental thereto’.

Salient features of the Act:

· The bill ensures the right to receivefive kilograms of foodgrains perperson per month at subsidised prices,to persons belonging to eligiblehouseholds under Targeted PublicDistribution System. Householdscovered under Antyodaya AnnaYojana will also be entitled to thirty-

five kilograms of foodgrains perhousehold per month at subsidisedrate.

· All pregnant women and lactatingmothers are entitled for free mealsduring pregnancy and up to sixmonths after the child birth. Aminimum Rs. 6,000 maternitybenefits will also be provided to thesewomen, provided they are not inregular employment with anygovernment sector and not coveredby any similar benefits.

· The Act also protects nutritionalneeds of the children in age group ofsix months to six years by providingmeals free of charge every day,through the ICDS or mid-day mealscheme. If a state fails to provideentitled foodgrains, then there isclause in the Act for providing foodallowances to each person as guidedby Central government.

· The Act does not specify criteria forthe identification of householdseligible for PDS entitlements. Theidentification of eligible households isleft to the State governments, subjectto the scheme’s guidelines forAntyodaya, and subject to guidelinesto be “specified” by the Stategovernment for Priority households.Numbers of eligible persons will becalculated from Census populationfigures.

· The Act provides for the creation ofState Food Commissions to monitorthe implementation of the Act.Advice to the State governments andtheir agencies, and inquiry intoviolations of entitlements are alsounder the purview of the State FoodCommission.

· Reforms in the public distributionsystem, focus on womenempowerment and provision forgrievance redressal mechanism aresome of the positive features of theNational Food Security Act, 2013.

Critical aspectsThe critics frame India’s food securitydebate as one on the “question of hungrypeople versus fiscal responsibility”. The billis likely to cost the government Rs. 1.25lakh crore each year. Given India’spresent economic condition, the Act wascriticised on the ground that it will worsenthe fiscal deficit situation. There is alsospeculation that India’s trade deficit will behit hard as the programme will require 70-80 million tonnes of additional foodgrains every year. India does not producethat much and the shortfall will have to bemet from imports. The move might alsoresult in rise in prices of food grains fornon-beneficiaries of the programme.

Right to Fair Compensation andTransparency in Land Acquisition,Rehabilitation and Resettlement Act, 2013

The Act is commonly known as ‘LandAcquisition Act’ which provides for landacquisition as well as rehabilitation andresettlement. It replaces the age old LandAcquisition Act, 1984.

Salient features of the Act:

· Developers need consent of up to 80percent people whose land is acquiredfor private projects and of 70 percentof the land owners in the case ofPublic–Private Partnership (PPP)projects. However, no such consent isrequired in case of PSUs.

· The compensation for land hasincreased by four times and two timesthe present market value, in rural andurban area respectively.

· Government can acquire land for amaximum of three years without anyprovision for rehabilitation andresettlement in this period.

* Protiva Kundu works with the Centre for Budget and Governance Accountability (CBGA), New Delhi

Recent Developments in National andInternational Economic PolicyProtiva Kundu*


· The provision of the bill is notapplicable for acquisition undercertain existing Acts

Critical aspects

There are many loopholes in this Actwhich need to be addressed. Due to dismalstate of land records, the most difficultstep in this process is identification of whoowns how much land. Moreover, the newAct does not protect land rights or dealswith historic injustices committed in nameof development and public purpose againstDalits, Adivasis, landless workers andfarmers. It is also not clear from the Acthow the market price will be assessed.Companies can witness cost overruns dueto higher land acquisition prices, whichcan stop or delay some infrastructuralprojects.

The Prohibition of Employment asManual Scavengers and TheirRehabilitation Act, 2013

This bill was passed by the Parliament inmonsoon session in 2013 and receivedassent of the President on 18th September,2013. The bill seeks ‘to provide forprohibition of employment as manualscavengers, rehabilitation of manual scavengersand their families, and for matters connectedtherewith or incidental thereto’.

Salient features:

· Elimination of manual scavengingand the rehabilitation of manualscavengers in alternate occupations.

· Elimination of insanitary latrines,which include latrines where humanexcreta need to be cleaned or handledmanually.

· Persons engaged or employed formanual cleaning of human excreta inan insanitary latrine or in an opendrain or pit, railway tracks etc. havebeen brought under the definition ofmanual scavengers.

· Provisions for identification ofmanual scavengers and insanitarylatrines

· Prohibition of hazardous manualcleaning of septic tanks and sewers toensure health and safety of manualscavengers

· Provision for setting up of vigilanceand monitoring Committees at theSub-division, District, State andCentral levels and strict punishmentfor contravention of the Act.

Critical aspects

The Act is facing criticism as it has manyshortcomings and also lacks clarity onsome aspects. The bill has a clause forproviding land to the manual scavengersfor rehabilitation purpose but no mentionof its implementation mechanism. TheAct is silent on the rehabilitation of thosescavengers who left this profession in thepast 20 years.

Some important steps have also beentaken by cabinet in last few months mainlyin education and health sector.

II. Policies

National Early Childhood Care andEducation Policy (ECCE):

Union cabinet approved the nationalECCE policy on 20th September, 2013.ECCE includes elements of care, health,nutrition, play and early learning within aprotective and enabling environment.Early childhood refers to children undersix years of age with well -marked substages: conception to birth, birth to 3 yearsand 3 years to 6 years. The ECCE iscomprised of i) Early Childhood Education(ECE) ii) Early Childhood development(ECD) iii) Early Childhood Care andDevelopment (ECCD) iv) IntegratedChild Development (ICD)

The objective of achieving universal accessto ECCE with equity and inclusion will bemainly accessed through Integrated ChildDevelopment Scheme (ICDS) inconvergence with other relevant sectors/programmes. Universal access to servicesfor each sub-stage and ECCE centreswould be functional as per populationnorms. It was also mentioned that age anddevelopmentally appropriate national

framework will be developed within 6months of the notification of this policy.

Rashtriya Ucchatar Shiksha Abhiyan(RUSA):

The Cabinet Committee on EconomicAffairs approved Rashtriya UcchatarShiksha Abhiyan (RUSA) on 3rd October,2013 for reforming the state of highereducation system. This is a flagshipprogramme under higher education andwill be in operation over the 12th and 13th

Five Year Plan period. This centrallysponsored scheme is designed to improveaccess, equity and quality of highereducation in State higher educationalinstitutes. A total of 316 state publicuniversities and 13,024 colleges will becovered under RUSA.

The objective of this scheme is to increaseGross Enrolment Ratio (GER) from 19percent to 30 percent by 2020. Theeligibility for funding under RUSA will bedetermined by certain prerequisiteconditions and select State universities/institutes will get their funding based ontheir performance. Reducing regionalimbalances in access to higher educationin rural and semi urban areas, setting upmore higher education institutions inunserved and underserved areas, equity ineducation by providing opportunities tosocially deprived communities, integrationof skill development with conventionalhigher education system are some of themajor objectives of RUSA.

Pharmaceutical Purchase Policy:

Cabinet approved policies for procuringmedicines produced by central PSUs forensuring availability of medicines at lowerprices on 30th October, 2013. This policywill be applicable to 103 medicines for 5years and will be consumed by PSUs,central government departments andautonomous bodies.

It will also be applicable to purchase ofmedicines by State governments undergovernment funded health programmeslike National Health Mission (NHM). Auniform 16 percent discount would begiven to all products. The pricing ofproducts under this scheme will be done

Recent Developments in National and International Economic Policy


by the National Pharmaceutical PricingAuthority using cost-based formula andwill be revised annually based on theWholesale Price Index, as per provisionscontained in Drugs Prices Control Order,2013.

Pradhan Mantri Jan Dhan Yojana:

Pradhan Mantri Jan-DhanYojana (PMJDY)is an ambitious programme launched on15 August, 2014 to promote FinancialInclusion. The objective is to ensure accessof weaker sections and low income groupsto various financial services. The planenvisages universal access to bankingfacilities with at least one basic bankingaccount for every household, ensuringfinancial literacy, access to credit,insurance and pension facility. In addition,the beneficiaries would get RuPay Debitcard having inbuilt accident insurancecover of Rs. 1 lakh. The target is to coverall unbanked households in the country by26th January, 2015.

Swachh Bharat Abhiyan:

The Swachh Bharat Abhiyan, launched on2nd October this year, marks the beginningof the largest programme on sanitation bythe Government in India till date. Theprogramme aims to ensure access tosanitation facilities (including toilets, solidand liquid waste disposal systems andvillage cleanliness) and safe and adequatedrinking water supply to every person by2019. The unit costs of individualhousehold toilets, angwanwadi toilets,school toilets and community sanitarycomplexes have been revised. Funding forthese new initiatives will be throughbudgetary allocations, contributions bycorporates and individuals to the SwachhBharat Kosh and through commitmentsunder the Corporate Social Responsibility.The total proposed investment (from allsources) according to media reports islikely to be to the tune of Rs 1.96 lakhcrore.

III. Key Policy Developments atGlobal Platforms:Some important and significant policydialogues have taken place in theinternational arena in the past year. In

this section, the focus is on some of theseglobal policy developments.

G-20 Summit, 2013:

Last year, the eighth G-20 summit, theworld’s forum for economic cooperation,was held in St. Petersburg, Russia on 5-6September, 2013. Leaders agreed on anumber of issues to strengthen the globaleconomy. The main objective of thesummit was to ensure coordination ofeconomic policies to promote strong,sustainable and balanced growth andaddressing global challenges that nocountry can tackle alone. Some of thespecific and pertinent global issues likeclimate change, trade expansion, taxevasion, nuclear industrial liability, workplace safety and corruption were discussedin the forum.

Some of the significant declarations in thesummit are:

1. Promoting growth and creating betterquality jobs was top economic policypriority in this summit.

2. Phasing down production andconsumption of a potent category ofgreenhouse gases through theMontreal Protocol.

3. Addressing international tax evasionand fixing tax rules to restrict MNCsto pay tax anywhere. Helping lessdeveloped countries to strengthentheir revenue collection was also oneof the important declarations at thesummit.

4. A strong multilateral trade agreementwith trade facilitation as coreobjective and extension ofprotectionist trade measures for anadditional two years.

What did India gain from this G-20summit?

As the former Prime Minister Dr.Manmohan Singh had pointed out in hisspeech, the unconventional monetaryexpansion in developed countries hassome spill-over effects on developingcountries like India. As a result, these

countries experience varying degrees ofcurrency depreciation. The Declarationaddressed this key concern by asking theCentral Banks of the developed world tocalibrate its monetary policy to minimisevolatility in capital flows and currencies.The most vital takeaway for India fromthe summit was from Japan. Japan willincrease its current swap arrangementwith India from USD 15 billion to USD50 billion. In addition, BRICS countriescomprising Brazil, Russia, India, Chinaand South Africa have finalised a corpusof USD 100 billion for emergencyfunding.

A New Global Partnership: EradicatePoverty and Transform Economiesthrough Sustainable Development—TheReport of High Level Panel of EminentPersons on the Post-2015 Developmentagenda

Fourteen years since the MillenniumDeclaration, enough progress has beenachieved in reducing poverty, improvingaccess and equity in education andhealthcare. However, the developmentprocess is not inclusive enough as theMillennium Development Goals (MDGs)failed to integrate the economic, socialand environmental aspects of sustainabledevelopment. In this backdrop, a highlevel panel was set up to work towardseradicating poverty and transformingeconomies through sustainabledevelopment. The new developmentagenda was to carry forward the best ofMDGs with focus on poverty, watersanitation, hunger, education andhealthcare and explore possible trends tofind optimum way forward for a post 2015sustainable development. In this process,the central objective would be eradicationof extreme poverty from the world by2030.

The panel identified five prioritytransformations for post-2015development and recommended work onthese transformative shifts as a universalagenda.

1. Leave No One Behind:The objectiveis to ensure that no person –regardless of ethnicity, gender,



geography, disability, race or otherstatus is denied basic economicopportunities and human rights.

2. Put sustainable development at thecore: Climate change andenvironmental degradation areunavoidable threats to humanity.Attempts should be made for rapidshift towards greening economies forsustainable development.

3. Transform economies for jobcreation and inclusive growth:Creation of economic opportunitiesand profound economic transactionsthrough a rapid shift in sustainablepattern of production andconsumption is one of the importantrecommendations of the committee.Making room for equal opportunityand capability to access qualityeducation, healthcare, water andsanitation is a primary agenda of post2015 development process.

4. Build peace and effective, open andaccountable institutions for all:Conflict and violence free nation,transparency and good governanceare core elements of well-being. Anagenda has been set forth to treatthese core elements as fundamentalrights of well-being, not as anadditional option.

5. Forge a new global partnership: Eachpriority sector identified by panel aspost 2015 agenda should be supportedby dynamic partnership. Solidarity,transparency, cooperation and mutualaccountability are the mainingredients to build up partnershipbetween governments, civil societyorganisations, local community,multilateral institutions, businesscommunity, women, marginalisedgroups, academicians and privatephilanthropists.

Base Erosion and Profit Shifting (BEPS):Role of OECD

Base erosion and profit shifting (BEPS)refers to tax planning strategies thatexploit gaps and mismatches in tax rules to

make profits ‘disappear’ for tax purposesor to shift profits to locations where thereis little or no real activity but the taxes arelow resulting in little or no overallcorporate tax being paid (OECD, 2013).Though, in most of the cases BEPS is alegal strategy and due to loopholes incurrent tax rules, fair allocation of taxingrights between countries is suffering.

The G20 leaders’ meeting in Los Caboson 18-19 June 2012 explicitly referred to“the need to prevent base erosion andprofit shifting” in their final declaration.The OECD was called on to develop anaction plan to address the BEPS issues in acoordinated and comprehensive manner.

Responding to this call, the OECD triedto design a policy framework which willfacilitate and reinforce domestic actions toprotect tax bases and providecomprehensive international solutions torespond to the issue.

Action Plan of OECD on BEPS:

The OECD in a report in July, 2013analyses the root causes of BEPS andidentifies six key pressure areas inparticular of the digital economy: (i) hybridmismatch arrangement and arbitrage (ii)excessive deductibility of interest incomeand other financial payments (iii)intragroup financing, with companies inhigh-tax countries being loaded with debt;(iv) transfer pricing issues (v)ineffectiveness of anti-avoidance rules (vi)the existence of preferential regimes. Tocounter these major issues of BEPS,OECD sets forth fifteen point ActionPlans. Some recommendations are:

1. Neutralise or end of hybrids andmismatches which generate arbitrageopportunities

2. Redesigning and StrengtheningControlled Foreign Company Rule(CFC) and other anti-deferral rules tocounter BEPS in a comprehensivemanner.

3. Recommendations regarding thedesign of rules to prevent baseerosion through the use of interestexpense and other financial payments

economically equivalent to interestpayments.

4. Evaluation of preferential tax regimein the BEPS context and promotingtransparency and substance to counterharmful tax practices more effectively.

5. Develop model treaty provisions andrecommendations regarding thedesign of domestic rules to preventtreaty abuse.

6. Develop rules to prevent BEPS bymoving intangibles among groupmembers, transferring risks orallocating excessive capital amonggroup members so that transferpricing outcomes are in line withvalue creation.

7. To monitor the implementation ofthe Action plan, development of database for BEPS and setting up tools foreffective analysis of data.

8. Mandatory disclosure rules foraggressive/abusive transactions andtax planning to improve transparency.

9. Re-examining transfer pricingdocumentation to enhancetransparency for tax administration.

10. Developing solution to counter treatyrelated disputes under MutualAgreement Procedure (MAP).

11. Developing multilateral instrument toenable jurisdiction to implementmeasures related to tax and publicinternational law issues and amendbilateral tax treaties.

The Action Plan will be implementedthrough a transparent and inclusiveconsultation process with developingcountries and non-governmentalstakeholders like business and civil societyrepresentatives.

Agenda for G20 Summit 2014:

The communiqué of the G20 Summit,2013 had identified the agenda items forthe November 2014 Summit. Enablinggrowth and creating jobs was given the toppriority. Ten thematic issues, namely Anti-



corruption, Development, Employment,Energy, Financial Regulation,Comprehensive Growth Strategy,Investment and Infrastructure, Reforms ofGlobal Institutions, Tax, and Trade havebeen identified for the discussion in theLeader Summit. In the agenda,‘Development’ is defined as creatingconditions for developing countries toattract infrastructure investment,strengthening tax system and improvingaccess to financial services. Importantaspects like social infrastructure, genderconcerns, poverty etc. are missing fromthis official G20 discourse. Some of thespecific issues on the agenda for theforthcoming G20 Summit are:

· Reducing the costs of corruptionthrough transparency of ownershipand control of companies.

· Combating tax avoidance andincreasing the sharing of informationbetween tax authorities andexpanding the use of formal financialservices.

· Addressing tax avoidance,particularly, base erosion and profitshifting (BEPS) by companies toensure profits are taxed in thelocation where the economic activitytakes place

· Removing obstacles to trade througheasing the cost of trading acrossborders and facilitate participation bybusinesses in regional and globalvalue chains.

· Strengthening development throughincreasing financing for infrastructureinvestment in developing countries

· Measures to lift labour forceparticipation, particularly femalework force participation and creatingthe right conditions for privateenterprise to generate employmentopportunities

· Improving the operation of globalenergy markets and energy efficiency.

Concluding remarks:The Indian Government has taken somestrong and positive measures in the socialsector. Among them, the most significantare the Right to Education, Right to Workand Right to Food. However, the country’sperformance on social indicators still has along way to go. India needs to balance itsdual imperatives of growth and inclusion.The Twelfth Five Year Plan approach wasfor ’faster, more inclusive and sustainablegrowth’. Higher standard of living anddevelopment opportunities for all shouldbe the ultimate aim of public policy whichcan make the development process moreinclusive.

References:Arvind Subramanian: A report card forIndia’s social sector, Business Standard,25th April, 2012 (link:http://www.business-standard.com/article/opinion/arvind-subramanian-a-report-card-for-india-s-social-sector-112042500051_1.html) accessed ason 2nd Jan, 2014

Business Standards: It’s raining bills thismonsoon session, 6th Sep, 2013

Government of India, official website forthe Pradhan Mantri Jan DhanYojana,available at http://www.pmjdy.gov.in/pmjdy_mission.aspx

Key bills passed in parliament’s monsoonsession, Hindustan Times, 7th Nov, 2013

Kusum Malik: Plan vs. Performance:Monsoon Session 2013, PRS LegislativeResearch, 7th Sept, 2013

Ministry of Human ResourceDevelopment: Cabinet gives nod toflagship programme for higher education-RUSA, 4th Oct, 2013, Press InformationBureau, Government of India

Ministry of Social Justice andEmpowerment: Introduction of “TheProhibition of Employment as ManualScavengers and their Rehabilitation Bill,2012” in Parliament, 3rd Sept, 2012

Ministry of Women and ChildDevelopment: National early childhood

care and education (ECCE) policy, 20th

Sept, 2013, Press Information Bureau,Government of India

OECD: Action Plan on Base Erosion andProfit Shifting, Chapter 3, 2013

Pallavi Bedi and Sana Gangwani: TheLand Acquisition, rehabilitation andResettlement Bill 2011, PRS LegislativeResearch, 23rd April, 2012

Planning Commission: Twelfth Five YearPlan, 2012-17

The Economic Times: What India gainedfrom the St. Petersburg G20 summit, ETBureau, 9th Sep, 2013

The New Indian Express: India Satisfiedwith G 20 summit outcomes, PTI, 7th Sep,2013

The Times of India (TOI): India’s incomeinequality has doubled in 20 years, 7th Dec,2011

United Nation: A New GlobalPartnership: Eradicate Poverty andTransform Economies throughSustainable Development; The Report ofthe High-Level Panel of Eminent Personson the Post-2015 Development Agenda,30th May, 2013


IN THIS ISSUE

Significance of the Finance Commission



Paradigmatic Questions about the Mandate of the FourteenthFinance Commission

Fourteenth Finance Commission in the context of emergingCentre–State Fiscal Relations

How Many Miles Before We Get Fiscal Policy Space Right?



The Political Economy of Absorptive Capacity – Case of theHealth Sector

Panchayat Finances: Issues before the 14th FinanceCommission

Suggestions for the Fourteenth Finance Commission onRenewable Energy

Strengthening Budget Transparency and Participation in Indiathrough the Pre-budget Process

Policy Asks for the 14th Finance Commission on BudgetTransparency

Centre for Budget and Governance AccountabilityB-7 Extension/110A (Ground Floor), Harsukh Marg, Safdarjung Enclave, New Delhi - 110029Tel: (11) 4920 0400, 4050 4846 (telefax) Email: [email protected] Web: www.cbgaindia.org

A Publication by Centre for Budget and Governance Accountability

Volume 10, Track 1-2, October 2014

This document is for private circulation and nota priced publication.

Copyright @ 2014 Centre for Budget andGovernance Accountability.

Reproduction of this publication foreducational or other non-commercial purposesis authorized, without prior writtenpermission, provided the source is fullyacknowledged.

ABOUT BUDGET TRACKA periodical that discusses the budget and

policy priorities of the government.

CREDITSEditorial Team:Praveen Jha, Sona Mitra, Saumya Shrivastava,Subrat Das

CBGA Team:Amar Chanchal, Bhuwan C. Nailwal,Gaurav Singh, Happy Pant,Harsh Singh Rawat, Jawed A. Khan,Jyotsna Goel, Kanika Kaul,Khwaja Mobeen Ur-Rehman, Manzoor Ali,Nilachala Acharya, Pooja Rangaprasad,Priyanka Samy, Protiva Kundu,Rajalakshmi Nair, Richa Chintan,Rohith Jyothish, Saumya Shrivastava, SonaMitra, Sridhar Kundu, Subrat Das,Sumita Gupta, T. K. Shaji

Illustrations:Vikram Nayak

Layout and Design:Mayank Bhatnagar

Printing:Kriti Creative [email protected]#9873249374

ABOUT CBGACentre for Budget and GovernanceAccountability (CBGA) is an independentpolicy research and advocacy organisation basedin New Delhi; it analyses public policies andbudgets in India and advocates for greatertransparency, accountability and scope forpeople’s participation in budgets. Please visitwww.cbgaindia.org to know more aboutCBGA’s work.

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