12th Finance Commission
Golden Jubilee function
Summary record of the inaugural
session of the Golden jubilee function to mark the completion of fifty years of Finance
Commission
The Golden jubilee function to
mark the completion of Fifty years of Finance Commissions in
The function provided an
opportunity to trace the development of fiscal federalism in the first fifty years of
independent
In his welcome address, Dr. C.Rangarajan, emphasized the need to establish a sound transfer
mechanism for vertical sharing of resources between the Centre and the States and
horizontal sharing among the States. Dr. Rangarajan also drew
attention to the principles of need, cost disability and fiscal efficiency, which must
characterize a sound transfer mechanism. On a
note of caution, chairman Twelfth Finance Commission stated that the elimination of
revenue account deficit and restraining fiscal deficit to debt sustainable level are the
greatest fiscal challenges confronting the transfer mechanism currently in place.
Hon’ble
Deputy Chairman, Shri K.C. Pant explained fiscal federalism from the
Planning Commission’s perspective by
citing the Gadgil formula arrangement for Plan transfers to
States as against the Finance Commission’s transfers of tax revenues. Hon’ble Deputy
Chairman also highlighted the significance of private sector flows to the States as
equally important for economic development and concluded that the benefits of federalism
and decentralization can be reaped only if certain modalities are evolved, which could not
be envisaged by the founding fathers.
The Hon’ble
Finance Minister, Shri Jaswant
Singh highlighted the importance of Finance Commission and Planning Commission as
principle pillars of economic and fiscal federalism. The Hon’ble
Finance Minister complemented the Finance Commission and the Planning Commission for
contributing uniquely to financial as well as political integration of the country. The Union Finance Minister expressed satisfaction
at the remarkable journey of fiscal federalism in the last 50 years.
In his inaugural address the Hon’ble President of India congratulated the Chairman and
Members of the previous Finance Commissions for the exemplary work accomplished by them. Elaborating on the theme of financial management in
the public sector as an important pre-requisite for achieving the targets of the economic
growth, Hon’ble President emphasized the need for
comprehensively computerizing all the financial transactions between the Centre and the
State. This would serve to ensure that funds
are spent on the targeted population. The Hon’ble President also called for empowering various levels of
governance for maximizing the best possible use of available funds. The Hon’ble
President called upon the Twelfth Finance Commission to promote the vision for overall
development by suitably empowering the Centre and the States.
Minutes of the meeting between the
Twelfth Finance Commission and Finance Ministers of States
The Twelfth Finance Commission,
under the chairmanship of Dr. C. Rangarajan held a meeting
with the Finance Ministers of State Governments on
The meeting was preceded by the
launching of the official website of the Twelfth Finance Commission by Dr.C. Rangarajan, who also released a
commemorative volume brought out by the Commission, titled, ‘Fifty years of Fiscal
Federalism’. Chairman, TFC, explained that the official website would
facilitate greater exchange of views
between the Commission and various stakeholders. He also explained the purpose of
publishing the commemorative volume and stated that it would serve as a reference on the
recommendations of the previous Finance Commissions and the action taken by the Government
of India thereon.
Commencing the meeting, Chairman,
TFC requested the Finance Ministers to comment on specific issues. Wherever prepared
speeches have been circulated, they may be taken as read. Chairman sought the views of the
Finance Ministers, inter-alia, on the following critical
issues:-
·
Size
of the vertical devolution from the Centre to the States
·
Principles
of determination of horizontal devolution of resources among
States.
·
Desirability
of providing conditional grants.
·
Weight
of the share of Central taxes and grants in vertical devolution
·
Role
of the Finance Commission in assigning funds to the Local bodies
·
Calamity
Relief
·
Sustainable
level of Fiscal Deficit of States
·
Principles
governing projection of revenues and expenditure of states
·
Management
of debt burden
The following were the views
expressed by the participants:-
Uttaranchal ( Shri N.D.Tiwari, CM)
·
Every
Five-year plan generates fresh commitments on maintenance, which increases the non-plan
expenditure thereby bringing state finances into greater stress. The target of 8% growth
in a huge non-plan deficit scenario is a big challenge. There can be no real growth unless
the problems of unemployment and underemployment and social disparities are addressed. The Planning Commission and the Finance commission
would have to jointly assess the genuine needs of the states in this regard.
·
The
economic growth target of 8 percent set by the Tenth Five year Plan can be achieved only
if the Centre helps out the states with large vertical transfers.
·
VRS
may ultimately lead to economy in revenue expenditure thereby bringing in greater
stability in states’ finances but it also leads to unemployment and underemployment,
particularly in smaller states.
·
There
are wide disparities among States in the credit : deposit
ratio. This is indicative of lack of effort to solve the unemployment problem.
·
State
Finance Commissions have greater flexibility and reach in addressing the requirements of
Local bodies. The Twelfth Central Finance Commission must discharge its constitutional
mandate by recommending a lump sum grant to states for disbursement by the State Finance
Commission.
·
For
states with locational disadvantages and newly created states,
a special consideration is required. The TFC
should submit an interim report for such states as the Eleventh Finance Commission had not
considered their problems.
·
A
newly created state like Uttaranchal needs substantial
assistance to build its physical infrastructure and preserve its ecology. Funds should be
provided for the Himalayan glaciers and a proper link between Kumaon
and Garhwal which are not directly connected because of
·
The
vertical share of Central tax devolution should be raised to 50 percent in view of the
fact that the share of Central taxes in absolute terms has been showing little growth
during the EFC’s award period.
·
The
revenue gap for states should be assessed realistically. The actual size of the gap for
·
Efforts
should be made to reduce regional disparities and
·
Linking
grants to performance is not desirable for states like
·
Autonomous
councils should be provided a special dispensation.
·
The
salary component of plan expenditure must be taken into account for assessment of revenue
expenditure by the Finance Commission. Depressed expenditure levels on account of
withholding additional D.A. should be taken note of and not excluded.
·
Liability
on account of State Electricity Boards should be kept in view while making expenditure
forecasts.
·
·
Revenue
loss on account of VAT should be fully compensated.
·
Calamity
Relief Fund should also be allowed to be used for restoring physical infrastructure
damaged by recurring calamities.
Manipur (Ibobi
Singh, CM)
·
There
are serious shortcomings in the way the EFC handled issues concerning the North-East.
·
As
the implementation of the Fifth Pay Commission was unavoidable for the State, the enormity
of its burden on State finances must be considered by the TFC. In the case of Manipur it
was about Rs.500-600 crore. This has reduced availability of resources for development.
·
There
was discrimination even among NE States by EFC in the matter of grants for maintenance of
roads. While Meghalaya got Rs.218 crore, Manipur got only
Rs.13 crore.
·
Loktak power project was provided
inadequate funding by the Tenth Finance Commission while it was completely ignored by the
Eleventh Finance Commission.
·
Geographical
terrain and insurgency warrant liberal assistance to the State by the TFC. Special grants
should be provided for security related expenditure of major projects.
·
A
better convergence between projections and actual must be brought about by the Commission
to arrive at a correct assessment of the states’ needs.
Mizoram (Zoramthanga,
CM)
·
Some
of the lapses committed by the EFC may have to be reviewed by TFC to guard against
possible repetition.
·
It is
not fair to withhold 15 percent of the revenue gap grant against specified improvements in
the revenue account under the MTFRP. It amounts to as much as 6 months’ salary in the
case of Mizoram.
·
Although
Mizoram has signed an MoU with the Government of India, possible resource benefits in this
regard are not forthcoming.
·
The
entire committed liability of the State on in its continuing plan schemes should be
included in the assessment of the Non-plan revenue expenditure of the state. The EFC made
a faulty assessment of revenue and expenditure which was completely off the mark.
·
Impact
of the Fifth Pay Commission should have been taken into account.
·
19%
of the non-plan revenue expenditure is incurred on debt servicing. The Planning Commission
and Finance Commission must reach an understanding on the level of borrowings.
·
Maintenance
of electricity and water supply entails huge recurring costs. Grants should be provided to
meet these costs.
·
Upgradation grants for infrastructure should
be recommended for Mizoram.
Meghalaya (Dr. Donkupar
Roy, Dy.CM)
·
It
should be ensured that the resource devolution to the State is adequate to meet the growth
targets set under the Tenth Plan.
·
Growing
insurgency in the state should be taken note of by the TFC in its assessment of the
state’s requirements.
·
The
revenue gap assessed by EFC fell much short of the actuals
which has forced the State to ask for Rs.200 crore of additional annual grant as also
moratorium on debt repayment.
·
All
committed liabilities carried on the plan side should be transferred to non-plan for a
correct assessment of non-plan revenue expenditure.
·
The
decline in the growth of central taxes is a matter of concern.
·
The
state received a lower share of Central tax revenues from the Eleventh Finance Commission
compared to the Tenth Finance Commission’s award.
·
In
the tradition of best fiscal practices, the state has imposed a ceiling on the issue of
guarantees and has set up a renewal fund. Seven PSUs have been
closed. Disinvestment is being pursued in respect of many others.
·
Efficiency
needs to be rewarded.
·
The
damage due to cyclone and earthquake was inadequately recompensed by the Central
Government.
·
The
adverse impact of Centre’s policies on States’
finances such as Pay Commission recommendations, withdrawal of CST etc. should not be
missed.
·
Financially
strong states should not be weakened through increasingly progressive horizontal
transfers. Stronger states are more capable of contributing to the enlargement of the
sharable pool through which larger gains can accrue to financially weaker states.
·
A
long standing vertical imbalance in sharing the Central revenues has caused the present
crisis. Fifth Pay Commission, funding of revenue plan through borrowings, high interest
rates of Central and RIDF loans, and shortfall in tax collection by both the Centre and
the States are other contributing factors. An
appropriate solution can evolve only with time.
·
The
immediate concerns are to bridge the revenue-expenditure gap of states, which have
increased significantly due to Centre’s inability to
agree to a moratorium on states’ repayment of debt as also shortfalls in Centre’s tax revenues resulting in lower accruals from
devolution.
·
The
TFC should endeavour to protect development expenditure to
ensure the targeted growth rates along with fiscal stability.
·
A
mere 5% reduction in debt stock is not adequate.
·
The
norms for revenue and expenditure growths must also be applicable on the Centre.
·
The
vertical devolution should be raised to 50 percent. This is possible if Centrally sponsored schemes costing over Rs.15000 crore are
transferred to the States. Unearthing of black money through the joint efforts of the
Centre and States would also help.
·
EFC’s relative weights for equity and efficiency were rational
and sensible.
·
Tax
efforts resulting in beyond targeted 15% growth must be rewarded.
·
The
GSDP growth should be assigned a positive weight in determining horizontal devolution.
·
Rescheduling
and/or moratorium on repayment of States’ debt to the Centre should be considered.
This was ignored by the last three Commissions. Debt swap alone is inadequate. Where it is
done, it should be through additional market borrowings and not small savings loans which
cost more.
·
With
regard to the State VAT, the formula for compensation has been worked out, which can be
taken into account by the TFC.
·
The
Centre should fund the maintenance of infrastructure by PRIs.
Mahrashtra (Jayant
Patil, FM)
·
The
projection of revenue and expenditure should be realistic, which is possible if the
sanctity of budget estimates is maintained and not moderated by applying unrealistic
norms. EFC’s approach was sound but it failed to factor
in the impact of Fifth Pay Commission
·
As
the Centre’s fiscal policies have a direct bearing on the
states’ resources as well as expenditure, the States should not be penalized for
under-performance attributable to these factors.
·
The interest rate must be reduced further on Central
loans as the rise in the rate since 1991 contributed significantly to the growth of
states’ debt burden.
·
Rescheduling
of States’ debt to the Centre is necessary to ease the burden on the States.
·
A
revenue corpus should be constituted by each state to guard against any unforeseen drop in
the growth of revenues.
·
The
TFC must note the need for resources to improve the infrastructure services in Mumbai.
Uttar Pradesh (Lal ji Tandon,
Housing & Development Minister)
·
The
occasion of the fiftieth anniversary of Finance Commissions provides an opportunity to
review the working of the Finance Commissions.
·
The
use of 1971 population census in the formula of horizontal devolution should be reviewed
as it is irrational.
·
The
Commission should make recommendations under its inherent powers in view of the fact that
its terms of reference do not find a mention of upgradation
and special problem grants.
·
The
Commission should arrive at a comprehensive scheme of horizontal distribution encompassing
all aspects of equity and efficiency according due weightage
to population.
·
Upgradation of infrastructure of Local bodies
must be suitably accommodated in the TFC’s report.
·
The
Commission may consider recommending a one-time settlement of States’ debt.
·
Interest
rate on Central loans should be brought down proportionately with the fall in deposit
rates.
Himachal Pradesh (Chandresh
Kumari, Minister)
·
The
sharable pool of Central taxes should be determined on gross and not net revenues. The
determination of the cost of collection often involves an element of arbitrariness.
Vertical devolution should be increased to 33.3%.
·
An
earmarking of 30 percent of the sharable pool of Union taxes should be made in the same
manner as for Normal Central Assistance done by the Planning Commission.
·
The
award of revenue gap grants should be unconditional.
·
The
recommendations of the State Finance Commissions should be duly accommodated in evolving
principles for grants to Local Bodies.
·
The
Commission should recommend the principles for sustained support to states on account of
losses due to the introduction of VAT. The losses should be compensated 100%.
Rajasthan (Praduman
Singh, FM)
·
The
implementation of the Fifth Pay Commission’s recommendations has led to a phenomenal
growth of salaries and pensions in the states.
·
High
interest rates on loans from the Centre and public financial
institutions has led to an enormous increase in debt servicing burden of the
states.
·
Further
compounding the problems of state finances is the shortfall of the states share of Central
taxes with respect to projections. It was of the order of Rs.800 crore in the last three
years.
·
The
Commission should consider recommending a scheme for reducing the debt burden of states.
·
Some
relief to the states would be available if the vertical share of the Union taxes is raised
to 35 percent.
·
Historical
disabilities and special problems like drought proneness call for more
progressive elements in the formula for
horizontal devolution.
·
Guidelines
for tapping NCCF should be framed so as to leave little discretion with the Centre in the
treatment of calamities as normal or one of ‘rare severity’.
Arunachal Pradesh (Rima
Taipodia, Minister of State for Finance)
·
The
vertical share of Union taxes to states should be suitably enhanced. There should be a
mechanism to compensate States in the event of a shortfall in the Central revenues.
·
The
90-10 distribution of grant-loan of Central Assistance to special category states needs to
be reviewed. It should be made 100 percent grants.
·
The
Plan-non-Plan distinction needs to be reviewed as separate assessments of states’
requirement by the two bodies which the distinction necessitates, suffers from problems of
coordination.
·
The
Commission may consider granting a ten year moratorium on states’ repayment of
Central debt.
·
Special
grants may be recommended for technical consultancy and support, computerization etc. for
the purpose of reorganizing the tax regime.
Chattisgarh
(Dr.
Ram Chandra Singh Deo, FM)
·
The
implementation of the Fifth Pay Commission’s recommendations has ruined the finances
of states. Additional D.A. every six months is further compounding the problem.
·
We
are turning into a capital consumption economy. Consumption of assets must be stopped.
This adversely affects the future economic growth. The Finance Commission should suggest
measures to prevent this.
·
Interest
rates on Central loans must come down.
·
Royalty
rates on minerals should be revised every three years.
Jammu & Kashmir (Muzzafar Hussain Baig,
FM)
·
The
State is in a debt trap. Special problems of States should receive due attention.
·
Needs should be given a higher weightage
as against efficiency norms in devolving resources to the states.
·
The
Commission should formulate a suitable approach to accommodate the conflicting needs of
both the states and local bodies.
·
The
Commission should take note of the fact that although the state of Jammu & Kashmir was
granted special category status in 1969, it was given the benefit of 90 percent grant and
10 per cent loan in Central Assistance only from 1980-81.
·
The
Commission should also accommodate in the assessment of States’ requirements the
payment of ‘ghost’ salaries, the state has been making to its employees, who
have migrated and settled elsewhere in the country.
Tripura (Badal
Chowdhury, FM)
·
The
Commission should look into debt liabilities of the state with a view to recommending a
moratorium or waiver.
·
The
Commission must take into account the problems of insurgency in the state, while
recommending its award.
·
Stress
on equity considerations in horizontal devolution would automatically lead to the ultimate
achievement of efficiency in resource use.
·
The
fact that the State has undertaken power sector and fiscal reforms should be viewed
favorably by the Commission.
·
A
macro-level policy of reducing interest rates would help the state reduce its
debt-servicing burden.
·
The
Commission must take cognizance of the fact that terrain problems in the state add
immensely to the maintenance cost of capital assets.
Orissa (Panchanan
Kanungo, FM)
·
Under
vertical devolution, the determination of the net proceeds of Union taxes is critical. The
‘collection’ charges should be normatively fixed.
·
Vertical
devolution should be increased to 40%.
·
Gap
between the richer and poorer States should not be widened in the name of efficiency.
·
The
relative levels of debt servicing burden should be used to categorize states. The highly
stressed states should be given more debt relief and debt waiver. Debt swapping will not
solve the problem. Moratorium and substantial waiver of principal and interest burden
would be necessary.
·
In
view of the frequency and intensity of natural calamities, which have hit the state, the
states’ contribution to its Calamity Relief Fund should not be insisted upon.
·
Security
issues like the Naxalite problem need to be addressed and
provision made for adequate expenditure in this regard.
·
State’s
fiscal problems are also attributable to Fifth Pay Commission recommendations.
·
Although
EFC was favorably disposed towards
·
Even
if removal of regional imbalances is not fully possible in the short run, some minimum
level of reduction should be agreed to and the Commission should direct its efforts
towards the quick attainment of this objective.
·
The
arguments in favour of efficiency do not specify how
efficiency will be assessed.
·
The
1971 population basis should be replaced by the latest available census for arriving at
state wise entitlements under horizontal devolution.
·
The
shortfall in Centre’s revenues impacts the states’
resources for capital expenditure as other expenditures are committed and thus cannot be
forsaken. The devolution formula should, therefore, prescribe minimum transfers in case
the percentage share falls below projections.
Nagaland (Kewekhape
Therie, FM)
·
The
size of vertical devolution to states must be increased.
·
Grant-in-aid
should be based on proper assessment of needs.
·
The
horizontal share under tax devolution of the State of
·
The
Fiscal Reform Facility must be reviewed.
·
Debt
swap scheme introduced by the Centre should be pursued.
Some States were represented by their Chief Secretary/Principal Secretary(Finance)/Finance
Commissioners. The following views were expressed by them:-
Andhra Pradesh (S.K. Arora, Principal Secretary, Finance)
·
The
total revenue devolution to states, indicated at 37.5 per cent of gross revenues of the
Centre by the EFC should be raised to 50 percent.
·
All
CSS schemes should be withdrawn
·
Just
as the 1971 census figures are adopted for population, the assessment of inequality among
states, as reflected in the relative levels of per capita income must also be frozen at
some benchmark year so that non-performance is not rewarded.
·
Revenue
Deficit grants should be minimized and replaced by incentive grants.
·
A
pragmatic debt relief scheme should be designed as the schemes suggested in the past have
been non-starters.
·
Compensation
for introducing State VAT should be determined on the basis of Tax/GSDP ratio.
Haryana (Chander
Singh, Principal Secretary, Finance)
·
Due
to its proximity to
·
The
levy of service tax should be awarded to the States or brought under the divisible pool.
·
Better
managed States should be rewarded for efficiency.
Karnataka (Sudha
Pillai, Principal Secretary, Finance)
·
The
vertical devolution of Central taxes should be raised to 35%.
·
The
weight of efficiency in the formula for horizontal devolution should be raised.
·
Karnataka
is being wrongly treated as a revenue surplus State.
·
The
utilization of grants awarded to the states should be left to them entirely. Special
grants must be recommended for VRS and closure of PSUs.
·
State
specific monitorable parameters should be fixed under MTFRP.
·
Interest
rates on loans should be aligned with market rates.
·
The
Commission should consider recommending 100 percent compensation for loss on account of
VAT.
·
The
prospective impact of the recommendations of judicial pay Commission must be included in
the assessment of states’ expenditure.
Kerala (L. Krishnan, Special
Secretary, Finance)
·
Tax
evasion at the Centre and the States should be addressed.
·
Expansion
of CSS and externally aided projects burden the states significantly and cause financial
problems.
Tamil Nadu
·
Under
horizontal devolution, 50 percent should be assigned for equity and 50 percent for
efficiency.
Chairman, Twelfth Finance Commission thanked the participants and assured a
detailed discussion on specific problems during the Commission’s visits to the
states.
List of Participants (Meeting
with Finance Ministers of States)
Twelfth Finance Commission
1.
Dr.
C. Rangarajan, Chairman
2.
Shri Sompal, Member
3.
Shri T.R. Prasad, Member
4.
Prof.
D.K. Srivastava, Member
5.
Dr
G.C. Srivastava, Secretary
6.
Shri R. Ramanujam, Jt.
Secretary
7.
Shri R.N. Choubey, Jt.
Secretary
States
1.
Shri N.D.Tiwari, CM, Uttaranchal
2.
Shri Tarun Gogoi,
CM, Assam
3.
Shri Ibobi Singh, CM, Manipur
4.
Shri Zoramthanga, CM, Mizoram
5.
Dr. Donkupar Roy, Dy.CM, Meghalaya
6.
Shri Vajubhai Vallah,
FM, Gujarat
7.
Dr. Asim Das Gupta, FM, West Bengal
8.
Shri Jayant Patil,
FM, Maharashtra
9.
Shri Lal ji Tandon, Housing & Development Minister, Uttar Pradesh
10.
Ms. Chandresh Kumari, Health Minister, Himachal Pradesh
11.
Shri Praduman Singh, FM, Rajasthan
12.
Ms. Rima Taipodia, Minister of State for
Finance, Arunachal Pradesh
13.
Dr.
Ram Chandra Singh Deo, FM, Chattisgarh
14.
Shri Muzzafar Hussain
Baig, FM, Jammu & Kashmir
15.
Shri Badal Chowdhury,
FM, Tripura
16.
Shri Panchanan Kanungo,
FM, Orissa
17.
Shri Jagdanand Singh, Minister, Water
Resources,
18.
Shri Kewekhape Therie,
FM, Nagaland
19.
Shri S.K. Arora, Principal Secretary,
Finance, Andhra Pradesh
20.
Shri Chander Singh, Principal Secretary,
Finance, Haryana
21.
Karnataka
22.
Ms. Sudha Pillai, Principal Secretary,
Finance, Kerala
23.
Shri L. Krishnan, Special Secretary, Finance, Tamil Nadu
24.
Madhya
Pradesh
25.
The Twelfth Finance Commission,
under the chairmanship of Dr.C.Rangarajan, held a meeting with
the Chairmen and Members of previous Finance Commissions, on
Welcoming the participants,
Chairman, TFC, stated that the Commission looked forward to hearing them on their
experience in handling the intricacies of resource transfers from the
Chairman, TFC, drew the attention
of the participants to the conflicting demands with regard to equity and efficiency in the
horizontal devolution and wanted to know what factors/variables could be kept in view to
determine efficiency. Chairman, TFC, further requested the participants to comment on the
considerations, which should go into designing a pragmatic scheme for restructuring of
public finances. The other issues on which views were sought were the role of Finance
Commission in augmenting the resources of local bodies, calamity relief, Medium Term
Fiscal Restructuring Plan and the extent of coordination required between Planning
Commission and Finance Commissions so as to ensure that resource transfers effected by
these two separate bodies are complementary without any conflict of goals and objectives.
The views expressed by the
participants were as under:-
Shri G. Ramachandran
(Member Secretary, Sixth Finance Commission)
The issues facing the current
Finance Commission are not much different from the ones confronted by Commissions thirty
years ago. Resource transfers from the
Although, the Finance Commission
has the option of redressing this by raising the weight for efficiency criteria in the
horizontal devolution, a lasting solution to the problem lies in doing something radical.
Considering that there is some scope for increasing income tax rates, a surcharge could be
allowed to be levied by the States from where the income tax is collected. This would
augment the resources for the advanced States without hurting the interests of the poorer
States as the Finance Commission could continue to protect equity considerations in
respect of amounts collected as the principal tax. On the issue of restructuring of public
finances, he wondered why the Centre and the States should have a creditor-debtor
relationship. Surpluses on the revenue account should be devolved as grants and States
could be allowed to borrow directly from the market based on their credit-worthiness for
capital expenditure.
Dr.B.S. Minhas
(Member, Sixth Finance Commission)
It is very important for Finance
Commissions or for that matter any body involved with transfer of resources to be clear on
the concept of equity. The very purpose of constituting an expert neutral body to go into
the determination of resource transfers is to ensure equity. Superior performance
attributable to historical or locational advantages should not
be regarded as efficiency. The Twelfth Finance Commission would be well advised to make a
report totally based on equity considerations and then consider marginal changes to allow
for the political dynamics of the system. The robustness of the Commission’s Report
will also be tested by what it recommends on privatization of services hitherto provided
by the public sector and the suggested scheme for utilization of the disinvestment
proceeds. Retiring the debt burden at various governmental levels should be the preferred
option. Care should be taken to see that the
resources so raised are not frittered away on the current account.
Shri N.K.P Salve (Chairman, Ninth
Finance Commission)
Over the years the fiscal health
of both the
Dr. C.H. Hanumantha
Rao (Member, Seventh & Eighth Finance Commissions)
Much of the blame for the overall
fiscal deterioration must lie with the Centre as it did not tap its revenue potential
adequately. A case in point is of the services sector, which despite growing phenomenally
in recent years has attracted very little tax levy. Revenues must be raised significantly
if the Centre has to secure the targeted additional 2-2.5% tax /GDP ratio for the purpose
of transferring reasonable surpluses to the States. Presently there is a gap of at least
3% between the taxable capacity and the tax efforts. Tax rates are being reduced but
adequate attention is not paid to widening the tax base. Regional disparities have
increased in the last few years. While there have been studies on the effect of the equity
considerations, the impact of efficiency parameters such as fiscal discipline, tax efforts
etc. built into the devolution formula is not visible. Determination of fiscal prudence
for the purpose of monitoring is a difficult and complex task. It is important to increase the grant component of
Finance Commission transfers and ensure that such funds are targeted towards redressing
regional disparities as well as specific problems. The Commission would do well to go slow
on the fiscal efficiency parameters in horizontal devolution as equity consideration alone
can achieve a just and fair distribution of resources. The relative weight for tax
devolution could, however, be reduced in favour
of conditional grants.
Shri V.B Eswaran
(Member Secretary, Seventh Finance Commission)
Finance Commission must clarify
unequivocally that States are not subordinate bodies but equal partners with the Centre in
the task of nation building. Efficiency cannot be induced by the Finance Commission as it
is not brought about by any money-transfer mechanism. The Centre itself is not a shining
example of efficiency. The Finance Commission must ensure adequate provisioning of
resources so that citizens are assured of equal access to basic minimum services such as
education, health, safe drinking water, sanitation etc. irrespective of the State in which
he resides. As for effective utilization of resources and proper expenditure management,
the Commission may only indicate the areas where improvement is possible. This should
equally apply to Central Government finances.
Shri G.C. Baveja
(Member, Eighth Finance Commission)
Presently, the emphasis on equity
is about 80% and efficiency 20% in the devolution formula. It is not clear if fiscal behaviour could be changed by emphasizing efficiency. However, the
Commission must dwell at length on the need to ensure fulfilment
of specified efficiency norms while expanding the quantum of vertical transfers from the
Shri Justice T.P.S. Chawla (Member, Eighth Finance Commission)
It is necessary that the award
period of Finance Commission and Five-year plan periods are synchronized for a proper
coordination and to ensure complementarity of resource
transfers from the
Shri Justice A.S. Qureshi
(Member, Ninth Finance Commission)
The Terms of Reference of the Finance Commission are in violation of the
Constitutional Scheme as it is the sole prerogative of the Commission to recommend
resource transfers. It is a matter of concern that Constitutional provisions are being
brushed aside and the Planning Commission is expanding its role. Grants are to be provided
to the States on the recommendations of the Finance Commission under Article 275 of the
Constitution. The efforts to ensure equity and justice are diluted by invoking Article
282, which is essentially a residuary provision for making grants for public purposes.
Finance Commission is a quasi-judicial body and should not only do justice to all the
states but also assert its authority in matters of devolution and grants in aid.
Shri Mahesh Prasad (Member Secretary,
Ninth Finance Commission)
The elimination of Revenue
deficit, being a pre-requisite to restore stability of Public Finances should be achieved
in one clean sweep and not through a gradual process. A graduated approach will diffuse
the very focus of reforms. The Finance Commission should become a permanent Constitutional
body monitoring resource transfer to the States. The Planning and Finance Commissions
could be merged to achieve this. Inefficient use of public resources should be penalized.
Shri BPR Vithal
(Member, Tenth Finance Commission)
Satisfactory improvement in the
transfer of resources from the Centre to the States is possible only if the Centre
significantly raises its tax-GDP ratio. The existing design of horizontal devolution, does
not adequately address the problem of States like Orissa,
which have a relatively small population and are also backward. It is important that the
Finance Commission also takes on the role of State Finance Commissions, at least for the
present, as SFCs are not being seen to be doing anything substantial except for providing
useful data on the Local Bodies. The efficiency criterion must be applied with great
caution as there could be a balanced budget even with low levels of income and expenditure
which reflects lack of efforts to tackle issues of development. On the other hand, a
deficit budget may reflect larger expenditure commitments on account of developmental
efforts inspite of large growth in revenues as well. Thus, in
a balanced budget, larger the size, greater
would be the efficiency, whereas in a deficit budget, efficiency parameter should be
assessed by looking at growth rates of revenue in relation to expenditure. As for conditionalities
to ensure proper utilization of funds, it must be appreciated that only the grants could
be made conditional and not entitlements.
Shri M.C. Gupta (Member Secretary,
Tenth Finance Commission)
The issue of governance is core to
the improvement of Fiscal performance. Good governance consists in controlling rampant
evasion of taxes and exploiting the tax base available under Articles 268-270 of the
Constitution. Better compliance alone can substantially improve the fiscal situation and
there is no need to increase tax rates. The adoption of a comprehensive VAT regime would
be in the interests of both the Centre and the States as it plugs leakages and evasion. A
single VAT is preferable to a dual
VAT which is presently being adopted. The MPLAD scheme is a negation of basic budgetary
ethics. Such schemes go against the principles of fiscal responsibility. The Commission
should comment on such acts violative of fiscal discipline by
the Centre and the States.
Shri Arun Sinha (Member Secretary, Tenth Finance Commission)
The Commission should explore the
possibility of devising a mechanism by which its recommendations are made enforceable.
Proper coordination between the Planning and Finance Commissions could be the first step
in this direction. It may also help in avoiding duplication of decision making, enable a
joint effort for devising an equity framework and establish the minimum requirements for
subsidies. Where allocations are on equity considerations, a proforma
should be prescribed for monitoring achievements. Subsidies should be targeted and
provided efficiently to benefit only the deserving. The Calamity Relief Fund must be
reviewed. Normal relief can be provided under various other schemes. In case of calamities
of rare severity, the surcharge itself determines the size of the corpus required to meet
the situation. Major calamities should be directly funded by the Centre.
The Commission’s
recommendations must reflect concern for the last person whose lot has not improved.
Economics is being sacrificed at the altar of political expediency. Recommendations
regarding resource transfers to the Local bodies must be based on a closer observation of
ground realities so as to make the deployment of funds more effective. It would help in
resolving such matters if the Planning and Finance Commissions are merged. The merger will
also restore the residuary character of Article 282 under which the Planning Commission
has been recommending substantial grants for the States. The Commission should focus on
infrastructure disabilities such as poor roads, lack of electricity etc.
Shri J.C. Jetly
(Member, Eleventh Finance Commission)
A permanent secretariat is a must
for the Finance Commission as a lot of fresh work has to be undertaken at the constitution
of every Finance Commission. The permanent secretariat would be ready with data and save
precious time for the Commission. The Finance Commission should insist on a decision on
each of its recommendations. The present practice is to accept the recommendations
involving resource transfers only and a number of important recommendations are
overlooked. Further, the Commission in its recommendations must impress upon the States
the need for implementation of the 73rd and 74th Constitutional
amendments in their true spirit.
Dr. Amaresh
Bagchi (Member, Eleventh Finance Commission)
Any scheme of restructuring the
public finances can go awry if there does not exist a central
policy making authority to ensure that actual performance levels are properly documented
against the targets. Past levels of achievement in raising of revenues could be considered
a fair norm and a decline in tax : GDP ratio should not be
accepted. Given the large quantum of resource transfers due to the States from the Centre,
actual performance of states may experience a dip in the face of poor revenue mobilization
by the Centre. One way of protecting the resource entitlements of the states would be to
fix the entitlements in relation to GDP. The protection of resource entitlements is a
necessary support to the states, as unlike the Centre, the States face severe constraints
with regard to borrowing. The Commission may consider recommending an enlargement of the
taxation powers of the states with a view to augmenting their non-debt resources and
ensuring a reasonable plan size. Income tax rates could be allowed to be determined by the
States after fixing floor and ceiling rates. The Commission should also review the
practice of approving large plans for heavily indebted states supported by further
borrowings. This aggravates their liabilities and compounds their resource problems.
Efficiency of resource use can only be ensured under a hard budget constraint and a regime
of specific purpose grants. Revenue gap grants under Article 275 are entitlements and
subjecting these to the achievement of certain pre-conditions would militate against the
spirit of the Constitution. The grants component of the resource transfers may be
increased so as to minimize the controversies over the relative weights for factors in the
devolution formula
Shri T.N. Srivastava (Member
Secretary, Eleventh Finance Commission)
Synchronisation of the Five Year Plan and Finance
Commission award period is most critical to achieving a robust system of resource transfer
from the Centre to the States. The huge revenue component in the Plan is an area of
concern as it is funded by borrowings. The Commission may look into the need for upgradation grants though there is no specific mention of this in
their TOR. If the Twelfth Finance Commission cannot address this issue, there has to be an
alternative mechanism. Otherwise the requirements of the sectors coming under Non-Plan
will suffer.
Concluding the meeting, Chairman, Twelfth Finance Commission, thanked the
participants for their views and hoped that the Commission would be able to use their
suggestions accommodate them suitably in its attempt to balance different conflicting
interests and come up with an acceptable resource transfer mechanism.
List of Participants (Meeting with
Chairmen and Members of Previous Finance Commissions)
Twelfth Finance Commission
1.
Dr.
C. Rangarajan, Chairman
2.
Shri Sompal, Member
3.
Shri T.R. Prasad, Member
4.
Prof.
D.K. Srivastava, Member
5.
Shri G.C. Srivastava, Secretary
6.
Shri R. Ramanujam, Jt.
Secretary
7.
Shri R.N. Chowbey, Jt.
Secretary
Chairman and Members of previous
Finance Commissions
1.
Shri G. Ramachandran, Member Secretary,
Sixth Finance Commission
2.
Dr.B.S. Minhas,
Member, Sixth Finance Commission
3.
Shri N.K.P Salve, Chairman, Ninth Finance Commission
4.
Dr.
C.H. Hanumantha Rao, Member,
Seventh & Eighth Finance Commissions
5.
Shri V.B Eswaran ,Member Secretary,
Seventh Finance Commission
6.
Shri G.C. Baveja, Member,Eighth
Finance Commission
7.
Shri Justice T.P.S. Chawla, Member,
Eighth Finance Commission
8.
Shri Justice A.S. Qureshi, Member, Ninth
Finance Commission
9.
Shri Mahesh Prasad, Member Secretary, Ninth Finance Commission
10.
Shri BPR Vithal, Member, Tenth Finance
Commission
11.
Shri M.C. Gupta, Member Secretary, Tenth Finance Commission
12.
Shri Arun Sinha,
Member Secretary, Tenth Finance Commission
13.
14.
Shri J.C. Jetly,Member, Eleventh Finance
Commission
15.
Dr. Amaresh Bagchi, Member, Eleventh Finance
Commission
16.
Shri T.N. Srivastava, Member Secretary,
Eleventh Finance Commission