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Centre-State Financial Relations | Social Issue Essay, Article, Paragraph for Class 12, Graduation and Competitive Examination.

Centre-State Financial Relations

Scheme of the Essay

Expositions: Constitutional provisions

Rising Action: The Tenth Finance Commission formulated two sets of devolution schemes


(1) According to the new scheme state govt. will get Rs. 2091 crore more during 1996-97 and it has many other advantages

(2) Modification suggested by the Finance Ministry

(3) The ministry’s suggestion to remove destruction between plan and non-plan expenditure is good

Falling Action: Scheme suggested F.M. is nothing but W.B’s Schemes

Ending: The Finance Ministry should accept devolution schemes.

The framers of the Indian Constitution recognised the fact that the constitutional scheme under which the functional responsibilities and the financial resources were distributed between the Centre and the states would result in substantial vertical fiscal imbalance. In order to reduce such imbalance, they provided for a Finance Commission under Article 280 to periodically review the financial position of the central and the state governments and to recommend financial devolution from the central government to the states. Even when they provided for compulsory sharing of yield from income under Article 272, they left it to the Finance Commission to decide the mode of distribution.

The Tenth Finance Commission formulated two sets of devolution schemes; one based on the traditional gap-filling approach to be implemented during 1995-96; and another slightly modified scheme to be implemented in the remaining four years. According to the second scheme, the tenth finance commission has recommended the devolution of 29 per cent of the gross revenue from the taxes levied and collected by the central government to the states for a period of 15 years. This scheme could not to implemented because it required the constitutional amendment to that effect. Further, state governments have been asking for much higher share than 29 per cent varying from 33 per cent to as much as 50 per cent. Dr Manmohan Singh did not bother about this scheme because it involved an enhanced level of devolution to the states.

However, the United Front government, true to its federal spirit, has taken up the alternative scheme of devolution for consideration. In keeping with the democratic tradition, the Union finance ministry has prepared a note presenting the financial implication of the alternative scheme of devolution of the Tenth Finance Commission on the finances of the Union government and has presented its own modifications for the consideration of Parliament and the wider public.

The alternative scheme of devolution requires snaring of 26 per cent of the gross proceeds of all central taxes (excluding stamp duty, excise duty on medicinal and toilet preparations, central sales tax (CST), consignment tax and surcharge), plus 3 per cent of the gross proceeds of all central taxes instead of existing share in additional excise duties in lieu of sales tax on tobacco, cotton and sugar. The 29 per cent of the gross yield from all central taxes would include the gross yield from income tax, all types of Union excise duties, corporate tax, wealth tax, estate duty, capital gains tax, taxes to be levied under Articles 268 and 269 other than CST and any other taxes which they may decide to levy under the residuary powers.

It is estimated by the Union finance ministry that if this scheme is accepted then the state governments will get Rs. 2091 crore more during 1996-97. The advantages of this new scheme are that: -There will be stability in the flow of financial resources from the Centre to the states. The states will be able to share the aggregate buoyancy of yield from central taxes. The Centre can pursue whatever tax reforms it wants without affecting the revenues of the stage governments; (d) the Centre will have the incentive to tap the sources of revenue indicated not only under Article 272 but also under Articles 268 and 269.

The Note prepared by the Union ministry of finance starts with a statement that the very idea of pooling all central taxes may not be acceptable because the central government also needs to have certain taxes at its exclusive command to meet exigencies. However, the union ministry of finance has suggested some modifications to the scheme. The first modification they have indicated is that consolidated devolution from the central revenues to the states should be not merely in lieu of existing shares in central taxes for meeting the non- plan revenue expenditure of the state governments but should be in lieu of existing financial transfers on the entire revenue account – plan and non-plan.

This the Union ministry of finance is not prepared to implement the alternative scheme suggested by the Tenth Finance Commission for the simple reason that it results in increased transfer of financial resources to the states. In fact, one of the justifications for contemplating broad-based divisible pool was to enable the states to receive gradually increasing amounts of revenue from the Centre. While the suggestion of the finance ministry to do away with the distinction between plan and non-plan expenditure is well conceived, that should be attempted to be achieved by asking the next (eleventh) finance commission to consider the expenditure requirements of the state governments on revenue account without making any distinction between plan and non-plan accounts. That is a more logical way of roving the existing distinction. The finance commission may be asked to examine the total revenue expenditure requirements of the states, including plan and non-plan, so the state governments will not hide something under plan account while presenting their case before the finance commission.

Much more than this, the scheme suggested by the Union finance ministry is nothing but the scheme advanced by the World Bank in their country report for 1996 wherein they have suggested the removal of distinction between plan and non-plan expenditure and covering the Planning Commission into a loan council to recommend only capital transfers from the Centre to the states for undertaking financially viable plan projects. It is surprising that the ministry of finance has accepted this suggestion without understanding the implications of the broader thrust of the economic planning in the country. Today, notwithstanding liberalisation and globalisation and opening up of economic activities to the market forces, the need for the Planning Commission arises mainly because the market forces do not guide private entrepreneurs to provide basic minimum needs like drinking water in rural areas, primary health, primary education, nutrition, food security, environmental protection, etc. which involve wide externalities. These are the areas where the markets fail, and the government’s intervention becomes necessary through the Planning Commission. In the wake of liberalisation, while the role of public sector has dwindled but the role of the Planning Commission has increased all the more in social sectors. Without realising this, the Union ministry of finance has mechanically accepted the World Bank’s scheme and has presented it to Parliament.

The Planning Commission has become an important institution in the federal set up of India. In the changed circumstances, its role as an allocator of investment has no doubt come down. This has been rightly accepted by the Planning Commission which has identified a much broader social role of ensuring basic minimum services to all the people. Besides, the government’s intervention has become necessary to assess and formulate appropriate policies to reduce inter-state as well as intra-state regional economic disparities. These two takes will require not merely capital funds but also funds on revenue account for promoting social goals. Therefore, it would be wise on the part of the Union ministry of finance to accept the recommendation of the Tenth Finance Commission’s alternative scheme of devolution and implement it. Any attempt of convert the Planning Commission into a loan council will only boomerang politically. There is no need for undertaking such a misconceived adventure at this stage of political development.


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