CHyi

EVALUATION OF THE FINANCIAL RELATIONS BETWEEN THE UNION AND

THE STATES IN INDIA,

Introduction

An attempt is made here to trace the financial

relationship between the centre and the states in India, and

to throw light on the salient features of the changing

pattern of the financial adjustments between them.

Also an attempt is made to study the changing impact of the said relationship on the finances of the State of

Maharashtra as well as the reactions and arguments of this

state to the changing pattern of the relationship between the

centre and the states.

The second part of this chapter is devoted to the

analysis of the issues involved in the transfer of resources

from the centre to the states. The role such transfer played

in Maharashtra's revenues, has been analysed in the chapter on Revenue Structure.

8.1 Early Beoinnino of Financial Relations in Indias

The problem of financial relationship between the

centre and the states is a practical complicated issue. This

problem can be backdated to the year 1833, when there was a

288 ]ight}y centralized system uf Government established by th«

Charter Act of 1833 which vested complete power of

legislation, administration and finance of the entire

territories in India, in the governor general of India.

Therefore, even the presidencies collected the taxes and

spent the proceeds in the name of the Governor General of

India; such states soon proved to have led to "irresponsible

extravagance" on the part of the provincial government.

Thus, the year 1870 was the year when financial

decentralization in India began. It is not necessary here to

continue along the way back into the developments from 1870

to 1975-76, since this study deals with the period from

1975-76 to 199S-93. But as a very brief background, it may

be mentioned that, "Mayo's Reforms of 1870 marks the beginning of continuous process of functional and financial devolution from t^ie central to the provincial Governments.

Mayo's scheme which came into effect in 1871, provided that, certain administrative departments such as, Education,

Medical Services, Ja ils , Police etc. should be under the control of provincial Governments, while the receipts from these departments, plus some "assignments" from the Cential revenues, were to form the provincial resources. This ar ranigements were termed as "Budget by assignments". The provinces therefore, were assigned the following revenue heads; Excise, Stamps, and t)->e License Tax. This system of

289 assigned revenues was modified in 1888, it was made quasi­

permanent in 190^ and permanent in 1912.

In 1909 the Secretary General of State appointed thie

Royal Commission on decentral i 2ation to go into the whole

question of financial relations between the centre and the

provincial Governments and to make recommendations. The

commission however favoured relaxation of central control in

a large number of minor matters, so as to avoid vexatious

interference with the financial administration in the provi nces.

Naturally the old financial structure, based on the

principle of detailed control over provincial finance by the

central Government, seemed grossly unsuited to the new

constitutional arrangement s contemp1 ated -

The Joint Report recommended the principle of

"Seperation of Revenues*'. This scheme of reallocation of revenues, involved the seperation of central and provincial budgets and a general relaxation of central control over p ro v in c ia l finance. The Jo in t Report recommended th a t, provinces should be given independent powers^ in the field of taxation, expenditure and borrowing, consistent with the general responsibi1ity of the Government of India for the stability of Indian finance.

290 Moreover, before* the reforms, the provincial

Governments) had no independent borrowing powers, loans were

given to them by the Central Government out of the provincial

loans account. "This relationship between the central

Government and the provinces was found unsatisfactory to both

and step by step the financial status of the provinces was

raised u n til, the 1919 Act had recognised the sep^ation of

revenues of the provinces from those of the Central

Government" ^ .

Thus with the inauguration of provincial Autonomy in

1937, India entered on a new career. This brought to a successful termination the development which had been going on since 1860. It is also known that the adoption of

Montagu-Chemsford Reforms marked the firs t stage towards introducing the federal system of finance in India. The

Government of India Act of 1935, should also be regarded as an important land mark in the evolution of the Indian federal system.

8-2 Problems of Financial Relations bet»»een the Centre and

the States

The setting up of a Finance Commission once in five years is a constitutiona1 obligation under Article 280 and the commission is required to make recommendations to the

President as to j-

291 (a) The distribu tion between the Union and the States, of the

net proceeds of taxes which are to be, or may be, divided

between them and the allocation between the states of the

respective shares of such proceeds;

(b) The principle which should govern the grants-in-aid of

the revenues of the states out of the consolidated Fund

of India.

(c) Any other matter re fe rre d to the Commission by the

President in the interest of sound finance. It is

difficult to erase the impression that the terms of

reference favours the Union Government. But our analysis

or the resource-rea11ocation between the centre and the

states might be a clear answer to this.

8.3 Sharino of Taxes

Union Excis»e Duties

Under the Six Finance Commission, the coverage of items for state's share has been sim ilar but the state's share was limited to 20 percent. The Seventh Finance Commission doubled the state's share to ^0 percent on the ground that if the states had sufficient resources with them, their dependence on the centr'e would be reduced. It included in the divisible pool all commodities excluding Excise on elect ric ity .

29P The? Eighth Finance* Commission, raised this share to 45 percent, but the increment of 5 per cent Mas used for meeting the assessed post-devolution de ficits of the states.

The Ninth Finance Commission, let the overall share remain at 45 percent, but used for index of infrastructure 5 percent and 7.4S5 percent was to be distributed among the deficits states in its First and Second Reports respectively.

Thus,the portion of the net proceeds of the union Excise

Duties from which all states receive a share was 40 percent for the Eighth Finance Commission. It remained so in the one year (1989-90) report of the Ninth Finance Commission, but it was reduced to 37.575 percent in its second report pertaining to the period 1990-1995,

The Tenth Finance Commission, raised the state's share to 47.5 percent, taking into consideration its other recommendations of a decrease in the state's share of the net proceeds of Income Tax,

There has been an increasing trend in the state's share of divisible pool through greater coverage as well as increase in the percentage of Excise Duties transferred to the states except during the period of the Ninth Finance

Commission.

P93 The recommendditions of the various Finance Co/nmissions

relating to the distribution of Union Excise Duties are

presented in the following table No.^2 given below;-

Table No- 37

Union Excise Duties

6th 7th 8th 9th FCR 10th States FC FC FC 1st 2nd FC Report Report

1 ) Andhra Pradesh 8.16 7.691 8,587 7.858 7.170 8.465 B) Arunachal Pradesh -- - 0.070 0.897 0.170 3) Assam 2.71 2.793 2.977 2.707 3.810 2.784 i*) Bihar 1 1 .47 13.021 13.202 13-573 11.028 12.861 5) Gujrat ^*.57 4. 101 3.506 3.109 3.183 4,046 6> )-)aryana 1 .53 1 . 177 1 .017 1 ,077 1 .099 1 .238 7) Himachal Pradesh 0.63 0.521 0,589 0,549 1-943 0.704 8) Jammu Kashmir 0,90 0.839 0.856 0.713 3,548* 1 .097 9) Karnataka 5.45 4,876 5.077 5.092 4. 104 5.339 10> Kerala 3.86 4.035 3.800 3-707 3.807 3.875 11) Madhaya Pradesh 8.15 8.725 8.852 8.726 7,224 8.290 IS) Maharashtra 8.58 6.63a 6.216 5.635 5.185 6.126 13) Manipur O.Hl 0-218 0.H33 0. 197 1 .174 0.285 1^») Maghalya 0.19 0.200 0.194 0. 199 0.891 0.283 15) Nagaland 0.11 0.097 0.096 0.070 1 .348 0.181 16) Sikkim - 0.028 0.039 0,032 0.260 0.126 17) Goa --- 0.074 0.523 0.180 IB) Mizoram - - 0.065 0.109 0. 149 19) Or i ssa 4,06 4-682 4.592 4,454 5.358 4.495 30) Punjab 1 -87 1 ,226 1 .317 1 .310 1 ,362 1 .461 21 ) Rajasthan 5.00 4,813 4.695 5.097 5.584 5.551 22) Tamil Nadu 7.43 7.637 7.317 7.785 6.379 6.637 83) T r ipura 0.30 0.373 0.292 0.295 1 .556 0.378 Si*) Uttar Pradesh 17.03 18.290 19.097 19.877 15- 638 17.811 H5) West Bengal 7 .79 8.025 7.449 7.729 6.600 7.471

100.00 100.00 100.00 100.00 100.00 100.00

Source These data were compiled from various reports of Finance Commissions

* Figures for Jammu and Kashmir are estimated

S94 This Table shows c3ear]y that the different Finance

Com/nis&ions kept changing the a/nount of share of each state

throughout history of Fir>ance Commissions in India. Among

these states, the major states like, Andhra Pradesh, Bihar,

Maharashtra, Madhya Pradesh, Tamil Nadu, Utter Pradesh and

West Bengal, are the states given more share compared to the

remaining states. Among these states Maharashtra State ranks

the Sixth in the country, taking into considerations the

amount shared between the states. The share of Maharashtra

state has been fluctuating throughout history of Finance

Commissions. It started with B.5B percent of the total shared

UEDs during the sixth Finance Commission and declined during

the then following Finance Commissions, t i l l it reached the

level of 6.156 percent of the total shared UEDs wh>ich was

recommended by the Tenth Finance Commission.

Basic C rite ria Adopted For The D istribute of UEDs

The following Table No.38 shows the various criteria

Foot Note:

The F ir& tf second ^nd the Th ird Finance Comoii&sions have

agreed that the distribution of the state's share should be based on population hut the Second Finance Commission added

up JO percent to other fa c to r. The Fourth Finance Commission

listed out seven factors as indicative of socio-economic

backwardness. The Fifth Finance Commission had a similar

approach, that the corrective factor to be financial t^eakness

and sucia-economic backhtardness of states.

295 • o o t 1 1 1 1 1 1 1 NCi »*»

& cu ♦ ; 1

3 3 1 1 1 1 1 1 t 1 I ir >

r

> 1 3

I 1 1 1 1 4 1 1 1

<1

« 1 o HS| « 1 r ' t ( 1 t

I 1 1 1 1 1 I 1 B 1 m a a 1 c s U ® § J i W V Xi l l l — S W 1 M * j 1 1 % 1 o 1 4 s g u ^ £ ll ‘ r s i r i CH - d S « -2 « ^g- f i I® a b V

3 *g 3 s - « n H I 1 % 1 1 1 1 1 en CN f S S I l f e • M © ^ a -s BM*C rj g *C ^ « n ee • n s 4 1^1 1 1 1 O I 1 1 < N 1 8 1 " CM <)■ s 8 5 n S e I P 5

«T | i n 1 i 1 1 l^-^i ■ ■ f S < s 2 cc

1 „ o o o •T) «r» >ri « n o o 0 0 (S < N M l r-

o i n © o o o o » r » • n f S f S f S f s < N a - c

9 0 r - r » •o »r > « r i o \ 0 O n < N O s 0 \ ON O n ON r- ON ON C CA 5c ^ O n •§ 1 «*4 u . 1 0 ;2 o 1 I f (U U .s H b 1 b. c/? C/5 s i z

i9 6 adopted by the successive Finance Commissions while determining the state's share in the UEDs . However, the

increase in the sharing of UEDs for the states has been

limited^ It is seen from the recommendations of all commissions previous to the Seventh Finance Commission, and except the First Finance Commission, that the state's participation in the total Excise pool has been almost sta tic, being not more than 20 percent "which was the share p of the state's in the total Excise revenue in 1958-53".

The Sixth Finance Commission adopted per capita income reworked at average all India prices as indication of relative economic positions of states. The relative share of each state in the 25 percent weightage accorded to this

factor was determined by the distance of the per capita income of state from that of the state with the highest per capita income. The Seventh Finance Commission has adopted the criterio n of per capita income in addition to people below poverty line as well as the revenue equalization

formal a.

The State Government, therefore, urges the Commission

that only principles germane to the tax revenue should be

adopted in determining the share of an individual state.

Thus, the state Sovernment was of the view that "Consumption

is the only criterio n for distribu tion of the proceeds of

?97 Excise Duties and in the absence of reliable data of

consumption, population could be adopted as one of the

important factors. It is an accepted fact that the level of

consumption in urban areas is higher than in other areas. It

is therefore, necessary to give larger weightage to the urban

component in the population of a state. The Government of

Maharashtra, therefore,urged that the d ivis ib le pool should be distributed on the basis of urban and other population in

the ra tio of 50:50, the entire net proceeds both from the basic excise duties should be shared Mith the states and the slate's share in the divisible pool should be raised to 50 percent.

The Eight Finance Commission increased the shareable percentage of UEDs from ^*0 percent to 45 percent, but set apart 5 percent exclusively to be distributed among the

states which still had a deficit after the devolutions recommended by it, in addition to the criterion of population and reciprocal of per capita income. The state of

Maharashtra's view was that, it is patently unfair that a portion of the shareable revenue from excise should again be set apart for “gap States",when these states are in any case given "gap grants” under A rtic le 275. In view of this, the state Government has suggested that shareable revenue from

Union Excise Duties be increased to 50 percent, frcjm 45 percent, without reserving any part thereof exclusively for

any category of states,

898 The Ninth Finance Commission MhiJe /naintaining the percentage of ^5 percent being the net distributable proceeds had a different approach in the matter of the treatment of deficit states. According to the principles recommended by the Ninth Finance Commission, the net distributable proceeds of the Union Excise Duties are shareable among the states on

the following criteria

(a) 25 percent on the basis of 1971 population.

(b) 12.5 percent on the basis of income - adjusted total

popu1 at ion .

(c) 12.5 percent on the basis of index of backwardness.

(d) 33.5 percent on the basis of distance of a state per

capita income during the triennium 1985-85 from that of

the state having the highest per capita income

multiplied by the 1971 population of the state.

(e) The remaining 16.5 percent is distributed among the

states adjudged to be deficient by the Finance

Commission after devolution. On this basis, under the

award of the Ninth Finance Commission the percentage

that became available to Maharashtra of the net

distributable proceeds under the Union Excise Duties

299 worskout to be 5.385 percent. Thus,the share of

Maharashtra state which was 6.215 percent in the light

of the recommendations of the Eighth Finance Commission

had thus come down to 5.185 percent under the Ninth

Finance Commission award.

The Government of Maharashtra had stressed the point that, the guiding principle for distribution of the net distributable proceeds of this revenue that each state should receive what it would have collected were it to levy and collect the tax. It was mentioned that the practice adopted by the previous Finance Commissions, it would be necessary to give weight to the economic backwardness of states, but such weighiage should not distort or negate the basic tenet of rational distribution of the proceeds which is one based on production. In fact here the state of Maharashtra had reiterated that no more than SO percent weightage be given to the factor of economic backwardness. This state also reiterated its earlier suggestion that the shareable proceeds from Union Excise Duties be increased to 50 percent from ^*5 percent without reserving any part exclusively for any special category of states. The state also suggested that the other factors which should be taken into account for the distribution of the shareable proceeds should be

Government functioning. It would be adequate if a weightage

300 of 10,5 and 5 percent re?spect i vel y is attached to these three factors. The remaining 60 percent of the shareable proceeds should be distributed on the basis of production measured with reference to contribution to the excise revenue-

The arguments of the Government of the State of

Maharashtra regarding this revenue source are more or less valid today. This is obvious from the fact that, when a portion of the Excise Duty is set apart for "gap States" it means that, these states are getting also "gap grants’* v4hich would clearly give them double grant. This is unfair in the sense that it w ill not only widen the regional imbalances in the country, but also encourages the financial dependence of the states on the Union Government.

M ore over, M ah arash tra S ta te is one of the most urbanized states in the country. As per the 1991 population census, the urban papulation in Maharashtra <3.05 crore) was

38.7 percent of the total population of the states this percentage was much higher than that of India 05.7). In this regards Maharashtra stands first among the major states in

India. In fact urbani2ation is one of the most important factors affecting taxable capacity of the state. Thus, any high rate of urban population will increase taxable capacity through (i) increasing the taxable goods and services; income and property ( i i ) Change in the consumption pattern and ( i i i )

301 Increase in money ©xpt?nditure. 1 ncrsa&B in urbani2 ation has also a positive effect on the tax collection system, in the

form of facilitating its collection. Therefore, tax ratio will be higher in state where there is a greater- urbanization• So, we expect urbanization and the ratio to move in the same direction.

The Government of Maharashtra State realized a ll these

facts; accordingly the state stuck on its argument of the factor of consumption as a very proper factor taking into

ideration the changers in the consumption pattern in thecons. state as a result of rapid urbanization within the state of

Maharashtra accompanied by the a v a ila b ility of consumption data. The alternative mechanism to consumption as per the arguments of the state was the population factor.

As we know, population has traditiona11y been considered a positive factor in stimulating economic growth.

A large labour force means more productive manpower, while a large overall population increases the potential size of domestic market. But at the same time high rate of growth of population has an adverse effect on domestic savings which is highly detrimental to the growth of the economy. Therefore, the ^ligher the rate of growth of population, the lower is the rate of per capita income corresponding to a particular rate of growth of National Income. Maharashtra State ranks Third

308 in respect of population c»moi>9 st all the state in India. The

total population of the state which was 396 lakh in 1960-bl,

has almost doubled its e lf in spav> of 30 y^ars, reaLhing the

level of 789.37 laUh in 1991. This population growth has its

effect on the financial position of the state. Though it

reduces the volume of per capita income, it helps in the

expansion of tax base, so that a large number of people could be brought under the umbrella of taxation, which will

natuj rally increase the tax r-evenue of the state of

Maharashtra,

Notwithstanding these facts, the state has to pay more

and more attention to the family planning policies, so that,

controlling the growth rate of population is very neces&ary

in order to lim it the social overhead sf?rvices to be offered

to them in the long run.

Thus, Maharai&htra state being third in population size

and leading state in urbanization, has the opportunity to

defend her arguments.

The population as well as urbanization aspects are

termed as economic resoLirces to the state which are supposed

to be u tilize d fu lly . Therefore, we regard the arguments of

the state of Maharashtra valid currently-

303 Income tax

The participation of the states in the sharing of the

net proceeds of income tax is provided in A rtic le 270 of the constitution of India. This explicit provision in the

constitution is by way of corrective to the imbalar»c© in the distribution of resources between the centre and the states

in view of large responsibility entrusted to the states for

the provision of services and infrastructural facilities for development. This corrective also implicitly recognises that

the scope for taxation given to the states by the

constitution is not adequately resilient and therefore the

resources of the states need to be strengthened.

Thus, the constitution accordingly provided for

compulsory devolution of Income Tax proceeds to the states in

Indi a.

304 Table No. 39

Recoiamendations of the various Finance CoMMis&ions

on the devolution of net Proceeds of the Incote Taxs

(share in Percentage)

6th 7th 8th 9th FCR 10th FCR FCR FC 1st 2nd FC States Report Report 197i*-79 1979-8^* 1984-B9 1990-95 1995- 2000

1 i Andhra Pradesh 7.76 8.021 S. 187 7.344 8.208 S. 465 2) Arunachal Pradesh - -- 0,066 0.073 0.170 3) Assam 2.5^ 2.5i* 2.789 2.507 2.631 2.784 Bihar 9.61 9.61 12.080 12.314 12.418 12.861 5) Gujrat 5.55 5.957 4.409 4.235 4.550 4.046 6) Har yana 1 .77 1 .819 1 .074 1.048 1 .244 1 .238 7) Himachal Pradesh 0.60 0.595 0.555 0.505 0.595 0.704 8) Jammu & Kashmir o.ai 0.818 0.838 0-682 0.695 1.097 9) Karnataka 5.33 5.440 4.979 4.937 4.928 5.339 10) Kerala 3.92 3.948 3.760 3.553 3.729 3.875 1 1 ) Madhaya Pradesh 7.30 7.354 8.378 8.000 8.185 8.290 IH) Maharasht ra 11 .05 10.949 8.392 10.110 8.191 6. 126 13) Manipur 0.18 0.188 0.220 0.181 0.171 0.282 It*) Maghalya 0.18 0.178 0.184 0.183 0.208 0.283 15) Nagaland 0.09 0.085 0.088 0.64 0.096 0.181 16) Sikkim - 0.035 - 0.028 0.030 0.126 17) Goa - - 0.035 0.090 0.110 0,180 18) Mizoram - - - 0.059 0.073 0. 149 19) Orissa 3.73 0.738 4.202 4.055 4,326 4.495 ao) Pun jab 2.75 2.713 1 .744 1 .522 1 .706 1 .461 21 ) Ra jasthan i*.50 4.362 4.545 4.773 4.836 5.551 25) Tamil Nadu 7.9^* 8.048 7.565 7.614 7.931 6.637 23) Tripura 0.27 0.258 0.269 0.269 0.303 0.378 2^*1 Uttar Pradesh 15.23 15.422 17.907 18,326 16.787 17.811 25) West Bengal 8.89 8.015 7.800 7.539 7.976 7.471

100.00 100.00 100.00 100.00 100.00 100.00

Source CompiJed data from the various finance commission reports

303 The? recommencJations of the various Finance Commissions

Di» the r>e»t proceeds of the income tax are well furnished in

Table No.^^ given above. This table shows clearly that the proceeds of Income Tax are almost d is trib u te d among a ll states in India in compliance with Article 270 of the constitution of India.

Among the major seven states, Maharashtra state ranks

Second after Uttar Pradesh, but the shared amount has never been constant. This is obvious from the fact that, the sixth

Finance Commission allotted a share of 11.05 percent, while shares a lotted by the successive Finance Commissions have been 10.9^9 percent by the Seventh Finance Commission,10,110 per cent by the Eighth Finance Commission, B.391 per cent by the Ninth Finance Commission, and 6.15£> percent by the Tenth

Finance Commission.

This table also shows clearly that the share of

Maharashtra in the net proceeds of Income Tax has been continuously deer'easing during the period under our consideration. In fact there is a very popular misconception that because Maharashtra has a hiigh per capita

SDP,Maharashtra is well off- Further^ more ,it is argued that Maharashtra is relatively advanced state and therefore, does not require any assi&tancei this has affected very much the share of Maharashtra State in the d ivis ib le pool during this period of our analysis.

306 The Slate Government ha& reacted strongly by saying that "We have been paying a heavy price for being categorized as A comparatively developed state in that we have received progressively lower shares in the transfers recommended by successive Finance Commissions and in the revised Gadgil

Formula. Ule have also been receiving steadily and steeply declining allocations of market borrowings, and so on In fact, it would bear repetition that owing to certain policy changes made by the Government of India we have stood to lose of Rs. 1,700 crore in loan assistance against small savings collections during the four year period 1986-90“^.

In fact the State Government is struggling to make good, at least p a rtia lly , this massive erosion of resources, i r inspite of these setbacks the state Government has been able to maintain reasonable level of per capita development expenditure, it should be renowned to the state's credit rather than be used as an argument against i t .

As regards the manner of distribution among the states of the net proceeds of income Tax assigned to them, all the successive Finance Commissions have recognised population and contribution to be the two relevant criteria. The

Commissions have differed only in regard to the relative weightage to be given to these two factors in assigning t)ie share in the scheme of distribu tion.

307 The Sixth Finarice Commissi.on expressed themselves again&t assigning the factor of contribution any higher

Meightage for the distribu tion of Income Tax proceeds than the then existing rate which Mas 10 percent, "in view of the increasing integration of the national economy and the influence of central policies on the location and development of industrial and territory sectors" In fact the commission further observed that, such enhanced weightage will further aggregate regional imbalances. The Sixth Finance

Commission then in d ire ctly brought in, the concept of grant in its scheme of devolution of tax revenue which could not be appreciated by the state Government. The commission also said that "At the same time, particularly after the exclusion of Income Tax paid by the companies from d ivis ib le pool, it cannot be denied that small, but not clearly identifiable percentage of personal incomes should be deemed to have purely local o rigin ". But the commission did not proceed to have scientific estimation of such items of local origin.

The State Government mentioned clearly that, basically the income from salaries, house property, professions, construction activities, retail trade especially in consumer goods can be considered as income of local origin; in addition, the income from small industi'ies, local transport etc, would also form a part of the income of local origin.

The contribution from income of purely local origin would,

308 therefore, be much £>bove ^0 percent of the total income. In view of this position the weightage of only 1-percent accorded to the factor of contribution by the Sixth Finance

Commission is wholly inadequate and unjust in the eyes of the

Government of Maharashtra.

3n view of this the State Government strongly urged the commission to to ta lly ignore the considerations in Para 5 of the presidential order while dealing with the devolution of tax revenue referred to in Para 4(a) of the presidential order and make recommendations for their allocation based on factors which are germane to the concerned tax. This aspect has all along been accepted in the past and the various

Finance Commissions proceeded on that basis although the factors that weighted with them in allocating the tax revenues may have been different. The State Government therefore, urged the Commission that the factors may be applied only to the issue of determining the grants~in-aid under Article 575. The state Government also urged the

Seventh Finance Commission that in the Scheme of distribution of the net proceeds of income tax between the union and the states to be recommended by them, the state's share in the divisible pool should be at least 95 percent. In the scheme of distribution among the states a weightage of at least 40 percent should be given to the factor of "Contribution"as measured by collection. The state Government did not submit

309 any suggestion in fixing the percentage share attributable to union ter rito r ie s .

The Seventh Finance Commission did not accept any suggestion on the ground that, it has to estimate the requirements of all states uniformly Mithin the constitutional framework of the centre-state relationship.

The commission felt that, the presidential order to apply the considerations set out in Para 5 to both types of Transfers was a purely formal recognition of the past practice. The commission also observed that tax sharing and grants-in-aid have been linked in the scheme of tra n sfe r of the past commissions and grants under A rtic le 275 were determined and recommended to tf»e extent the revenue requirements of the state had not beer> met by the tax share.

The commission has also recommended only 10 percent of the d iv is ib le pool of the income tax should be distributed in proportion to the principle of contribution. It felt that while a smaller proportion would be unacceptable to the states which contribute sig n ifica n tly (Maharashtra state) to the income tax, a larger proportion would set the trend in the wrong direction, in as much as the effect of a larger weightage to the contribution factor would tend against its proposed objective of the fiscal transfer scheme. In the case of the remaining 90 percent of divisible pool, the

310 Finance Cominiission adopted the principle of population which has been traditional 1y accepted.

In consequence, the commission tried to inject equity and d is t r ib u t iv e Ju s tic e , in the scheme of h o r i2 ontal devolution^ The net effect uias that Maharashtra suffered as the percentage share of the state in the d ivis ib le pool of income tax came down from 11.05 percent to 10.95 percent.

The reduction was more drastic in tlie share of the divisible pool of UEDs which came down to 6.63 percent from 8.58 percent recommended by the Sixth Finance Commission.

As mentioned earlier in regard to the inter se distribution among the states of the proceeds from income tax, the sixth and the seventh Finance Commissions distributed these on just two criteria vi2 , population and collection in the respective states. They attached 90 percent and 10 percent weightages respectively to these two factors, while the other Finance Commissions assigned weights of 80 percent and 30 percent respectively. It was only the

Eighth Finance Commission which made a radical departure.

After setting a part 10 percent of the proceeds on the basis of contribution, the remaining 90 percent was distributed among the states on the same principles as for sharing of

UEDs.

311 The State Government is clearly of the view that the ^

time honoured c rite ria of population and contribution should

alone be employed for determining the shares of states in the

proceeds from Income Tax. The state Government also proposes

that, the shareable proceeds from income tax be distributed

among the states by giving a weightage of 55 percent to population and 45 percent to contribution. The State

Government submitted its view that, the shareables proceeds

of income tax be reduced to 75 percent as against 05 percent

during the previous Finance Commission jbut it should coupled

with sharing of 20 percent of the proceeds from corporation

tax with the states, and pending amendment of the

constitution for sharing of corporation tax. The State

Government also recommended that, the apportionment of the

cost of collection between income tax and corporation tax

should be reviewed. It further suggested that, the recently

imposed surcharge on income tax be also shared with the

states on the same lines as income tax, and taxes payable in

respect of union emoluments st'iould not be excluded from the

net distributable proceeds and the constitution be amended

for this purpose. The state of Maharashtra in her arguments

had considered the necessity of bringing corporation tax into

the sharing tax pool between the Union Government and the

federating units. In fact this source of revenue

(Corporation Tax) has been recommended by Sakaria Commission

in its report submitted to the Union Government.

312 As far a& our research is concerned there ha^ never fi been any major changes in the composition of the shareable taxes, in India; rather there have been a continuous change in the percentage share of different states during the successive finance commission periods.

Therefore, it is the right time to add up new kind of sources of revenue to be shared with the states which wouid positively augument the resources transferred to the federating units.

Aadditional Duties of Excise

In pursuance of the decision taken by the National

Development Council in December 1956, Sales Tax levied by the

State Governments on, Sugar, Tobacco and Textiles was replaced by Additional Excise Duties on these commodities by the Central Government. Th is was a form of tax rental agreement, wherein the entire proceeds are distributed among the states with the assurance that each unit must receive e at least the amount which it had collected througl’i the foregone Sales Tax in 1956-57.

Foot Note

But due to J iHbS ] S t y of data on consu^ptjon, each

fineince coai/Tiission suggested formui^ i^hich it considered wouJd most closely approximate to this principle.

313 Therefore, the variouis Finance Com/wissioris have accepted consumption to be the appropriate principle for distributing the proceeds of Additional Excise Duties among the states.

The Sixth Finance commission made a departure from the earlier practice of first setting a part the guaranteed amounts as they were convinced that there was no risk of the share of any state r»ot coming up to the guaranteed amount.

This commission gave small Meightage to production and it decided to allocate the shares on the basis of population,

State Domestic Product and Production in the ratio of

70:20 510 respect ive ly.

Like the earlier commissions, the Seventh Finance

Commissiorj felt that, the appropriate basis for the distribution of revenue from AEDs,would be the level of consumption of the d ivis ib le a rticle s in each state. The

Commission finally adopted two separate basis for the distribution of the net proceeds, one for Sugar and other for

Textiles and tobacco- Accordingly, they determined each state's share in the net proceeds from AEDs on textiles and tobacco by m ultiplying its average per capita SDP for the three years ending 1975-76 ,by its population according to the 1971 Census.

31A The Eighth Finance Commission did not favour the use of either the consumption data based on National Sample Survey

(NSS), or Sugar dispatches to different states* or sales tax revenues. They recommend that the share of the states in the

AEOs be determined by giving equal Meightage to State domestic product and population.

The Ninth Finance Commission maintained the view that since the AEDs were levied in lieu of Sales Tax which itself is a a tax on consumption , the share of the states should correspond to their share in the consumption of these com­ modities. The Commission therefore, recommended that, the shares of individual states be decided by giving equal weighiage to state domestic product and population. The commission preferred to use 1981 Census figures of population because in their view, distiib u tio n of AEDs was not in the nature of devolution for which the 1991 Census data were to be used as per their terms of reference*

The Tenth Finance Commission has used the principle of compensation for the loss of revenue from sales tax on Sugar, textiles and tobacco. Like earlier commissions, the commission was unable to use the NSS estimates and constrained to consider the distribution of Additional Excise

Duties on the basis of suitable proxies. The Commission adopted the c rite ria of population, SDP, and the average

315 collection of State Sales* Tax (excluding inter-state sales

tax), by dssigning a Meightage of SO percent, 40 percent and

10 percent respectivel y . The Cummission preferred to us©

1991 Census figures of population, because in their view, the distribution of Additional Excise Duty is not in the nature of devolution for which the population figures of 1973 should be used as per their reference. Hence they used the latest census figures of 1991 .

As regards the recommendations of the Sixth Finance

Commission, the State Government argued th a t,it was incorrect and also inappropriate for the Sixth Finance Commission to do

away with the distribution of the guaranteed amount as a separate entity and to distribute, instead the entire amount on the basis of fixed percentages based on the principles adopted by the commission which could never be considered as adequate indicators of the state's entitlement. The State

Governments, was therefore, of the view that the

recommendations of the commissions proceeding the Sixth

Commission that the guaranteed amounts should firs t be set apart from the net proceeds, should stand, it is also accepted by the State Government that a statewide consumption of the commodities would be a correct basis for distributing the AEDs. The State Governments were dissatisfied with the distribu tio n of the levy of duties on the three commodities

in question between the Central Excise and the Additional

Excise.

316 Thus, the State Government submitted its suggestion in the following fashion:-

( 1 ) That the guaranteed amounts should be set apart from

the net proceeds of AEDs, for distribu tion among the

states as a separate entity*

O ) The distribution of the proceeds of AEDs in excess of

the guaranteed amount should be on the basis of the

proportion of Sales Tax revenues realised in each state

to the total sales collections in all states taken

together.

(3) The rate of levy of Central Excise and AE should be in

the proportion of 2:1 subject to a minimum incidence of

10,8 percent of the value of clearance of items subject

to AED.

(^) Any shortfall in the yield to the states, reckoned as

at < i i i ) above , should be made good by s u ita b le

grants-in-aid.

The State Government was of the view that the recommendations of the Sixth and the Seventh Finance

Commissions not to segregate the guaranteed amount f ir s t , is contrary to the background and the s p irit with which the agreement had been entered into between the states and the union in 1956-57. Therefore, the State Government submits

317 that , the Eighth Finance? Commifjsion should firs t "allocate

the guaranteed amount a& determined by the earlier Finance

Commis&ion& and set apart the share of each state as then

worked out. The share of Maharashtra in respect of the

guaranteed amount should accordingly be maintained at Rs«

6.38 crore”^.

Coming to the question of the principles of

distribu tion of the amount, in excess over the guaranteed

amount, the Seventh Finance Commission agreed with the

earlier Commissions in supporting consumption as the basis

for distribution.

With due respect to the Seventh Finance Commission, it

is submitted that in the case of Sugar*, equating consumption

of Sugar to the dispatches to the States is deficient as a

concept, p a rticu la rly in the case of Maharashtra, where we deal with a situation in which a compensatory amount is being worked out in view of a tax which but for voluntary surrender, would have been continued to be levied by the

state. If the state had continued to levy sales tax on

Sugar, then the tax receipts would have accrued to the state

from (a) the Sugar consumed within the state, by way of State

Sa^es Tax and also (b) the Sugar dispatches to other States

by way of Central Sales Tax. Therefore, for a state like

Maharashtra which produces about 35 percent of Sugar produced

318 in the country, but is taken to consu/ne only about 18 percent of the total production, the principle of consumption merely on the basis of dispatches is not only, in practical terms, detrimental, but also contrary to the principles of tax

re n ta l,

Contrarywise, it is equally true that in respect of consumption of an item in regard to which Maharashtra is an importer, by virtue of its higher per capita income the

actual consumption level would be higher than in many other

states. In that case also, if the Sales Tax Mere to be

levied, the state would ^^ave reaped the full impact of the higher consumption level notwithstanding that i t is a net

importer. Thierefore, justice demands the formula of d is trib u ­ tion should be based on 50 percent weightage to the consumption factor, as represented by dispatches in the case of Sugar, and the product of the population and the per capita SDPs, in the case of textiles and tobacco.

Moreover, since, the Eighth Finance Commission chose population and SDP by giving equal weightage to each, in

view of the State Government, a combination of the factors of population and SDP might give a general measure of the level

of consumption, but not of the commodities subject to

Additional Excise. Therefore, the share of the state should

correspond to what thie state would have reali 2 ed had it

319 continued to levy Sales Tax, This is reflected not only in the levels of consumption in that state but also by the levels of taxation. In fact these Sales Tax revenues of btates would more closely capture both these factors than any other measure or combination of factors. In fact the Fourth

Finance Commission had adopted this measure.

The Ninth FirtancB Commission in its Second F^eport, has conceded the validity of the principle that the shares of various states should correspond to their shaies in consumption of the commodities covered under the levy of

AEDs.

The state Government in its memorandum reiterated its recommendation to the Ninth Finance Commission, that, since

AEDs are levied in lieu of sales tax, *'it M o u l d be logical that the proceeds should be distributed on the basis of consumption and, therefore, the share of a state should correspond to what the state M o u l d have realized had it continued to levy sales tax"^.

All the above arguments of the state Government submitted to the various Finance Commissions Mere very strong in the sense that they touched the real practical aspects of the resources transfers.

320 What is more interesting her© is that, the state

Government has been rppeatedly sub/niting more or less the similar suggestions at appiopriate moments. The various financ.e commissions did suit their policies as well as Mhat

favours the union Government-

The Table No. ^0 given below shows share of all states in the country out of the total proceeds from the Additional

Excise Duties in lieu of Sales Tax.

3H1 Table No. ^

Additional Exci&e Duties in lieu of sales tax

( in percentage)

6th 7th 8th 9th FCR 10th States FCR FCR FCR 1st 2nd FCR Report Report 1989-90 3 990-95

1 ) Andhra Pradesh B.39 5.245 7.504 7.933 7.680 7.820 a> Arunachal Pradesh - - - 0.100 0.107 0. 104 3) Assam 2.^*7 S.40B a. 566 2.711 a .743 2-483 U) Bihar 9.36 5.933 8,627 8-519 8.317 7.944 6ujrat 5.91 8.742 5.941 6.094 5.905 5-995 h) Haryana 1 .94 a. 656 2.488 2-358 2.317 2-366 7) Himachal Pradesh 0.59 0.860 0.663 0.652 0.621 0.595 8) Jammu & Kashmir 0.73 0.831 0.853 0-916 0-929 0.856 9) Karnataka 5.62 4.901 5.561 5.581 5.865 5.744 10) Kerala 3.58 3.783 3-963 3.834 3.723 3.740 11 ) t^adhaya Pradesh 6.99 6.019 6.942 7.070 7.164 7.a36 IS) liahar asht r a 11.65 17.082 11.461 11.763 11.886 12.027 13) Manipur 0.17 0. 143 0. 178 0.19a o.ai3 0, 197 Magha1ya 0.17 o.oa9 0.183 0.179 0.190 0. 188 15) Naga1 and 0.08 0.1 15 0.098 0. 127 0.120 0. 137 16) Sikkim _ 0.057 0.039 0.048 0.052 0.053 17) Goa --- o.aso o.aaa 0.232 18) Mi2 oram - - - 0.061 0.068 0.079 19) Or issa 3.59 a . 179 3.653 3.680 3.496 3.345 20) Punjab 2.68 6.aao 3-675 3.478 3.533 3.4aa 21 ) Rajasthan <4.17 4.729 4.827 4.636 4.689 4.873 as) Tamil Nadu 7.27 6.449 7.549 7. lao 7.064 7.669 23) Tripura 0.25 0. 17a 0.287 0.279 0.278 0-286 2it) Uttar Pradesh 16.10 13.184 14.318 14.109 14.657 14-573 25) West Bengal 8.30 8.254 8.624 8.330 8.165 8-036

100-00 100.00 100.00 100.00 100.00 100.00

Source Compiled from the reports of various Finance Commissions and "Finances of the States” in RBI bulletins.

322 Under this spurce of financt?, still the state of Uttar

Pradesh continijes to be the leading state in having a large share in comparison with the rest of the states.

Mah»arashtra State ranks Second in the country in respect of its share from the Additional Excise Duty. Jn fact it received differeiit amounts of share under different

Finance Commissions recommendations. Its share shoMS a continuous increase. It began with 11.65 percent during the

Sixth Finance Commission ai^d reached 12.027 percent during the Tenth Finance Commission, which shows obviously that, the

State of Maharashtra is getting advantage from this source of revenue, though it is not adequate.

323 Grants in li&u of Tax Under Ri^ealed Passenger Fares

Tax Act 1957.

The Finance Commission has to recommend changes, if any, to be made in the principles governing the distribution among the states of the grants to be made available to them in lieu of the Tax Under the Repealed Railway Passenger Fares

Act 1957. The State Government was of the view that, the allocation among the states should be on the basis of railway route lengths and passenger earnings from non-suburban

Traffic for the latest period for which data was available.

Foot Note

The Second Finance CommSssion recommended d is tr ib u tio n o f the p^s&enger e^rnjngsi amongst the states on the basis of the route Jength of raiJuays located in each state wj't/7 due a}loMance for the variation in the density of traffic, This principle has been accepted by the successive Finance

Commission but the shares of individual states shoiMS t^ide

variations^ as between the recommendation of one commission and the other. For instance, Maharashtra's share which

10.B per centf as per the recommendations of the Third

Finance Commission f e ll dot^n to 9 .8 7 percent as recommended by the Si^th Finance Commission. Maharashitra Government had expressed firm views before

the Fifth and Sixth Finance Commissions that, the quantum of

the grant is relevar)t to the distribution of the grant among

the states and that the commission should examine this issue

from all its aspects and make a specific I’ecommendat ion to

the president on the quantum of grant to be paid to the

states, in addition to its recommendations on the principles governing it s distribu tio n . The State Government was of the

firm view that, the quantum of the grant must be fixed with reference to passenger earrings from the non-suburban section, as long as there was a considerable increase in passenger travel and passenger earnings from the non suburban

section. The total amount of the passenger earnings from

non-suburban section were Rs. crore in 3963-6^ and

they increased to Rs, 418.78 crore in 1975-76,the average growth rate being nearly 8.9 percent per annum. On this basis the State Government would, therefore, be justified by the Commission to recommend fixing the quantum of grant at

Rs. 75 crore per annum for the period 1979-B4.

The Sixth Finance Commission was convinced that the plea of the State Governments for the reimposition of tax or

for corresponding enhancement of the quantum of grant is

valid and their grievances in this respect need to be

redressed early. The Sixth Commission felt that the repeal of

passenger tax and its replacement by a fixed grant was not

325 quite in accordance with the provisions of A rticle 269 of the

constitution. Therefore, the commission, urged the Central

Government to redetermine the amount of grant payable in lieu of tax on pa&senger fares in terms of what the states could

have got if the Railway Passenger Fares Tax had continued in

its original form-

The State Government agreed with the recommendations of

the Seventh Finance Commission, that the most appropriate distribution of the grant in lieu of the tax would be in

proportion to the non suburban passenger earnings from

traffic originating in each state. In addition to this the

State Government opines that the principles established by

this commission are salutary and should be maintained by the

Eighth Finance Commission also.

The Sixth and Seventh commissions found that the tax

element in the fare structure, when the tax was in force, was

on an average 10-7 per cent. The Eight Finance Commission

adopted this percentage while arriving at the quantum of

grant and recommended an increa&e from the then prevailing

level to be raised to Rs. 95 crore,

The State Government was unsatisfied with the idea

th a t, the grant should be a fixed amount for the 5 year

period covered by the report of the Finance Commission.

326 Instead, It Mould be better and more equitable if the quantum of grant i£> calculated from year to year and is determined as

a fixed percentage (12 at least) of non suburban pas&enger

earnings each year. This would of course ensure that the

states get their due share in the increased earnings from growth in tra ffic and fare revisions, from time to time.

The Ninth Finance Commission, however, was influenced by the pleading of the Railways that any increase in the quantum would put the development efforts of the Railways in jeopardy. It had accordingly recommended a grant of Rs.l50 crore per annum to be distributed among the states in proportion to the non-suburban passenger earnings from traffic originating in each state.

Out of this grant Maharashtra State received the percentage share of 22.63^ ,corresponding to the earnings

from the non-suburban passenger traffic originating in

Maharashtra.

One of the members of the Ninth Finance Commission justice Shri Oureshi had, in his note of dissent, indicated bis opposition to the recommendation of the majority report.

He has observed*"This a compensatory grant aid, therefore, its quantum has to be based on what the yield of the tax would have been,had the tax been in force. When the Tax was

327 iu -force the tax element in the fd»re structure was, on an average, 10.7 percent. It will, therefore, be fair only, that quantum of grant is determined an the bas^is of 10.7 percent of the non -suburban passenger fare earnings in each year of our recommendations. The railway finances and their modernisation plan should not depend on the contributions by the states..,. I would therefore, recommend that , the state should be paid grants equivalent to 10.7 percent of the non-suburban Railway passenger fares collections in each year

from 1990-91 to 199tv-95"^.

These observations by the Hon.Member fu lly reflected the sentiments of this State Government. However ,the state

Government has reiterated its recommendations that a percent­ age be increased to 12 and the grant distributed accordingly, as well as a separate calculations may be made for each year with reference to the non-suburban passenger fares earning of the respective years, instead of a fixed annual quantum for the five year period.

The Table No.^1 given above is showing the distribution of the Grants-in-Lieu of Tax on Railway Passengers Fares, among the various states in the country during different

finance Commission periods.

32S The State of Maharashtra is hdvinQ the leading larger share under all Finance Commissions, The share also shows fluctuating trend for the State of Maharshtra in specific.

While the Sixth Finance Commission recommended a share of 0*87 percent to be given to the State of Maharashtra the

Tenth Finance Commission had recommended a share of 17.5^9 percent be given to the State of Maharashtra. In fact this share is lesser than that recommended by the Ninth Finance

Commission which was BS.767 percent in its First report and

22.63^ in its second reports.

399 T a b l e N o .

Grants - in lieu of tax on Railway Pa&sengers Fares

During the various Finance CcMMiission Periods

(Shares in Percentage)

feth 7th 8th 9th FCR 10th States FCR FCR FCR 1st 2nd FCR Report Report 1989-90 1990-95

1 ) Andhra Pradesh 8-10 6.99 7.68 7.574 7.484 8.345 H) Arunachal Pradesh _ - - 0.006 0.008 0.005 3) Assam S .70 2.03 1 .472 1 .509 1 .368 Bihar 10.58 9.50 9.51 8.215 8.266 9.326 5) Gujrat 7,i*7 5.28 6.67 5.772 5.717 6.901 6) Haryana 2.57 1 .97 1 .84 1 .600 1 .637 1 .917 7) Himachal Pradesh 0.17 0.13 0.14 0.101 0.098 0.108 8) Jammu & Kashmir 0.02 0.74 0.95 0.522 0,520 0.728 9) Karnataka 3.^7 3.21 3,43 3.282 3.271 3.388 10) Kerala 1.61 2.61 3.18 3.602 3.562 3.495 1 1 ) Madhaya Pradesh 9.89 5.84 5.85 5.936 6.061 6.882 18) Maharashtra 8.87 15.87 15-70 28-767 88.634 17.548 13) Manipur - - 0,02 0.015 0.013 0-018 1^) Maghalyd - - 0.05 0.037 0.0^0 0.034 15) Nagaland 0.01 0.26 0,16 0.152 0.165 0.145 16) Sikkim - - 0.01 0.008 0.004 0.010 17> Goa - -- 0.131 0.133 0.194 18) Mi zoram - -- - - 0.001 19) Orissa 2,24 1 .73 1 .58 1 .552 1 .614 1 ,715 eo) Punjab 5.06 3.81 3.88 3.081 3.110 3.280 21 > Rajasthan 6.59 5.48 4.87 4.772 4.579 4.445 S2) Tamil Madu 5.1^* 6.85 6.61 6.924 6.893 6.458 23) Tripura 0.02 0.04 0.04 0.038 0.042 0.039 2^f) Uttar Pradesh 19.85 18.58 17.85 15.174 15.437 15.568 25) Mest Bengal 5.73 8.65 7.95 7.267 7.203 8.082

100.00 100.00 100.00 100.00 100.00 100.00

Source i - Compiled Data, FCR's

330 T a b l e N o , UB

Total transfers to states 1974—75 to 1978—79

Sixth Finance Commission C l97^t-75 to 1978--79 (5 years)1

Total Rank Percent Rank St ates Assistance to total (Rs. crore)

1 8 3 4 5

1, Andhra Pradesh 776.01 4 8.08 4 s. Assam A39.62 11 4.57 n 3. Bihar 844.79 S 8.79 2 6uJarat 368.64 13 3.83 13 5. Haryana ISO.66 20 1 .26 SO 6. Himachal Pradesh 204.05 15 2.12 15 7. Jammu & Kashmir 232.28 14 S. 42 14 8. Kerala 479.97 10 5.00 10 9, Madhya Pradesh 543.57 B 5.66 8 lo ­ Tamil Nadu 538.57 9 5.60 9 l l . Maharashtra 711-53 5 7 - ^ 5 IS­ Manipur 128.01 19 1 .33 19 IS. Meghalaya B7,52 21 0.91 31 Karnataka 383.64 IS 3.99 12 15. Nagaland 135.67 17 1 .41 17 16. Orissa 577.32 6 6.01 6 17. Punjab 168.97 16 1 .76 16 18. Rajasthan 563.92 7 5.87 7 19. Tripura 132.19 18 1 -38 18 SC­ Uttar Pradesh 1349.05 1 14.05 1 SI . Mest Bengal 82S.93 3 8.56 3 52. SiWkim — —

Source Report of the Sixth Finance Commission 1979

331 Table No. 43

Total Transfers to States 1979—80 to 1983—84

S e v e n t h F i n a n c e Commission C 1 9 7 9 - 8 0 t o 1 9 8 3 - 84 <5 years)J

T o t a l Rank Percent R a n k S t a t e s Assistance t o t o t a l (Rs. crore)

1 2 3 4 5

1 . Andhra Pradesh 15EE.49 6 7 . 3 0 6 H , A s s a m 5 1 8 . 6 5 13 2 . 4 9 13 3 . B i h a r a e i a . 8 7 2 1 0 . 6 7 2 £*. G u j a r a t 9 6 3 . 8 7 10 4 . 6 2 10 5 . Haryana 308,57 17 1 . 4 8 17 6 . Himachal Pradesh 325.07 1 6 1 . 5 6 10 7 . Jammu & Kashmir 376.89 1 5 1 .8 1 1 5 8 . K e r a l a 7 7 0 . 3 5 12 3 , 7 0 12 9 . Madhya Pradesh 1 5 9 7 . 4 6 5 7 . 6 6 4 . 5 10 . Tamil Nadu 1503-60 7 7.21 7 11 . Maharashtra 1 7 1 4 . 0 6 4 6 . 2 3 3 12 . M a n i p u r 1 9 4 . 0 3 20 0 . 9 3 20 13. Meghalaya 1 3 4 . 1 5 21 0 . 6 4 21 1 4 . K a r n a t a k a 1 0 0 5 . 0 0 8 4 . 8 2 8 15. Naga1 and 240.59 18 1 . 1 6 18 1 6 . O r i s s a 9 8 4 . 4 5 9 4 . 7 2 9 1 7 . P u n j a b 4 1 9 . 5 3 14 2.01 1 4 1 8 . R a j a s t h a n 9 0 2 . 8 1 1 1 4 . 3 3 11 1 9 . T r i p u r a 1 9 9 . 8 4 19 0 . 9 6 19 PO. Uttar Pradesh 3314.74 1 1 5 . 9 1 1 P I . West Bengal 1597.11 3 7 . 6 6 4 , 5 a e . S i k k i m 3 6 . 8 5 22 0 . 1 8 22

Source Report of the Seventh Finance Commission 1984

332 T a b l e N o .

Total Transfers to States 1984—89

E i g h t h Finarice Commi ssion C 1 9 8 4 - 8 5 to 1988-89 (5 years)3

T o t a 1 Rank Percent R a n k S t a t e s Assistance t o t o t a l (Rs. crore)

1 2 3 4 5

1 . Andh>ra Pradesh 2096.52 5 7.34 5 s . A s s a m 1 6 0 7 . 4 8 11 4 . 0 7 10 3 . B i h a r 4 2 2 0 . 4 7 2 1 0 . 7 0 2 4 . G u j a r a t 1 4 8 9 . 0 5 12 3 . 7 7 l a 5. Haryana 439.22 20 1.11 19 6. Himachal Pradesh 774.37 15 1 . 9 6 15 7. Jammu & Kashmir 1 1 1 9 . 6 9 14 2 . 8 4 14 e . K e r a l a 1288.25 13 3.27 13 9 . Madhya Pradesh 2 9 5 7 . 6 8 4 7 . 5 0 4 10. Tamil Nadu 2464.94 7 6 - 2 5 7 11. Maharashtra 2635.42 6 6.68 6 I H . M a n i p u r 4 6 9 . 0 5 19 3 - 9 2 18 13. Meghalaya 3 8 1 . 8 6 21 0 . 9 7 21 1 4 . Karnataka 1727.97 9 4 . 3 8 9 1 5 . N a g a l a n d 5 2 7 , 4 2 18 1 . 3 4 20 1 6 . O r i s s a 1 9 0 9 . 6 6 8 4 . 8 4 8 1 7 . Pun jab 646.15 1 6 1 . 6 4 16 1 8 . Rajasthan 1676.17 10 4 . 2 5 1 1 1 9 . Tripura 561.18 17 1 . 4 2 17 20 . Uttar Pradesh 6 1 0 5 . 0 3 1 1 5 . 4 7 1 21 . West Bengal 3449.98 3 0 . 7 4 3 PH. S i k k i m 1 0 4 . 4 5 22 0 . 2 5 22

Note Per Capita figures are estimated by using mid-year population for the years 1974-78 and 1979-83.

Source Report of the Eighth Finance Commission 1989 RBI, Various Bulletin Issues.

333 T a b l e N o .

Total Transfers To States: 1990—95

Ninth Finance Commission

S h a r e o f G r a n t s - T o t a l Grants Rs.crore S h a r e s T a x e s a n d i n - a i d C o l - Towards Total D u t i e s ( 1 + 2 ) Meeting Transfer Relief Col. Expenditure (3 + 4)

1 2 3 4 5 6

.1. Andhra Pradesh 6575.47 341.25 6916,72 3 2 2 . 5 0 7 2 3 9 . 2 2 s. Arunachal Pradesh 554.59 3 0 a . 7 9 827.38 7.50 834.89 3 . A s s a m 2 9 6 9 . 5 7 874,23 3843.80 112,50 3956.30 B i h a r 9670.53 1374.27 11044.BO 131.25 11176.05 5 - G o a 3 3 8 , 5 4 1 6 6 , 5 0 5 0 5 - 1 2 3 . 7 5 5 0 8 . 8 7 . G u j a r a t 3 3 9 4 . 6 8 - 3 3 9 4 . 6 8 3 1 8 . 7 5 3 7 1 3 . 4 3 7 . H a r y a n a 1 1 3 1 . 0 6 -- 1131-06 63.75 1194,81 8 . Himachal Pradesh 1269.43 523.09 179H.52 67.50 1860,02 9 , Jammu & Kashmir 2217.32 1 0 9 6 . 4 2 3 3 1 3 . 7 4 45.00 3358,74 10 , K a r n a t a k a 3 9 6 2 . 0 2 - 3962.02 101-25 4 0 6 3 . 2 7 1 1 .Kerala 2919.10 412.54 3 3 3 1 - 6 4 1 1 6 - 2 5 3 4 4 7 - 8 9 12 , Madhya Pradefth 6 5 3 4 . 4 8 1 0 4 7 . 8 1 7 5 8 2 . 2 9 2 6 1 . 0 0 7 8 4 3 . 2 9 1 3 - Maharashtra 6 0 3 6 . 3 6 - 6 0 3 6 , 3 6 1 6 5 - 0 0 s a o i . 3 6 li*. M a n i p u r 7 1 0 . 0 7 3 7 1 . 6 5 1 O B I . 7 2 3 . 7 5 1 0 8 5 . 4 7 15, Megha1aya 558.21 256.18 8 1 4 . 3 9 7 . 5 0 8 2 1 . 8 9 1 6 . M i z o r a m 6 3 7 . 4 7 3 7 9 . 7 9 1017.26 3.75 1021.01 1 7 . Nagaland 781,88 458.67 1240.55 3.75 1 2 4 4 . 3 0 18. Orissa 4263.81 1082.98 5 3 4 6 . 7 1 1 7 6 . 2 5 5 5 2 3 . 0 4 19, Pun jab 1515.22 53.91 1569.13 105,00 1674,13 20 . R a j a s t h a n 4 6 1 3 . 8 3 1 4 4 6 . 7 9 6060.62 465-00 6525.62 21 . Sikkim 156.25 84.68 204-93 11 . 2 5 2 5 2 . 1 8 a e . Tamil Nadu 6008.16 43.79 6051.95 146.25 6 1 9 8 , 2 0 S 3 . T r i p u r a 9 5 6 , 6 6 4 6 6 . 0 1 1422,67 1 1 .25 1433.92 24. Uttar Pradesh 1 3 8 7 6 . 5 4 3 2 3 5 . 1 0 17111.64 337.50 1 7 4 4 9 - 1 4 25. VOest Bengal 6260,75 998.65 7259.40 150.00 7409-40

T o t a l 6 7 8 8 2 , 0 0 15017.10 102899,1C 1 3 1 3 7 - 2 5 1 0 5 0 3 6 - 4 3

Including Rs> 122.25 crore for Bhopal Gas Leak Tragedy.

Source Report of the Ninth Finance C o m m i s s i o n > 1 9 8 4 .

334 The Tables* No. ^2, ^3, and ^5 given above present the extent of aggregate financial transfers made by the central Government to the States on the reco/nmeridations of various Finance Commissions. The ranks indicate very obvious pattern. There is a broad indication that relatively

developed states and middle level States have received higher

absolute amounts as well as percentage shares. Of all the developed states, Maharashtra has always retained its relatively leading rank as compared to other developed states. Among the less developed states only Uttar Pradesh and Jammu & Kashmir have received higher per capita a/nounts.

It may be observed that less developed states like Assam,

Rajasthan and Orissa have not received as much as the other

less developed states in the country.

DevplutioTi and Transfer of Resources in the Fora of

Brants — in ~ aid and shared Taxes to all States in

oeneral and to Maharashtra State in particular.

Total Grants—in—aid to all states during the period 197S—7f> to 1979-80:-

Table No. presents the Total Grants-in-aid transferred to all states in India during the period from

1975-7t to 1979-80, has shown an increasing trend throughout the first consecutive four years of this period of our analysis. It decreased only during tV-»e final year of the

335 5aid period. Thus the amount of tota] grants stood at Rs.

1218.5 crore in the year 1975-7^, It moved up to Rs-1505,S crore in the year 3976-77. It went up to the level of Rs.

1830.1 crore in 1977-7B. It increased to R b . 2^72.7 crore in the year J978-79, The amount of total grants has increased by 103 percent during this period i.e.from 1975-76 to 1978-

79. In the last year it decreased to Rs. S083.1 crore.

Total Grants—in~aid to Maharashtra State:-

The amount of total grants-ion-aid transferred to

Maharashtra State during the period 1975-76 to 79-BO , was increasing continuously throughout the years of this period, except in the final year when it Mitnessed a very slight and negligible decrease. It Mas increasing in absolute terms as well as in terms of percentage, except in the year 1976-77, it was fluctuating in percentage terms and in the year 1979-

60, it was decreasing in absolute terms.

The amount of total grants received stood at Rs. 49 crore in the year 1975-76. It moved up to Rs. 52.8 crore in

3976-77. In the year 1977-78, it increased to Rs, 75.3 crore. It jumped upto Rs. 119.9 crore in the year 1978-79.

In the final year of this period it declined slightly to

Rs.118.9 crore which is the result of the decrease in the total grants transferred to all states in the same corresponding year. During the whole period it increased by

142.6 percent.

336 Oil an average, for the whole period under our consideration it formed ^-4 percent of the total grants-in- aid transferred to all states during the said period ie.

1975-76 to 1979-80.

Total Taxes Centrally shared with all states durii>o the period 1975-76 to 1979-80.

The total amount of shared taxes given to all states in

India during this period of our study has been increasing significantly in absolute terms without showing any fluctuations. Thus the total amount transferred to all states was F?s. 1599.3 crore in the year 1975-76. It increased to

Rs- 1679.B crore in 1976-77, to Rs. 1005.8 crore, to Rs.

195S.8 crore, and to Rs. 3^t07.8 crore in the years 1977-

78,1978-79 and 1979-80 r©spectively.

Therefore, the total amount transferred in the form of shared taxes to all states during this period has increased by 113.1 percent .

Total share of Maharashtra State in centrally shared Taxes during the period 1975-76 to 1979-80*

The total amount transfered to the state of Maharashtra in the form of shared taxes during the said period has shown an increasing Trend in absolute Terms throughout the years of this period. Thus it, was Rs. 161.5 crore forming 10.1

337 percent of the total eimount of the ^ihared taxes in 1975-76.

It increased to Rs. 168.4 crore constituting 10 percent of the total amount of shared taxes Mith all states in 1976-77,

It moved up to Rs.lBO.7 crore but forming only 10 percent of the total amount of shared taxes in 1977-78. It increased to Rs. 19^.7 crore accounting for 10 percent of the total amount of shared Taxes in 1978-79. In the final year of this period it jumped up to Rs.301.6 crore forming B-B percent of the total amount of shared Taxes with all States in 1979-80.

During this period the total share of Maharashtra State has increased by 86^.7 percent. For the whole period on an average, it formed 9.8 percent of the total amount of shared

Taxes during this period ie. 1975-76 to 1979-80.

Total Grants—in—aid to all States during the period from

19B0-B1 to l9B^-85

Table No. /fT" presents the amount of total grants-i n-aid transferred to all states during the period from 1980-81 to

1984-85, has shown an increasing trend continuously without showing any fluctuation through out the years o'f this period.

The amount of total grants was Rs, S622.6 crore in the year 1980-81. It increased to Rs. 5 7 3 6 . ^ crore in the year

338 1981-82. It moved up to Rs. 3381.5 crore in the year 1989-

93, It again jumped upto Rs. ^*092-7 crore in the year 1983~

8*^. In the final year o i this period it increased to Rs.

^761.6 crore. Thus, the total grants transferred to all

states in India has increased by 81.^ percent during the said p e r i o d .

The Total Grants transferred to the State of Maharashtra

during 1980-81 to 198^-85,

The amount of total grants-in-aid transferred to the

State of Maharashtra during thiis period, started rising in

the first year of this period. It was Rs- 13^ crore in the

year 1980—81. In the year 1981-82, it decreased to Rs 130-5

crore. Again it started rising and amounted to Rs. 185.4

crore in the year 1962-03. It moved up to Rs. 270.6 crore in

the year 1983-84. It Jumped up to Rs. 326,2 crore in the

final year of this period. Thus the total amount of grants

has increased by 143.4 percent during the said period. It is

clear that the total amount of grants was increasing in

absolute terms in four years and decreased only once.

In terms of percentage it was fluctuating for the

period as a whole. On an average it formed 5.7 percent of the

total amount of grants transferred to all states in India

during the period from 1980—81 to 1984—85.

339 Total Taxes* centrally shared with all states durino the per.iod 1980-Bl to 198^-85.

The total amount of re&ources transferred to all states

in the form of centrally shares taxes during this period of our analysis has shoMn an increasing trend in absolute terms,

it Mas Rs. 3788,9 crore in 1980-81, it increased to Rs. ifP59.7 crore in 3983-8H, to Rs. ^632-7 crore in 1989-83,to

Rs. 5007.8 crore in 1983-84 and to Rs.5854,5 crore in the

final year of this period iel984~85.

Thus,the total amount of taxes shared with all states during this period has increased by 54.5 percent.

Total shared taxes of the State of Maharashtra d u r i n o t h e period froi 19B0-81 to 198^-85.

In the case of the State of Maharashtra the totaJ amount yielded by the above mentioned source has been showing a continuous rising trend during this period in absolute terms- In terms of percentage it was fluctuating throughout the period under considerat ion.

The total yield from this source was Rs- 336-4 crore in the year 1980-81. It moved upto Rs. 368.4 crore in the year

1981-85. It increased to Rs- 4S2 crore in 1982-83. It went up to Rs- 450 crore in the year 1983-04. In the final year of this period it increased to Rs. 529-8 crore. Thus the

340 l.otal yield hdd increa«ied by 57.5 percent during this period of our analysis.

For the Mhole period, on an average it formed 8.9

percent of the total taxes shared Mith all states during the

said period. If we compare this average with the average per crentage of the previous period, it is found to be less

than that of the previous period which was 9.8 percent.

Devolution and transfer of Resources from the Centre in the

form of Srants-in-aid to all states during the period 1985-86

to 1992-93.

The Total Brants-in-Aid

T a b l e N o . ^8 present the amount of total grants-in-aid

transferred to all states during the period 1985—86 to 1998-

93. It has been showing a continuous increase throughout

the years of this period, except the year 1989-90, when the

total amount of grants registered a declining trend.

Thus, the total amount of grants-in-aid, was Rs. 6322*6

crore in the year 1985-86.. This amount increased to

RS-681B.7 crore in the year 1986-87. It jumped upto Rsi. 8275

crore in the year 1987-88. It continued to increase to Rs.

9636.4 crore in the year 1988-B9. In the year 1989-90, it

decreased to Rs. 8505.4 crore. Again it started rising up

341 and reached the level o f Rs. 3S6,^3.2 crore in the year 1990-

91. It went up to Rs. crore in the year 3991-95.

In the final year of our analysis in this period it amounted to Rs- 177,58.8 crore. Thus, the total amount of grants transferred to all states during the said period has increased by 180.8 percent Mhen Me compare the total amount transferred in the final year with that of the initial year of the period under our consideration.

Total amount of urants transferred to thp State of

Maharashtra during the period 1985-86 to 199g—93.

The total grants transferred presented in Table No. 48

The total amount of grants-in-aid transferred to the State of

Maharashtra during the period from l985~86to 1999~93 has been showing a continuous increasing trend through out the period under our consideration in absolute terms.

The total amount of grants was Rs. 381.9 crore in the year 2985-86. It continued to rise up to Rs. 604,9 crore in the year 1989-90, to Rs, 795.2 crore in the year 1990-91 ;to

RS..810.9 crore in the year 1991-92, and to Rs. 927.7 crore in the year 1992-'93. Thus, the total amount of grants transferred to the State of Maharashtra has increased by

188.2 percent in the year 1992—93, over its level in the

initial year of our analysis in this period viz, 1975-76.

342 The total amount o i grants transferred to the State of

Mahara&htra has been shioMing a fluctuating decreasing trend in ternis of percentage durir>g the period under our consideration.

For the whole period, on an average it formed 6-1 percent of the total amount of giants transferred to all states during the said period.

If Me compare this average percentage of this period with the average percentages recorded in the previous two periods, we find that the total amount has increased during the period of our study i.e ., 1975-7fa to 199S--93, which reflects the expansive nature of the grants transferred to our state during the said period.

Total Ta>

The total amount of centrally shared taxes with all the states has shown an increasing Trend in absolute terms during this period of our analysis ie. 1985-B6 to 1992-93. Thus, it was Rs. 7P59-.9 crore in 1985-86. It increased to Rs. 8278.1 crore in 1986—87, to Rs- 9659.9 crore in 19Q7-8B to Rs.

10,7736,6 crore in 1988-09, to Rs. 13,097,3 crore in 1989-

90,to Rs. 1^,H35.6 crore in the year 1990-91, to Rs,16,8^7.9 crore in 1991-92, and to Rs. 20,580.1 crore in the final year

of this period ie. 1992-93.

343 Thus, the total amount of shared taxes centrally with all states during the said period has increased by 183.5 p e r c e n t .

Shared Taxes of the State of Maharashtra during the oericxj

1985-BA to 1995-93.

In the case of Maharashtra State the total share during the period 1985-06 to 1992-93 has been showing a continuous increasing Trend in absolute terms. It was Rs. 499.7 crore in the year 1985-8t>, It moved up to Rs. 952.8 crore in the year 1989-90 . It increased to Rs. 989.9 crore in the year

1990-91. It jumped up to Rs. 1219.7 crore in the year 1991-

92. In the final year of our analysis it increased to Rs.

1396.6 crore. Thus, the total share of Maharashtra in the

Centrally shared taxes during this period has increased by

179.5 percent.

For the whole period, on an average it formed 7 percent of the total taxes shared centrally with all the states during the said period.

344 c/5

fSi <

'O 00o ONI 9\

ve r-I M r^»n •S ^

V £is (flo 00»r> I s

00 s fcl ^1b O' s e I J l *" il r- © "V u bsw oc e ^ I S ‘S-c * o H - g 08 e) 2 3 e s .a o ■S_g tCl 9 Cm *3 a s JSM 2 9t ■§ S e •o B

t3 s « Si s e ( / i VO

t' VO o\ >0 fN Os fSI OvON

V3 w — 00 ^ 2 1S o= HI 2i ^ B S es S .a B O 4^ r •m^■*- Am « s © S B o^ «?v 2 « Ov 00 ON te t iri t^ «T) Q r-rv| 00

m •o or< Ov c^ £ . C4 Ov Ov 4> O' r-mOv «> S rflo

■:>f-h'^ 8-5 The planninct commis&ion and the central plan assistance

to the states;

It was seen earlier that to deal with the transfer of resources from centre to states, there are two seperate organisations, viz; finance commission and planning commission in the country. The government of India also makes additional transfers at its own discretion (known as discretionary transfers).

Teransefers through the finance commission have been discussed earlier. It is proposed, in this section to deal with the transefers which take place on the advice of the planning commission i.e.central plan assistance.

The rationals of central plan assxstancet

"In a federal constitution, the sharing of tax proceeds between the central government and the state governments is

inevitable^ similarly, in a process of planned economic development, where states are the main executive agency for the implementation of a major part of the plan schemes, central assistance to the states in respect of schemes

included in the central as well as states plans becomes

Q e q u a l 1 y i n e v i t a b 1e ' .

As has already been explained, vertical fiscal

imbalance is inherent in the constitutional provisions.

348 Since many of the development functions are within tJie jurisdiction of the states, a large number of development s c h e m e s a r e to be executed by them, which requires huge funds. Thus, left to themselvys,the states are unable to execute their schemes;. Fulfilment of their development programmes, therefore, requires financial assistance from the union governments

Planning in India began as central initiative.

The central government thought of having a plan and induced states to undertake activities according to the plan and priorities."Because the central government did this and because additional activities required additional financing. One of the easiest ways the central government thought of to induce state governmevits to fall in line with their plans or implement their plans was to attract them o with financial assistance"

" S i n c e t h e u n funds fr'om its el successfully used the p o 1 i c i BS t o t h e s t a t p l a n s "

349 Thus, the reason for making assistance available to the states for plan purpose is to enable them to undertake the programme of national priority which, but for such assistance

Mould have been left at the discretion of individual states.

In the words of Dr. Lakdawala, "distribution of central plan assistance among states has to ensure that recognised objectives of the plan are fulfilled. Broadly speaking these may be defined as groMth Mith equity, including employment and regional equity. Each plan lays down detailed specific programmes. Plan assistance has therefore, to be so given that the priorities of planning are observed by the states, that they raise their maximum of resources, economise in non­ plan expenditure, and whatever they spent they spend effectively and get results"

The principle of allocation of central assistance to the s t a t e s

Prior to the ^th five year plan, a system of schematic assistance was in practice. The central assistance was related to specific scheme or programme. There were plan schemes under different heads of development with their own patterns of assistance. The proportions of loans and grants in which centre shared the expenditure of the scheme. In other words,there were different patterns of assistance for different schemes. The states could select the schemes and

350 d r i 4w loans* and grants accordingly. The proportion of loans and grants in overall assistance differred •from state to state depending upon the schemes included in the state's plan.

Thus, the central assistance was available to the states under two types of schemes, (i) the centrally assigned or centrally aided schemes, and (ii) centrally sponsored schemes. Former schemes were those, which because of the variations of local conditions, were best suited for states and hence left to the initiative of the states themselves. The latter schemes were initiated and sanctioned by the concerned central ministry. The ministry concerned used to meet the entire cost of the schemes and entrust the responsibility of maintaining the projects after completion to the concerned state gover nment s .

The basic approach, which was followed for the first three plans, and also the three annual plans <19i>6-l9t9)

,regarding the central assistance to the states was what may be termed as "gap filling approach". Central assistance was provided to each state to fill the gap between the approved state plan outlay and the state's own financial resources available for the plan. It was treated as the balancing factor between the desirable plan size of state and its own resources.

351 The basic approach and criteria underwent a change at the time of the formation of fourth five year plan on account of a variety of reasons. There Mere complaints of lack of objectivity and presence of discretionary element. Several

states had expressed the view that central assistance for the state's plans should be distributed in accordance with certain objective criteria, "further the better off states were able to get higher proportion of assistance in the form of grant by adopting schemes with higher grant component, while providing for matching funds, some of the poorer states on the contrary had to meet a part of the revenue expenditure

1 P through loan assistance" .

The schematic methods of allocating central assistance

also generally encouraged preparation of inflated plans and resulted in hard bargaining for central funds. The states

tended to inflate their expenditure and deflate their resources so as to widen the resources gap and obtain more central assistance.

Accordingly, the whole question of allocation of central assistance to the states was re-examined by the planning commission and the new proposals in regard to the

formula for distribution of central assistance to the states was unanimously adopted in the meeting of the NDC in Sep

194j8. This formula is known as gadgil formula. “Out of

35P the total amount of the central assistance as determined on the basis of this formula, each state was to get 30 percent in the form of block grants and the balance of 70 percent by way of block loans. However in the case of Assam, Nagaland and Jammu & kashmir, the entire assistance was provided 1 T in outright grants" .

Thus central assistance to various federating units was no more related to specific schemes or programmes. The union government in consultation with the planning commission decided the total amount of financial assistance (depending upon the financial position of the centre) which it could provide annually to state over the period of five years. And then the share of each state was calculated in terms of these criteria.

The formula was reviewed at the time of finalization of

Fifth Five Year Plan in July-august 1976, And it was decided that it would be desirable to continue the Gadgil Formula with updated calculations for the Fifth Plan as a whole.

The discretionary assistance has, however, to play an important role. In the words of Dr. Lakdawala,” discretionary assistance for special problems continues to be essential as no formula can suit the needs of all the states. A formula which relied greatly on population would

353 naturally do injustice to poorer states with large areas

Mhere per capital expenditure was no criterion of the needs.

”It was also likely tliat with their best efforts, states occasionally faced difficulties which in the absence

of special assistances would very much affect plan tempo and

there is a certain base at which the tempo must be continued

in order to produce an impact" Hence at the time of the

finalization of the Sixth Five Year Plan (197B-83), "the principles governing the allocation of central assistance

to states were reviewed by the National Development Council

(NDC) in its meeting held on 25 Feb 1979"

The NDC made some changes in the formula of central

assistance to the states. There was a persistent demand from

the states to reduce the amount of centrally sponsored

schemes and centrally schemes. It was decided that the centrally sponsored schemes to the extent of nearly Rs.SOO crore should be dropped and the amount, thus saved, be made available to the states as part of the central assistance on

the basis of Income Adjusted To Population divided by the per capita slate domestic product should form the basis of

the distribution of Rs. SOOO crore.

Table No- 49 depicts the distribution of the Rs. HOOO

crore, among the non special category of states. Allocation of central assistance of Rs. 8 0 0 0 crure to states on the basis of lATP formula for the four period 1979—1963

Table No. 49

S r Non special category states Amount n o (Rs.in crore)

1 . Andhra Pradesh 160.77

P,Bihar 399.63

3 . 6u j r a t B O . 7 4

4 , Haryana 34.60

5 . K a r n a t a k a 9 6 . 15

6 . Kerala 77.P3

7 , Madhya Pradesh 1 8 4 . 0 9

S. Maharashtra i a a . 1 6

9 . O r i s a 9 4 . 9 1

10 . P u n j a b 2 9 . 3 0

1 1 , Rajasthan 1 0 3 , 5 9

12 . T a m i l n a d u 1 4 9 . 9 9

1 3 . Uttar prade&h 4 8 3 - 7 3

14. Mest bengal 1 4 7 . 1 1

T o t a l 2000.00

Source : Chandr adhar Sinha ‘'Resource-Sharing between the

Centre and the States: Acritigue", in, “Financing of Statefe

Plans," Jagannath Mishra and R.K. Sinha (ed), New

Delhi, 1984, pp g43~P44 16

355 A cursory look to the above given table would clearly tell us that, among the non-special category of states, Uttar

Pradesh topped the states with a share of Rs.403.73 crore along with that, states like, Bihar, Madhya pradesh,

Andhra pradesh, Tamil nadu, west bangal and Maharshtra state, have also get rs/narkable share. The state of Maharshtra has occupied the Seventh position with a share of Rs.

128,16 crore.

Again the national development Council (NDC), in its meeting in august 1980, modified the Gadgil Formula in

favour of backward states for the seventh plan (1980-

85) by distributing SO percent central assistance on the basis of backwardness instead of 10 p e r c e n t .

Finally, the national development council modified the

Gadgil Formula in its meeting held in Dee 1991.

This continuous modifications of the above mentioned formula by the National Development Council, explained explicitly the attitude of the NDC towards the

federating units in India. It shows also the intention of

the NDC, to devolve more and more resources to the states in order to reduce the regional imbalance and to smoothen the growth of the economy in the whole country. Hence such efforts are necessarily to be obliged by the researcher.

356 Tht? new modified formula accords SO percent weiglitage to population, which falls in line with our idea of giving more weightage to this factor while distributing the total revenue from the income tax. It also supports the idea of the state government of Maharshtra in giving more weightage to the population factor.

The new formula also has given 10 percent to the performance of the states which is quite logical, in the sense that, those states with less economic performance should be given less, while those states with ^ligh performance should be given more, so as to encourage and remunerate the various states for such performance. This idea would serve very much the interest of the state of

Maharshtra. This is clear, because as we had an occasion earlier to refer to, the popular misconception t^lat the state of Maharshtra is well off, and hence, it does not require any assistance had affected the share of the state.

Moreover, the new modified formula gave 10 percent weightage to the special problems of states- This also, would obviously help those states which are facing special problems (like Maharshtra state). But it should be

remembered that, such modification unless it is taken into

its practical aspect rather than kept within its theoretical framework, can not serve the target.

357 Finally, the new formula, has given 50 percent

Meightage to per capita of which 5 percent will be based on the distance criterion and the remaining 15 percent on the deviation criterion. Thus all these modifications if accompanied by correct application would serve and help the federating units to a reasonable extent.

The Table No, 50 given below depicts the growth of central plan assistance to the state of Maharshtra during the various Planning Commissions' award periods.

3^8 Table No. 50

Resource transferred to Maharshtra b y The planning

cooMiissions.

PI an/item s Total approved Actual expenditure v a r i a t i o n Auiar d o u t l a y t o in the state of P e r i o d s Maharshtra M a h a r s h t r a ( 1 ) (H > ( 3 ) ( 4 )

Fifth five 2 , 3 4 7 . 6 1 3 , 8 7 8 . 1 5 ( + ) 4 6 9 - 5 Y e a r p l a n ( 1 9 7 4 - 7 9 )

Sixth five 6 , 3 7 5 . 0 0 6,549.39 (-) 374.39 Y e a r p l a n ( 1 9 8 0 - 0 5 )

Seventh five 10,500.00 3 3 ,044.50 ( - ) 5 4 4 - 5 0 Y e a r p l a n ( 1 9 8 5 - 9 0 )

Eight five 1 8 , 5 e 0 . 0 0 1 8 , 9 7 6 . 3 0 ( - ) 4 5 6 , 0 Y e a r p l a n ( 1 9 9 e - 9 7 )

Source: compiled data from the various Planning Commission Reports & budget in brief of the state of Maharshtra.

During the Fifth Five Year Plan (197^-79> the total

approved outlay given to Maharshtra was to the tune of Rs.

2,3^7.61 crore. This amount increased to Rs- 6,175.00

crore during the Sixth Five Year Plan (19B0—B5> to Rs-

10,500-00 crore and to Rs- 18,520-00 crore during the

seventh plan and the eighth Five Year Plan periods

respect ive ly .

359 The pattern of central as&istance to the state of

Maharshtra reveals that, though the total approved outlay given to the state has been increasing continuously,the plan expenditure of the state of Maharshtra also increased r e m a r k a b 1y .

8-6 Problems of financial relations beti^een the centre and

the* states;

Financial relations between the centre and the states in general and the state of Maharshtra in particular great 3y influenced the finances of the state of Maharshtra din'ing the period of our analysis.

We have traced the financial relationship between the centre and the states and analysed the impact of the recommendations of the various Finance Commissions. It was noted that there has been a continuous increase in the total amount of funds transferred to state governments, since every finance commission and planning commission are transferring more and more funds from the centre to the states. The basis of distribution of such funds became a matter of controversy not only between the centre and the states but also among the states.

In order to make the picture more clear some of the practical problems merit analysis. It is unfortunate that

360 all along a negative approach distinguishing the states as advanced and backward has been followed in recommending grants. It will not be incorrect to say that time has testified to the fact that this principle has helped neither the centre nor those states.

The so-called backward states that had been

assisted have not become self-reliance and are still dependent on the centre even in balancing their budgets*

Continuance of such principle would result in perpetuating injustice to the so—called advanced states (Maharshtra state i& one of those classified as advanced state) and the possibility that it would encourage financial imprudence and indiscipline on the part of the assisted states,can not be ruled out.

The union government has been sanctioning installments of dearness allowance to its employees from time to time according to a given formula. The state governments have necessarily to follow suit and ensure parity in the dearness allowance payable to their employees and t^»e employees of other institutions dependent on the state governments. For obvious reasons, this has been a compulsion for the state governments, their resources position notwithstanding. In fact this had given rise to similar demands from the state's

361 e/nptloyees th£>t are difficult to resist. Thi& is going to be

A permanent charge on the finances of the states governments which is a fact of life and should be recognised as such.

It is therefore, necessary that raising burden of dearness allowance is duly taken into account to the full extent while assessing the revenue position of the states and the states should be insulated against such inroads made into their resources.

Again the link between the finance commission and the plannir»g commission fall onto a controversial junction in the matter of higher education. As it is already known that the planning commission would finance higher education during the

first five years of its commencing, after which the various state governments have to bear the cost of running the whole amounting expenditure. Mhat is interesting here is that the state governments^ after the completion of five years, if they have any gap in their revenue expenditure they resort to demanding grants-in-aid, from the Finance Commission immediately to fill up the gap.

But the controversy junction is that, whether these states have to approach the planning commission as the

institution which is responsible for running such project or to approach the finance commissions which not have any relation with the specifically mentioned project.

Initially in our view it would be highly appreciated if

36P the initiaiive-authority could continue Jooking after its plans till the stage of executions so as to achieve its ultimate goal, instead of leaving the project creeping; failure to resist MOuJd demolish the Mhole idea and cause a huge loss to the whole nation.

Thus, the compositions of "finance commission" and "planning commission" be given a re-look and their functioning needs coordination; tax structure and tax rates should be rationalized as a part of the long-run term

fiscal policy and any arbitrary and random variation, on

annual basis, adversely affecting the ifiterests of the states, be avoided.

Lastly, as laid down in the constitution such devolution be on souttd financial principles, and there is need to ensure that the funds devolved so far have been utilized for the purpose for which they were intended.

363 REFERENCES

1. PJ Thomas, The Growth of Federal Finances in India

1939, P £f?9.

2. Memoranduffi submitted to the Seventh Finance Commission

(Government of Maharashtra) December 1977, Chapter-3,P-12

Finance Department.

3. Memorandum submitted to the Ninth Finance Commission,

March 1989, Ps 11-13, Government of Maharashtra, Finance

Depar tm ent.

4. Memorandum submitted to the Seventh Finance Commissions,

Dec 1977, P 8 Para 3, Government of Maharashtra, Finat>ce

Department.

5. Memorandum submitted to the Eighth Finance Commission,

Jan 3983, P20, Government of Maharashtra, Finance

Department.

4>. Memorandum submitted to the Ninth Finance Commission

June, 1993, p. 21. Govt, of Maharashtra Finance

Department.

7 . I b i d .

36A 8 . A. Prem Chad, "control of public expenditure in India"

19£>3 P 1 9 5 .

9- D.R. Gadgil, centre-state "finances-l: Concept of

plan finances" Hindus, April 3 ,1971 P B.

10. G.Thimmaih ,"Federal Fiscal System of Australia & India,

1976 P 270.

11. P.T. LakdaMdla, "Plan Finances in a Federal Economy"

yojang. May 16,1979 P 6 .

12- S. Chakravarthy, "The Planning Process in India:

an approach, "Working Paper for the Planning

Commission, Bovernment of India, (quoted by

G.Thimmaih O.P.Cit. PaS2) May 1972 P 9,

13. G.Thimmaih, Q -P.lit. P - 280.

1^. P.T. Lakdawala, plan Finances in a Federal Economy,

OP. Cit. 1979 P.9

15. Annual Plan, Planning Commission, pages 18,19,1979-80.

365 16. Chandradhar Sinha, "Resource-Sharing Between the centre

and the St ates:Acritique" in, "Financing of States

PJans", Jaganath and Mishra and R.K. Sinha (ed), New

Delhi, 1984, Pages, 243-24^*.

266