Chapter I INTRODUCTION

The Finance Commission of India came into existence in 1951. The Finance Commission is established under article 280 of the Indian Constitution by the President of India. The Indian Finance Commission Act was passed to give a structured format to the Finance Commission of India as per the world structure of the modern Act was laid in the early 1920’s. The Finance Commission is formed to define the financial relations between the centre and the state. The Finance Commission Act of 1951 tells about the qualification, appointment, term, eligibility, disqualification and powers etc. The Finance Commission of India and also discuss about the constitution of Finance Commission.

The four southern states of India are Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. All the four states are classified as general category middle income states. Taken together, these four states contribute more than a quarter of output in India. Their share in the sum of GSDPs of all the states has also been large and growing. Even while their tax bases have been increasing and correspondingly their contribution to the base for the central taxes has also been growing, their share in the tax devolution and in the grants given by the central government has been coming down. This has significantly affected their capacity to provide services at an adequate level in terms of quantity and quality, particularly in relation to public goods like law and order and justice and merit goods like health and education. 2

Vertical fiscal transfers and horizontal fiscal transfers Vertical fiscal transfers arise when there is a simultaneous transfers between means and responsibilities, in two different tiers of government. In one tier the means will exceed the needs of the Finance Commissions. These transfers include state’s share in central taxes and statutory grants and grants for natural calamities. Vertical transfers are given in equal percapita amount to all states including the highest fiscal capacity states.

Horizontal fiscal transfers relates to the same level of governments. This refers to the differences in the fiscal capacity of the states. Horizontal fiscal transfers can be improved by the process of redistribution of resources. Aggregate fiscal transfer exists if the surplus of one tier cannot eliminate the deficit of the other. It arises to the fiscal needs. This analysis has been done for the periods covered by the Ninth, Tenth, Eleventh and Twelfth Finance Commissions both in aggregate and state specific needs.

Need for the study The present study attempts to analyse the Finance Commission’s fiscal transfers to the Southern States in India. In this context the study aims to analyse the various issues of Finance Commissions Fiscal transfers to southern states in India viz. Tamil Nadu, Karnataka, Kerala and Andhra Pradesh. This study highlights the emerging controversies among states and the financial transfer to the states. The need for the study is important, especially in the context of present controversies regarding Financial transfer between the states will also be examined in the present study. 3

Statement of the problem Finance Commission Fiscal Transfer It plays a vital role in Indian Federal Finance system. The constitution of India came into force in 1950. The Government act of 1935 divides the functions and financial powers of the Government into Central and States spheres together with the concurrent areas. The Finance Commission is a salient feature of the India’s constitution. It is an advisory body which deals with the transfer of resources from the centre to the states. The Finance Commission is established by the President of India for every five years to review the finances of the Union and States and recommend devolution of taxes and grants-in-aid of revenues to the states.

Income tax sharing between the Centre and the states underwent a fundamental transformation with the Constitution in 2000. The net process of income tax are shared with States on a mandatory basis. The commission made recommendations regarding the combined share of states out of the “divisible pool” of the net income tax proceeds and the proportionate share of each indivisible state within the combined share of all States.

Union excise duties – The President of India has the discretion to refer the question of sharing of excise duties with the states to the commission. In effect, this matter was always included in its terms of references. Here, again the Finance Commission recommended the sharing of net proceeds of union excise duties between the Centre and 4

States and the distribution of their collective share between individual States.

Grants-in-aid The Finance Commission is asked by the President to estimate the revenue needs of states and recommends grants-in-aid of their revenues. It also lays down the principles which should govern three grants from the Centre to the States. Therefore, all the States need not receive their grants and different states may receive different level of amounts. The Finance Commission can also recommend special purpose grants to any state which may be included in its terms of reference. This type of grants may include grants for helping the local bodies, grants for relief in the case of natural calamities, grants for upgradation of state activities and so on.

States get grants from the Finance Commission, Planning Commission and other Central Ministries. The Finance Commission grants are for meeting the assessed revenue gap of the states as also for various other purposes including for special needs and upgradation of standards. From a methodological viewpoint, the determination of the revenue-gap grants are the most important. It is the determination of these grants that necessitates the Finance Commission to undertake a comprehensive examination of both central and state finances. It is, in this context that the Finance Commissions have often been accused of following a gap-filling approach, which leads to significant adverse incentives.

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Finance Commissions, particularly from the Ninth Finance Commission onwards, have attempted to apply to some extent normative principles for making an assessment of state’s own tax and non-tax revenues as well as revenue expenditures. This is done in two steps. The first step requires the estimation of the variables for the base year. Secondly, projections for the recommendation period are made. While the Ninth Finance Commission used a panel data modeling approach to determine the tax base in the base year, some of the more recent Finance Commissions have used partial adjustments in respect of those states whose tax-GSDP ratios were below the average tax-GSDP ratio for the relevant group of general and special category states.

Trends in Fiscal Transfers The finances of the central and state governments went into revenue deficit on permanent basis since 1979-80 for the centre, 1987-88 for the states considered together, and 1982-83 for their joint account. These accounts have remained in such deficit until now. The states appear to be emerging into revenue account surplus once again. As its peak, the combined revenue deficit was close to 6.9 per cent of GDP in 2001-02. After that there has been an improvement. Large revenue deficits have made the task of achieving vertical balance through fiscal transfers quite difficult.

There is a steady improvement in the share of transfers to the states as percentage of centre’s gross revenue receipts. From the level of about 25 per cent under the Third Finance Commission, this share increased to 6

39.1 per cent for the Ninth Finance Commission period and may turn out to be above 40 per cent for the Twelfth Finance Commission period.

The share of centre and states in the combined revenue receipts before transfers and after transfers get completely reversed. Before transfers, centre’s share has been in the range of 61-66 per cent from the Second Finance Commission period onwards. However, after transfers, centre’s share in combined receipts has fallen to 36.37 per cent. State’s share, on the other hand, has increased from 56 to 64 per cent between the Seventh and the Twelfth Finance Commission periods. The relative shares of the centre to the states in the combined revenue expenditures however, have remained stable throughout the period covered by the First to Twelfth Finance Commission periods. States’ share in the combined revenue expenditures throughout this period has been on average about 57 per cent whereas that of centre has been at 43 per cent with small variations. A falling share in revenue receipts after transfers for the centre while maintaining a stable share in revenue and total expenditure can only imply that centre’s share in borrowing has increased over these years.

Measuring Forecast Accuracy Finance Commissions in India are required to make their recommendations for a period of five years based on information about central and state fiscal aggregates. Between the last year of the recommendation period and the last year for which accounts data are available, the gap could be seven to eight years. The Finance Commissions have to make forecasts for various fiscal aggregates and 7 then determine grants that are specified in absolute amounts. We have looked at the nature of forecast error in one crore determinant of grants, viz., forecast of central revenues. In turns out that among the four recent Finance Commission, viz., Ninth, Tenth, Eleventh and Twelfth have underestimated the central tax revenues.

Dependence of States on Central Transfers We have also looked at the pattern of dependence of the states on central transfers. This analysis is done with respect to the revenue receipts of the states as also their revenue expenditures. We have looked at the pattern of dependence both in terms of the aggregate account of the states and for individual states.

States’ dependence of the share of central taxes has changed over time. These changes are partly due to the recommendation of the Finance Commissions as to the share that should be given to the states from centre’s shareable taxes as well as on changes in relevant macro variables like the ratios of the centre’s gross tax revenues and state’s own revenue receipts to GDP.

The following observations can be made. 1. Third Finance Commission: Relative to the average for the preceding Commission period, states’ dependence on central taxes increased inspite of a fall in the share of central taxes in gross central tax revenue. This is because of a large positive role played by an increase in centre’s tax-GDP ratio. 8

2. Sixth Finance Commission: There is a fall in the states’ share in central taxes relative to states’ revenue receipts. This is almost entirely due to a fall in the share of central taxes in gross central tax revenues. 3. Eighth and Eleventh Finance Commissions: There is a fall in states’ dependence on share in central taxes relative to average for preceding commission period. This is mainly due to a fall in the share of central taxes in gross central tax revenues. 4. Ninth and Tenth Finance Commissions: There is a fall in states’ dependence on the share in central taxes relative to the average for the preceding Commission period. This is mainly due to a fall in centre’s tax-GDP ratio. In the case of the Tenth Finance Commission period there was a fall in states’ revenue effort.

Own Tax Revenue The trend growth rates of own tax revenues were estimated over the period 1993-94 to 2002-03. These were applied to 2002-03 levels and TGR based estimates for 2004-05 were derived. From these, the tax- GSDP ratios were calculated and compared with the corresponding group averages for special and general group categories. For all states, where the tax-GSDP ratio was below the category-average, it was adjusted upwards by a margin of 30 per cent of the distance from the respective group average and own tax revenues with respect to this normative adjustment were calculated. For the projection period, the prescriptive buoyancy was used. A distinction was made taking into account the average OTR-GSDP ratio achieved in 2002-03, improvement in OTR-GSDP ratio in 2000-03 9 over 1993-96, and average per capita GSDP over 1999-02. States showing higher tax-GSDP ratio or higher improvement in tax-GSDP ratio were asked to achieve a lower prescriptive buoyancy. The nominal growth rates were kept at 11 per cent, 12 per cent and 12.8 per cent. The prescriptive buoyancies were kept at 1.20, 1.25, 1.30 and 1.35.

Non-tax revenues For interest receipts, a 7 per cent return on outstanding loans and advances, and for dividends, a 5 per cent return on equity investment was provided for in a graduated manner. For irrigation receipts, cost recovery rates were provided in a graduated manner to cover 50 to 90 per cent of maintenance expenditure on utilized potential or major, medium and minor irrigation projects. For other non-tax revenues, 12.5 per cent of annual rate of growth for general services and 25 per cent for social and economic services were applied.

Aggregate share of states in Central Taxes: First to Twelfth Finance Commissions Comparing changes in the shares of individual states for the entire period from the First to the Twelfth Finance Commissions is difficult because of the shift from the earlier practice of sharing the revenues of individual taxes to the present practice of sharing all central tax revenues subject to some adjustments. In order to make such a comparison we need to settle on a common denominator and rework share of states with respect to this. For this purpose it is idle to take centre’s gross tax revenues as the common denominator. Since the actual shares whether 10 with respect to individual taxes or a divisible over pool of central taxes are given as shares and not absolute amounts, we need to rework the absolute amounts and then determine the shares as percentage of centre’s gross revenue tax receipts. Here, there are two options, one, we may take the estimated absolute amounts of the states tax shares as provided by the Finance Commissions themselves. These would amount to a weighted share of the shared taxes as envisaged in the Commissions scheme of distribution. The second option is to take the actual share of states in the central taxes in absolute amounts. There would still continue to be some difficulty in comparison over time because of re-organisation of states from time to time.

The shares in central taxes from the First to the Twelfth Finance Commission based on the estimated absolute amounts given by the Commissions themselves. Looking at individual shares it will be observed that there are some stable patterns and some volatile patterns. The share of the general category states which used to be as high as 97.3 per cent came down to about 86.5 per cent in the award period of the Tenth Finance Commission period. Correspondingly, the share of special category states has also changed. It was at the highest for the Tenth Finance Commission period 13.5 per cent but fell to a range of 7-8 per cent during the Eleventh and Twelfth Finance Commission periods. The larger shares for the Eighth, Ninth and Tenth Finance Commission periods out of tax devolution were because of the practice of earmarking a certain percentage of the states’ share of the Union Excise duties for distribution amongst states in proportion of ‘assessed’ deficits. 11

Research gap A number of research articles have been published on fiscal transfers in India. The previous Ph.D., research on the particular topic in various universities in Tamil Nadu is very rare and it is socially relevant hence the researcher felt that there is a need to fill the gap found in the present study.

Research questions raised 1. What are the functions of Finance Commissions? 2. What are the methods of fiscal transfers from Centre to States? 3. What is the position of Finance Commission Fiscal Transfer to Southern States?

Objectives of the study The following are the objectives of the study.

 To study the trends of the Finance Commission Fiscal Transfers in India (1990-91 to 2009-10).

 To analyse the Finance Commission Fiscal transfer to southern states (1990-91 to 2009-10).

 To analyse the grants-in-aid revenue of southern states (1990-91 to 2009-10).

 To study the central share of taxes and duties to the southern states (1990-91 to 2009-10).

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Hypothesis of the study The following are the hypothesis of the present study.

 There is an increasing trend on the shares of taxes and duties to the southern states.

 Grants-in-aid to the southern states shows on increasing trends.

 There is a positive relationship between the general category states and southern states on receiving central fund.

Period of the study The study covers a period of 20 years from 1990-91 to 2009-10. The present study attempts to analyse the functions of various Finance Commissions in India, particularly the recent four Finance Commissions namely, the ninth, tenth, eleventh and twelfth.

Methodology and database The present study mainly depends on secondary data relating to the Finance Commission fiscal transfers such as, shares of sharable taxes and duties and grants-in-aid from the centre to states etc. collected from the reports of the various Finance Commissions and the budgetary documents of the Government of India. The collected data have been tabulated, classified and analysed, suitable diagrams have also been provided for data illustration. Statistical tools like percentage, correlation, regression, standard deviation, time series analysis, simple growth rate and mean average are used in the study.

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Limitations The present study attempt to analyse the overall functions of the Finance Commission Fiscal transfers. The data has been collected only for the Southern States for the functions of Finance Commission. The finding of the study may be relevant only to those areas of fiscal transfers. Therefore the generalization of the research findings on fiscal transfers should be made with utmost care. The present study examine some of the relevant issues of resource sharing between the union and the states particularly during the Ninth, Tenth, Eleventh and Twlfth Finance Commission focus is on the Southern states viz., Tamil Nadu, Andhra Pradesh, Karnataka and Kerala, in matters of fiscal transfers, has to take into account competing claims of different states on a limited pool of sharable resources.

Chapter Scheme Chapter I Introductory, presenting the objectives, hypotheses, methodology and chapter scheme of the study. Chapter II reviews the existing literature on Finance commissions. Chapter III presents the theory of Federal Finance in India. Chapter IV presents data analysis relating to Finance Commissions fiscal transfers. Chapter V presents the data analysis relating to the Finance Commissions fiscal transfers to Southern States. Chapter VI gives the leading findings and conclusion of the study. Chapter II REVIEW OF LITERATURE

Srivastava (2009) in his study, “Finance Commission and the Southern States: Overview of Issues.” This paper has discussed three basic features of the southern states, share of their GSDP in all – state GSDP, share of the population in all state population and their average percapita GSDP relative to the and their average percapita GSDP. Sections discusses issues of vertical and horizontal transfers highlighting how over the long run, the share of the southern states in the transfers has recorded. Section 3 discusses issues arising from the implementation of GST, Particularly for the southern states. Section 4 highlights the problems of intra-state imbalances focusing on Tamil Nadu. Section 5 looks at some special problems of the southern states, particularly those arising from the large coastal areas that they need to manage. Before analyzing the issue of fiscal transfers, it is useful to look at three basic features of four southern states, Tamil Nadu, Karnataka, Andhra Pradesh and Kerala and their contribution in the economic activities of the country, their share of population and their relative position in terms of percapita incomes.

George and Krishnakumar, (2009) in their study, “Kerala Development Experience. Its implications for finance commissions.” The recent finance commissions in the specific context of the ongoing work of the thirteenth finance commission is currently engaged in determining the 15 quantum and modes of financial transfers from the centre to the different states for the five year period beginning from 2010-11. It is the transfers which are being decided now by the present commission that are going to determine in the medium term size and the shape of the budgets and the plans of not only the state government but also of its local bodies. Our review of state’s finances shows that finance commission transfers account for about three fifths of the total revenue transfers from the centre to the state and about one fifth of the state’s total revenue. In the approach of the earlier commissions which resulted in progressive decrease in the flow of central funds to Kerala, thus aggravating its fiscal crisis.

Natarajan (2013) in his study, “Study on the Grants-in-aid Revenue of the Government of Tamil Nadu.” The States expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure. Throughout the 19th century, most governments followed laissez faire economic policies and their functions were only restricted to defending aggression and maintaining law and order the size of public expenditure was very small. But now the expenditure of governments all over the world has significantly increased.

Valliammai (2013) in her study, “Budget and Budgetary procedure.” Budget without doubt is the most important economic event not only outlines major economic initiatives of government for the next year but also comes out with the rates for both indirect taxes as well as direct taxes. It is not only important for corporate but for individuals from 16 all sections of the society. Budget is the systematic allocation of one’s sources or income to the various requirements which are nothing but expenses. Budgeting can have different connotation for different people it is a process of keeping the monthly savings aside and then utilizing the left over amount for every day expenses.

Vetrivel (2013) in his study, “Evaluation of Indian Union Budget 2013-2014 an Overview.” A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. It is an important concept in Macro Economics which uses a budget line to illustrate the tradeoffs between two or mere goods. In other terms, a budget is an organizational plan stated in monetary terms. The union budget of India also called the general India budget is presented each year on the last working day of February. The budget is presented by the finance minister of India in parliament. Budget is most economic event in the country which outlines all the economic planning of the government of India for the next year. It is not only important for corporate but for individuates from all sections of the society.

Bhuvaneswari and Jayachandran (2011) in their analysis, “The Finance Commission and Improving Fiscal Outcomes.” Concern with the quality of public expenditure in India and its impact on social outcomes probably began in 2005 with the budget speech of Finance Ministers. He introduced a machinery to measure major development outcomes that years working with the planning commission. It has been suggested in the discussion here that the finance commission has not chosen the best 17 possible route to meant its mandate of recommending ways to make public expenditure more outcomes oriented. However, elsewhere in its report, it has a number of important suggestions that should help achieve output. Oriental outlays, though these do not add up to a comprehensive reform package for output-oriented expenditure reform. The finance commission still deserves out admiration and thanks for what it has achieved. Perhaps the major problem lies in terms of reference, which ask a human agency to accomplish a superhuman task in an impossibly short time frame.

Pranab Mukherjee (2012) in his study, “2012-13 Budget Speech of Union Minister of Finance.” I rise to present the union budget for 2012- 13. For the Indian economy this was a year of recovery interrupted. When one year ago I rise to present the budget, the challenges were many, but there turned out to be different. The sovereign debt crisis in the Euro zone intensified political turmoil in Middle East injected wide spread uncertainly crude oil price rose an earthquake struck Japan and the overall gloom refused to lift. The implementation of the fiscal responsibility and budget management act 2003 (FRBM act) at centre and the corresponding acts at state level was the pivot in the successful consolidation of our fiscal balance prior to the global financial crisis of 2008. The out break of the crisis coincided with the year when the mandated targets of 3 per cent fiscal deficit and elimination of revenue deficit were to be achieved.

Bhuvaneswari and Jayachandran (2011-2012) in their study, “An Overview of Thirteenth Finance Commission Recommendation.” The 18 finance commission act 1951 states the terms of qualification, appointment and disqualification, the term, eligibility and powers of the finance commission. As for the constitution, the commission is appointed for every five years and consists of a chairman and four other members. This has led to major changes in the Finance Commissions recommendations over the years.

Natarajan and Santhakumar (2011) in their study, “Finance Commission Fiscal Transfer in India.” Transfer routed through the Finance Commission pertain to sharing to central taxes and grants-in-aid of revenues of the states. In other words although the taxation powers allocated to the centre and the states and mutually exclusive yet all the taxes and duties levied by the centre are not meant entirely for the centre. In fact revenue from certain taxes and duties leviable by the centre are totally assigned to or shared with the states to supplement the revenues of the states in accordance with their needs. The architects of the constitution probably realized that even with a share in the proceeds of divisible taxes, some states might still need financial assistance. Accordingly they made provision for annual grants-in-aid of revenues under 275(1) to such states as may be in need of assistance, also the centre is required to give grants- in-aid to the states.

Govindan (2011) in his analysis, “Finance Commission and it Recommendations for Punchayat Raj.” The finance commission was constitutional by the president under article 280 of the constitution of India. Punchayat Raj is a system of Government where gram Punchayats 19 are the basis units of administration. It has three level, village, block and punchayat having originated during the British administration. An important challenge faced by the commission was that the assessment of the resource position of the centre and states has had to be made in the face of more than normal uncontained, given the development in the global economy and the consignment need for resources to be devoted for stabilization and country local measures by the centre and states. The impact of countercyclical measures on the absolute and relative finances of central and state government will affect the future fiscal roadmap. This in turn, has to be taken into account in preparing the forecasts necessary to calculate consistent and appropriate vertical and horizontal devolution.

Alexander (2011) in his study, “Finance commission in India.” As per the article 280 of the Indian constitution, the president of India constitutes a finance commission with a chairman and four members, the main objectives of the commission is to recommend the allocation of grants between states, orders on the recommendations under articles 270 and 275(1) of the constitutions relating to share in union taxes and duties and grants-in-aid, respectively, will be issued after obtaining the approval of the president. The recommendations relating to reorganizations of funds for disaster relief, debt relief to states and borrowing cealling will be implemented by executive orders, other recommendations of the commission will be actual upon in due course.

Vasantha Arockiaselvi, (2011) in her study, “The Government of India act 1935.” Was an important level mark in the history of India which 20 is to a large extent subtitled the deciders of the people of a juderations, through states were outside it came into effect from April 1937. It opened a new chapter in the central provincial financial relations; the act is the largest in the history of British parliament, contained 321 sections and 10 schedules. The seventh schedule of the act contained three list, federal legislative, provincial legislative, concurrent list. India federalism with some changes in both political and fiscal spheres. In the political sphere, the reorganization of states or linguistics basis, further bifurcations of states on the basis of other cultural identities. Provisions of constitutional basis for local governments and constrains on the use of articles 356 by the union level has almost becomes inevitable, so also many states. These political developments in the Indian federalism are not reflected in the rearrangement of fiscal power between the union and states government.

Palanichamy (2011) in his study, “India Federal Structure.” In which a clear destinations is made between the union and state functions and sources of revenue, but the residual powers belong to the centre. Although the states have been assigned certain taxes which are levied and collected by them, they also share in the revenue of certain union taxes and there are certain taxes are levied and collected by the union but the proceeds of which wholly go to the states.

Govinda Rao (2011) in his study, “Fiscal Decentralization in Developing Countries”, “Notwithstanding the weaknesses, it must be natal that the system of inter-government fiscal arrangement in India has served reasonably well for over fifty years. It has achieved significant 21 equalizations over the year, instituted a workable system of resolving the outstanding issues between the centre and the states and among the states, and delyusted to the changing requirements. It has thus contributed to achieving a degree of cohesiveness in a large and diverse country.

Raja and Chellah (2011) in their study, “Fiscal Federalism in India”. It is now well accepted in the theory of federal finances that inter- government fiscal relations should be constructed on the basis of the principles of adequacy, inter-state equity, autonomy, fiscal discipline and economic efficiency. All these principle are equally important but come into conflict to some extent in particular areas and hence a balance has to be struck among them so as to enable the time levels of governments to sulfite their functions efficiently.

Vithal and Sastry (2011) in their study, “Fiscal Federalism in India,” the constitutions recommends that the division of resource and functions between the union and the states were such that there would be an imbalance between them. The finance commission periodically corrects this imbalance, bringing about an alignment between the two. It has been our endeavour to show that it is this institutions and the manner in which the finance commission have responsible over these 50 years, that have been responsible for a basic contradiction in the constitutional structure leading to any breakdown.

Rathin Roy (2011) in her study entitled, “A response of count drums and fundamentalisms received in the THFC.” In the THFC’s award 22 both the volume and state wise incidence of these grants declines sharply, not because any deliberate policy decision was made by the commission to do because this, as the report states “Is to be expected given the structural improvement in the fiscal position of many states, including special category states.” Since the commissions approach is to persist with increasing the process of fiscal consolidation by states gain proportionally and progressively in their share of devolution a NPRD grants while at the same time aiming for their expiry as a significant instrument of devolution.

Vijayakumari (2011) in her study analysis, “Working of finance commission in India.” The analysis of 13th Finance Commission report on sharing of centre’s tax receipts with the states. “It will be tabled before the budget.” An official said while briefing them on the cabinet meeting which considered the recommendations of the commission, which was headed by former finance secretary Vijaykelkar. The commission’s suggestions will be reflected in the budget, finance minister Pranab Mulcherjee has said earlier. The report assumes importance in the light of likely implementation of new indirect tax regime on goods and service tax and the new direct tax code in a couple of years. The Vijaykelkar headed thirteenth finance commission has biked the share of the states in central taxes from the existing 30.5 per cent to 32 per cent while making a strong pitch for greater fiscal discipline both at the centre and the states.

Rajendran (2011) in his study, “An Analysis of Intergovernmental Transfer of Financial Resources in India.” transfers routed through the 23 finance commission pertains to sharing of certain central taxes and grants- in-aid revenues of the states. The taxes imposed and collected by the centre are not meant entirely for the centre. In fact revenues from certain taxes and duties leviable by the centre are totally assigned to or shared with the states to supplement the revenues of the states in accordance with their needs. There is no permanent formula for the sharing of taxes. The precise manner of sharing taxes and the actual determination of grants is left to the deliberations of the finance commission. The 11th finance commission proposed the continuance of the existing debt relief scheme linked to improvement in the ratio of revenue receipts of a states to its to total revenue expenditure with enhanced incentive, the 12th Finance Commission recommended enacting fiscal responsibility legislation.

Krishnaveni (2011) in her study, analysis, “The Pre-independence History of Fiscal Federalism in India.” The present fiscal structure of India is the result of a gradual evolution over the last 140 years although it is desirable to look back at the historical developments of a subject to understand its current features, the situation is different in the present case the political and economic scene in India is greatly different today from what existed during British rule. Before 1947 India was a dependence of the united kingdom and consisted of British India and the princely states. It encompassed the entire area which now forms the four countries, such as India, Pakistan, Burma and Bangladesh. The princely states enjoyed internal financial autonomy and therefore did not form part of the public finances.

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Natarajan and Ravindran (2011) in his their study, “Chanalization of Fiscal Transfers in India with Special Reference to Finance Commission Transfers.” The working of finance commission’s fiscal transfers in India such as shares of sharable taxes and duties and grants-in- aid to the states from the centre for need based financial distribution, 11 mountainous states of the north and north-east have been classified as “special category states” and the remaining 17 states are considered to be “General category states”, the finance commission concentrate more on the social and economic upliftment of the “special category states”, because they are backward in nature. Union excise duties are concern the president of India has the discretion to refer the question of sharing of excise duties with the states. In effect, this matter was always included in its terms of references, here again the commission recommended the sharing of net proceeds of union excise duties between the centre and states and the distribution of their collective share between individual states.

Rajendran (2011) in his analysis, “Economic Reforms and Centre - State Financial Relations in India.” The Commission on Centre - State relations 2010 considered the impact of the recommendations made by the eighth to Twelfth finance commissions on the fiscal relations between the centre and the states, especially the greater dependence of the states on devolution of funds from the centre. The commission reviewed the trends in fiscal transfers to the states since the period covered by ninth finance commission. In India, transfers from the centre to states, comprising statutory and non statutory transfers, take place through three channels, 25 namely, finance commission, planning commission and the central sectors. Statutory transfers in the form of share in the proceeds of central taxes and non-plan grants are on the basis of the recommendations of the finance commissions.

Chaarlas (2011) in his study, “13th Finance Commission Implications of key Recommendations for the State Governments.” The THFC has recommended that the states maintain their financing gap at 3 per cent of GSDP beyond 2014-15 and that the centre raise additional resources and pass these on to the states in accordance with the horizontal devolution formula in the event of macroeconomic shocks. This would help maintain the focus on fiscal consolidation at the state level over the course of business cycles and prevent such slippages as seen during the last two years of the THFC period, which coincided with macro economic slowdown in India. If implemented the THFC’s recommendation that structural shocks, such as payout of commission related arrears be avoided would help smoothen the revenue expenditures of the state governments and prevent income expenditure mismatches.

Sulthana Barvin (2011) in her study, “Grants in India: The Thirteenth Finance Commission Perception”. The expression of grants-in- aid of the revenue has not been defined in the constitution of India. Two kinds of grants are provided by the centre to states, the first under Article 275 which are routed through the finance commission and the second under the article 282 which have traditionally been determined by the planning commission, article 280 requires the finance commission to 26 make recommendations are to the principles which should govern the grants-in-aid of the revenue of the state under article 275 however, the principles underlined on the provision of grants-in-aid to the states are budgetary needs, tax efforts, tax efforts and economy in expenditure and so on.

Prabakaran (2011) in his analysis, “Local Finance and 13th Finance Commission Recommendations: Some Observations.” Local government finance is an important agent for multidimensional and local development for the following reasons. In the first place, in many countries, hard - pressed national governments are increasingly shifting functions to local governments in the expectation that additional local resources centre mobilized to pay for them. Local expenditures and local revenue are thus likely to constitute an increasingly important component of total public sector activity. Secondly regardless of how large local governments are in terms of raising revenue, they often play a vital role in the provision and utilization of important public sources.

Rajendran (2011) in his study, “Recommendations of 13th Finance Commission on Sharing of Union Tax Revenue - An Evaluation.” The thirteenth finance commission was constituted on 13 November 2007 to make recommendations for the period 2010-15, one of the terms of reference of the commissions was to make recommendation regarding “the distribution between the union and the states of the net proceeds of taxes which are to be, or may be divided between them under chapter I part XII of the constitution and the allocation between the states of the 27 respective shares of such proceeds.” Transfers routed through the finance commission pertain to sharing of certain central taxes. The taxes imposed and collected by the centre are not meant entirely for the centre, In fact revenue from certain taxes and duties leviable by the centre are totally assigned to or shared with the states to supplement the revenue of the states for their needs.

Viji and Kavitha (2011) in their study, “Growth of the Indian Fiscal Federalism”, India is a federal country with constitutional division of functions between the union and states. The legislative functions of two levels are assigned in terms of the union. State and concurrent lists the conditions prevailing at the time of independence necessitated adoption of the constitution with centripetal bias. The centralizing trend was reinforced in the evolution of inter governmental policies and institutions with in the frame work of planned development strategy in a mixed economy framework with economic liberalization and opening up of the economy, intergovernmental policies and institutions have to be reoriented to meet the new challenges of competitive market economy. The salient recommendations of the twelfth finance commission, the share of the states in the net proceeds of sharable central tax was fixed at 30.5 per cent, treating additional excise duties in lieu of states sales tax as part of the general pool of central taxes. Share of states was brought down to 29.5 per cent, when states were allowed to levy sales tax on sugar, textiles and tobacco. In case of any legislation enacted in respect of services tax, after the notification of the 88th amendment to the constitution, revenue accruing to state should not be less than the share that would accrue to it, 28 had the entire service tax proceeds been part of the sharable pool. The indicative amount of overall transfer to states would be fixed out 38 per cent of the centre’s gross revenue receipts. A grant of `20,000 crore for the Panchayat Raj institutions and `5,000 crore for urban local bodies should be given to the state for the period 2005-1010.

Chakravarty (2010) in his study, “Report of the 13th Finance Commission Introduction and Overview.” The union finance commission (UFC) appointed every five years by the president of India for the purpose of resource sharing between the centre and the state is unique to the Indian federal structure. The UFC’s task is defined by its terms of reference (TOR), which have been expanding in recent times. Although the primary function of the UFC as envisaged in the constitution of India is to correct vertical and horizontal imbalances, over broadening TOR have required it to look into among other things, the critical issues of macroeconomic stability and fiscal restructuring by both the centre and the states. The thirteenth finance commission 2010-2015 had, larger primary task of resource sharing to suggest measures for improving the output and outcome of government expenditure to took into means to tackling climate change and environmental sustainability and to assess the implications of the proposed goods and services tax on the finances of the centre and the states.

Chakroborty and Rao (2010) in their study, “The Articles Raise Several Issues.” Some are potential others have to do with the fundamental political economy of inter government fiscal relations in 29

India and therefore the context within which all finance commission reports are written. Engagement on these issues is very important. However, this would require a broader theoretical frame within which to engage in a discussion that transcends the THFC report. This response is limited to addressing a few substantive points raised by these authors with reference to the THFC report (THFC, 2009).

Reddy (2009) in his study, “Global Down Turn and the Thirteenth Finance Commission.” The fixing of the higher plan outlays creates three major liabilities on the non-plan revenue expenditure beyond the plan period. These liabilities are in the form of interest payments on loans taken to finance the plan, maintenance of assets created during a plan period and the payment of salaries for the staff deployed on plan schemes transferred to non-plan side. Besides plan grants do not fully cover the revenue component of the plan. Thus unless the plan revenue account is taken into account by the finance commission there is no way the problem of a deficit of the revenue account of the state budgets can be addressed. For facilitating the finance commission to take in to account the plan revenue account, it is necessary to synchronize the periods covered by the finance commission and the planning commission. As indicated earlier, the finance commissions have been facing certain practical problems as the periods covered by a five year plan.

Pylee (2009) in his study, “Constitution of India.” Analysis the importance of the finance commission.” As a constitutional instrument capable of settling many complicated financial problems which affect the 30 relationship of the union and the states may be seen from the recommendations of the 12th finance commission. The present system of allocation of finance between the union and the states in almost the result of these recommendations. Viewing the union - state relationship in the financial field as a whole, one finds that is in harmony with the general nature of the Indian federalism, namely the tendency for centralization. The union government is financially stabler and stronger than the state government. This was necessary to facilitate the planned development of the country as a whole and to check in the economic activities within individual states. As it is the states are in view of their limited resources bound to look up to the union for financial aid foremost, if not all development projects. Naturally, they will have to follow the lead of the union and often even submit to its dictates.

Issac and Chakraborty (2008) in their study, “Inter Governmental Transfers: Disquieting Trends and the Thirteenth Finance Commission.” This period has also witnessed an increase in the share of conditional transfers to the states. One of the most disturbing aspects of this phenomenon is the attempts to link even the finance commission transfers to fiscal performance. A few examples in this context are monitarable. Fiscal reforms programme of the Eleventh Finance Commission, the Fiscal Responsibility Acts (FRA) of TWFC and the terms of reference of the thirteenth finance commission on be it review of the debt consolidation and relief facility and thereby FRA, or issues like quality of public expenditure to achieve better output and outcome. It appears that the basic constitutional foundation of finance commission has been 31 diluted by the way of the TORS of successive finance commissions. It is true that our transfer system has various deficiencies, but that requires correction not through heavy reliance on tied and conditional grants, but an alternative approach is a must which accommodates and protects the objectives of equity, efficiency and autonomy of the recipient state governments.

Ravishankar (2008) in his study, “Indian States, Fiscal Correction: An Unfinished Agenda.” A composition of the level of own revenue among the states, including both tax and non-tax revenue of the southern states of Karnataka and Tamil Nadu which are middle – income states and the northern high income states of Punjab and Harayana, are the four with the highest relative tax take in 2005-06 and except Punjab the other three have maintained or improved their ranking since 1998-2000. Among the poor states, those that have significantly increased their own revenues by more than 2 percentage points of GDP since 1998-2000 are Orissa, Uttar Pradesh, Rajasthan and Madhya Pradesh. Those that have consistently remained at the bottom of their ranking are Gujarat, Kerala, Maharashtra and Punjab.

Rangarajan and Srivastava (2008) in their study, “Reforming India’s Fiscal Transfer System. Resolving Vertical and Horizontal Imbalances.” The twelfth finance commission submitted its report at the end of 2004 in the backdrop of a severe fiscal stress affecting government finances, particularly states finances in India. The report contained a part from the recommendations concerning the crore tasks of the finance 32 commission regarding tax devolution and grants, a detailed roadmap for the restructuring of India’s public finances including an incentive lined debt – relief scheme for the states. The TFC deliberated on fiscal transfer issues in the background of severe fiscal imbalances affecting both the central and the state finances. To reverse these trends, the TFC recommended a scheme that provided for a major restructuring of government finances including the borrowing and on – lending regimes for the states.

Rajaraman and Majundar (2005) in their analysis, “Equity and Consistency Properties of TFC Recommendations.” The report of the Twelfth finance commission henceforth. TFC report makes four major departures in terms of approaches from previous commissions which have such an important bearing on states, that they are examined first before going on to the equity aspects of the TFC recommendations. The first of the four major TFC departures from prior practices is the offer of conditional write-offs on debt repayments owned by states to the centre and concessions on the interest rate payable on that stock. This major departure, although the previous eleventh finance commission had made beginning with a fiscal reforms facility, founded by a small with held portion of the grants entitlement of states, conditional on a revenue deficit correction requirement.

Thimmaiah (2002) in his study, “Economic and political weekly”, the finance commission in India is a unique constitutional body which has 33 survived for 50 years, we do not find similar constitutional institutions over in older federations like the US, Canada and Australia.

Vithal and Sastry (2002) in their study, “Growth of the Indian Fiscal Federalism.” Three consistent strangles that run through the recommendations of all the commissions. These are (1) satisfaction with the provisions of the constitutions; (2) a desire to do justice to both the centre and the states; (3) a concern to ensure equitable treatment among the states taking into accounts the special circumstance of each states.

Rao and Singh (2002) in their study, “In Equity and Disincentives from Central Transfers.” Reform in the transfer system is outside the purview of individual states. Yet it is important to address the issue to make the transfer system adequate, efficient and equitable. The fiscal adjustment at the centre the growth of transfers the states from 14.6 per cent in 1980s to 11 per cent in 1990s. It is also necessary to note that the transfer system has not been able to offset fiscal disabilities satisfactorily. The income elasticity of transfer for 14 major states declined from 0.35 in 1990-91 to 0.20 in 1998-99. The specific purpose transfers compose central sector and centrally sponsored schemes. There has been the proliferation of these schemes and at present they numbered more than 175. Besides spreading the resources thinly, these programs distort states” choices in expenditure allocation multiply bureaucracy and cause thin spread of resources across several schemes.

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Govinda Rao (2002) in his study, “State Finances in India: Issues and Challenges.” The terms of References (TOR) of the 11th finance commission specially required the commission to review the finances of both central and state governments and recommend measures to restore fiscal balance concern at growing fiscal imbalances promoted the central government to extent the TOR to require the commission to work out “A monitorable fiscal reforms programme aimed at reduction of revenue deficits of the states and recommend in which the grants to the states to cover the assessed deficit in their non plan revenue account may be linked to progress in implementing the programme.”

Amaresh Bagchi (2002) in his study, “Fiscal federalism in India.” The task of the finance commission consists not only of recommending how much of union revenue should be distributed to state but also decide their allocation among states to redress the gross horizontal imbalances and enable all states to provide basic public services at a minimum level. A transparent, stable system of transfers is widely regarded as conductive to efficiency and retinal bueleseting by governments.

Rao and Singh (2001) in their study entitled, “Implementation by the Eleventh Finance Commission.” Sharing between the centre and the states reflects one dimension of the bargaining that must take place among a federations constituent presumably, the initial effect of the change will be to leave the overall shares of the centre and the states in aggregate near their previous values, avoiding the problem of creating clear initial losers from the reform. Principle of their sort might be used to tackle a harder 35 problem that of revising the formula used to divide the States share of tax revenue among them. These formula are quite complex, without embodying any clearly defined objective, either of interstate horizontal equity or provision of incentives for fiscal prudence.

Govinda Rao (2000) in his study, “Changing Contours in Federal Fiscal Arrangements in India” India is the largest democratic federal polity inhabited by a billion people spread over 28 states and 7 centrally administered territories. A separate legislative, executive and judicial arms of government are constituted at both central and state levels. The upper house or Rajya Sabha in the parliament is the council of states. The seventh schedule to the constitution specifies the legislative domains of the central and state governments in terms of union state concurrent lists. The constitution also requires the president of India to appoint a finance commission every five years to review the finances of the centre and the states and recommend devolution of taxes and grant in aid for the ensuring five years. Historical factors have played an important role in the adoption of federal constitution with strong unitary features in India.

Qates (1999) in his study, “An Essay on Fiscal Federalism.” Intergovernmental grants constitute a distinctive and important policy instrument in fiscal federalism that can serve a number of different functions. The literature emphasizes three potential roles for such grants, the internalization of spillover benefits to other jurisdictions.

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Guhan (1997) in his study, “Centre – State Fiscal Transfers Beyond the Tenth Finance Commission.” A share in the total gross proceeds of all central taxes may be assigned to the states in lieu of (a) estate duty, shares in income tax and basic union excise duties, (b) the grant in lieu of sales taxes. The divisible pool will also include taxes under Article 269 except the central sales tax and the consignment tax but will not include taxes under article 268, based on average shares in 1990-95, 26 per cent of the divisible pool may be assigned towards the states share in income taxes union excise duties and the grant in lieu of the railway passenger fare tax and a further 3 per cent of the divisible pool may be assigned to the states towards the additional excise duties in lieu of sales taxes through a suitable amendment to the constitution (i.e., at total of 29 per cent). This share is to be reviewed once in 15 years.

Bind Richard and Wallich Chaistine (1993) in their study, “Fiscal Decentralization and Intergovernmental Relations in Transition Economics.” In their view, this is necessary because an efficient provision of local public sources calls for a higher proportion of local taxation to strengthen accountability, efficiency and flexibility at this level, have recommended that local governments in Hungary should be allowed to impose their income taxes in the form of a surcharge on the national tax.

Guhan (1995) in his study analysis, “Report of Tenth Finance Commission.” April, (1995) central transfers in the revenue account include shares in taxes and statutory grants for state plans and centrally 37 assisted sponsored schemes and non-plan grants such as for the relief of natural calamities. The purpose to bring out the significance at both levels of centre-state revenue transfers and the role of the finance commission in mediating them shows that gross central revenue transfers during 1990-95 amounted to about 40 per cent of the centre gross revenue tax and non tax and to a similar proportion of states aggregate revenue receipts that transfers under the aegis of the finance commission have constituted about 60 per cent of such central transfers, this is bleak background in which the TFC has had to frame its scheme for central transfers for the award period of 1995-2000. The core of its scheme consists and expenditure at the two levels so as to bridge the gap between the centres capacity and the states needs. The basis for vertical sharing of the shareable taxes.

Balakrishnan (1990) in his study entitled, “Union Budget for 1990- 91 (April 21, 1990).” The budget speech refers to the need for employment - oriented planning. This system from a recognition of the fact that while the agricultural sector still contributes the largest share of the national product. Prospect for labour absorption within this sector are limited. On the other hand, the increasing share in output of manufacturing and services has not been matched by a significant growth of employment in these sectors. This was obviously the concern which has motivated the prime move in this budget as far as direct taxation is concerned. The abolition of investment allowances to the corporate sector combined with a reduction in the corporation tax rate would appear to be an imaginative stroke. It simplifies the tax system a step welcomed by simplifies the tax system, a step welcomed by industry. 38

Gurumurthi (1988) in his study, “First Report of Ninth Finance Commission an Analysis.” A perusal of the first report of the finance commission shows that the commission has not made any major departure in the quantum of divisible part of income tax or the union excise duties, the divisible pools of the income tax and the excise duties have been retained at 85 per cent and 45 per cent respectively as determined by the Eighth finance commission. The criteria for horizontal distribution of the divisible pools too have only been slightly modified. While 75 per cent of the divisible pool follows the same pattern as recommended by the Eighth Finance Commission namely 25 per cent of the basis of 1971 population and 50 per cent in the basis of 1991 population on the basis of the distance criteria. The ninth finance commission has made a change only in respect of the remaining 25 per cent. As against the last Commissions decision to distribute the balance 25 per cent on the basis of inverse of per capita income of the state multiplied by the 1971 population, the present commission has restricted the weightage to this component of 121/2 per cent on the basis of proportion of poor people in the states according to the estimates of 1983-84 made by the planning commission.

Sitaraman Gurumurthi (1988) in his study, “First Report of Ninth Finance Commission an Analysis.” The teams of reference of the ninth finance commission are probably the widest ever given to a finance commission in the past a perusal of the first report of the finance commission shows that the commission has not made any major departure in the quantum of divisible pool of income tax or the union excise duties, the divisible pools of the income – tax and the excise duties have been 39 retained at 85 per cent and 45 per cent respectively as determined by the eighth finance commission. In the case of grants in lieu of railway passenger fares the recommendation of the finance commission is rather disappointing. In the case of additional excise duties, the commission has focused the approach of the last commission and assigned equal weight to SDP and population in determining the shares of individual states.

Sarkaria (1988) in his study, “Report of the Commission on Centre – State Relations.” The constitution of India adopted it provides for two layers of government, one at the central level and the other at the level of the states. A federal policy of this kind requires division of powers and responsibilities between the centre and the states and generally brings in its wake problems and conflicts in centre – state relations other important countries of the world with federal setup of US, Canada, Australia, Brazil and Nigeria. In a country too large and diverse for a unitary form of government, they envisaged a system which would be worked in co- operation by the two levels of government, national and regional, as a common endeavor to serve the people.

Thimmaiah (1987), in his study “Terms of reference of ninth finance commission this point of view is based on a misunderstanding of the performance of past commissions.” The constitutional provision can only provide for a statutory commission should be constituted and indicate guidelines for its functioning. These matters are normally left to the legislature parliament to determine through an appropriate legislation. Chapter III FEDERAL FINANCE IN INDIA

Introduction The Finance Commission is constituted by the President of India every five years under Article 280 of the Indian Constitution. The Finance Commission is mandated by the Indian constitution to provide recommendations on the sharing of union tax collections between the Central Government and the Indian State Governments the various non plan grants to be provided by the Central Government to the state Governments and the measures that may be taken to augment the resources of the Urban and Rural local bodies which form the third tier of government in India. Additionally the Commission provides recommendations on specific areas as may be mandated by the President of India. The THFC was mandated to review the finances of the Union and the State Governments and suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth. The recommendations of the Thirteenth Finance Commission (THFC) constituted by the President of India under article 280 of the Indian constitution will govern various elements of the fiscal relation between the Government of India and the various State Governments over the period of 2010-2011 to 2014-2015.

Finance Commission Transfers An analysis of the per capita transfers from the First to the Eight Commissions reveals that there were no marked differences in the 41 transfers across state indicating not so equalizing nature of these transfers. Since 11th Finance Commission, the position changed but more markedly from 11th Finance Commission onwards with the transfers becoming more and more progressive. This is a welcome development. It is a delicate task for the Finance Commission onwards, efficiency parameters are being built into the devolution formula, thus addressing the concerns with regard to promoting efficiency.

In the wake of rising inequalities across states, it is not proper to put the blame on the Finance Commission transfers alone. Transfer through Finance Commission, though important, is just one of the channels of resource transfers and cannot address the equity concerns adequately. However, Finance Commission transfers were found to be more progressive than other transfers. Furthermore, inequalities should be addressed from many fronts, particularly on the front of planning and public investments which are outside the realm of the Finance Commission. However, we envisage an enhanced redistributive role for the Finance Commission. Recent Finance Commissions have made recommendations in this direction by recommending grants to address special problems and bridge the gap in the provision of services like education and health. We are in favour of the Finance Commission adopting more sophisticated methods to assess the needs of backward states and providing them with higher transfers. Performance-linked incentive grants are likely to be more effective in addressing the problems of backward states.

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Another aspect of the Finance Commission transfers in the relative proportion of tax devolution and grants. States have been seeking predominance of tax devolution because of its inherent buoyancy as compared with the grants which are fixed in nature. Another issue is the conditionalities attached to grants. The proportion of grants in total Finance Commission increased from 9.0 per cent in the award period of 10th Finance Commission to 13.5 in the period of 11th Finance Commission and further to 18.9 per cent in the period of 12th Finance Commission. Compared with tax devolution, grants have a greater redistributive role. 12th Finance Commission felt that grants provided a more effective mechanism to address redistributive concerns. The commission extended the scope of grants to achieve equalization of expenditure across different states in two sectors, namely, education and health. This is a welcome development. We are the view that the relative shares of tax devolution and grants should be better left to the judgment of the Finance Commissions.

Central Finance Commission and Transfers to Local Bodies The 73rd and 74th amendments of the constitution do not provide for direct funding of local bodies by the Union Government. The involvement of the Union Government is strengthening the financial position of the local bodies is indirect following the consequential amendment made to Article 280 mandating the Central Finance Commission to make recommendations on the measures needed to augment the consolidated fund of a state to supplement the resources of panchayats and municipalities in the state on the basis of the recommendations made by 43 the Finance Commission of the state. The purpose of this provision is to find ways and means to meet the financial requirements of local bodies without changing the primary role of states.

“The responsibility of sharing of taxes with panchayats and assigning grants to them has not been transferred from the states to the centre. The responsibility for providing panchayats with an independent source of revenue as also grants for specified purposes is very much that of the State Governments. The State Finance Commissions are there to ensure proper allocation of resources as between the State and the Panchayats. If in the process of supplementation of the resources of panchayats a need arises for the augmentation of the State Consolidated Fund, it has to be considered by the Finance Commission.”

The constitution of India adopted on 26th November, 1949, became operative on 26th January 1950 provides for two layers of government namely the Central and the states. The kind of federal policy requires division of powers and responsibilities between the centre and the states. India is a vast, populous and most popular democratic country with 28 states and 7 union territories. There is no specific geographical region for the government of India such as state governments hence the union government has to concentrate all the states and union territories for their political, social and economical activities.

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The following is the organizational structure of multilevel fiscal system in India.

Union Government

Union Territories State Governments (directly controlled by the centre)

Urban Local Rural Local Governments Governments

District Panchayats Block Panchayats

Village Panchayats

It can be classified as union territories and the state governments under the central level and under the state level, there are more than a quarter million local governments. Of these 3000 are in urban areas and the remaining are in rural areas. The most important centralization process was done when the major commercial banks were nationalized in 1969 and the Central government virtually acquired complete control over the financial system. Recent economic and political events such as privatization, liberalisation and globalization and the end of single part rule, emergence of coalition of parties in power at the centre and increasing importance of regional parties in the political affairs have 45 forced greater decentralization. Rural local government or Panchayats – again are at three levels – such as district, taluk and village.

Transfers in three – tier system Most decentralized system has more than three tiers government through the extent of decentralization to the third tier is in the nature of de-concentration. The principles of the transfer system detailed above applies to governmental systems with multiple layers though there can be a number of operational issues in designing and implementing them. Three important issues pertinent to countries with three (or more) tier systems may be noted. First, the third tier receives transfers from both the central and the regional governments though in many federations, the regional (state) governments resent direct transfers to local governments from the centre. In India, for example, when constitutional status was sought to be given to the third tier in the last 1980s proposal to give direct transfers from the centre to local government by passing the state governments was not acceptable to the latter.

Second in most cases, even the general capacity segmenting type of transfers received by the third tier are in the nature of specific purpose transfers and the implementation of programmes by them is closely monitored. They do not have independent revenue raising decisions. In other words in many countries, the third tier is more an agency than an independent fiscal decision making unit. This is partly due to the perception that the local governments do not have the capacity to 46 undertake independent decisions. Such systems however do not reap efficiency gains from decentralization.

Constitution of the Finance Commission and their ToR Under article 280 of the constitution, Finance Commission is constituted by the president at the expiry of every fifth year or earlier. The constitutionally mandated responsibilities of a Finance Commission are making recommendations regarding. i) the distribution between the states of the net proceeds of taxes which are to be or may be shared or divided between then and the allocation between the states of the respective shares of such proceeds. ii) the principles which should govern the grants-in-aid of the revenues of states out of the consolidated fund of India, and iii) measure needed to augment the consolidated fund of a state to supplement the resources of panchayats and municipalities in the state. These constitutionally mandated responsibilities are the same for all the Finance Commission and are spelt out as such in the ToR. In addition to these responsibilities any other matter can be referred to a Finance Commission in the interest of sound finance.

In addition to the above matters, it has become customary for the ToR to include some considerations, which the Finance Commission is required to take into account, among others. There has been an enlargement of the considerations over the years. States have been contending that the specification of considerations are loaded in favour of the centre and have been restricting the freedom of the Finance Commission in delineating their approach. In their response to our 47 questionnaire, a number of states pleaded for their involvement in the finalization of the ToR. One of the suggestions was that the states and the centre should jointly constitute the Finance Commission and select the members through the Inter-State council (ISC).

The terms of reference of the Ninth Finance Commission were wider as compared to previous commissions. For example, one term of reference provided that the commission might examine the feasibility of the merger of additional duties of excise in lieu of sales tax with basic duties of excise. The commission was asked to adopt a normative approach in assessing receipts and expenditures on the revenue account of both the centre and the states. The normative approach was considered essential to ensure fiscal discipline and adequate efforts to augment revenues.

The commission presented its first report for the year 1989-90 to the president on July 29, 1988. The second report for the five year period 1990-91 to 1994-95 was submitted in December 1989. The report of the commission was not unanimous as one of its members justice A.S. Qureshi disagreed with certain recommendations. His note of dissent formed part of the report.

The Ninth Finance Commission made a basic departure from the practice of previous Finance Commission by adopting the normative approach. Under this approach, the needs and capacities of different government were assessed normatively and such normative assessments 48 were used to the basis for determining the volume and pattern of federal transfers. In other words, the fiscal performance of the governments was judged on the basis of what ought to be rather than on the basis of what it actually is. To put it differently, the commission rejected the base year figure on the receipts as well as the expenditure side as the right figures. The commission emphasized that the normative approach would be applied to both the centre and the states and that the assessment of revenues and expenditures would be done in a manner so as to maintain incentives for greater revenue efforts and economy in spending.

Alternative Terms of Reference The guidelines issued by the central government to the Ninth Finance Commission such as to follow the normative approach in assessing the revenue and expenditure of the Central and State Governments and keep in view the special requirements like defence, security, debt servicing and other committed expenditures or liabilities of the centre, was presented by some state governments. On January 30, 1988, a group of Chief Ministers meet the Prime Minister to present alternative terms of reference for the already set up Ninth Finance Commission. Almost simultaneously the government released a summary of the report of the Sarkaria commission on centre state relations.

The alternative terms of reference for the Ninth Finance Commission were jointly submitted to the Prime Minister on behalf of the seven non congress (I) Chief Ministers who unanimously framed them at their meeting in Bangalore on January 11, 1988. The seven non-congress 49

(I) states (West Bengal, Harayana, Karnataka, Andhra Pradesh, Kerala, Tripura and Assam) believed that the terms of reference of the Ninth Finance Commission were one-sided in favour of the centre and the reference in them of normative approach was vague and devoid of operations content. The Chief Ministers demanded the holding of a tripartite meeting between the Ninth Finance Commission, the centre and the state governments to evolve the normative approach was vague and devoid of operational content.

Need for Transfers The need for transfers arises because the own revenues of a lower level governments are generally insufficient to meet the expenditure required for providing services allotted to it. Very often central government retains with it elastic revenue sources such as income tax, excise levies, and customs duties. Contrarily, inelastic sources of revenue (such as sales tax, excise on liquor, and motor vehicle tax) are allotted to state governments. The gap between ‘own resources’ and expenditure needs indicates the degree of dependence of state governments on the central government.

Forms of Transfers Transfers from the higher level to a lower level of government are made in the form of (a) tax sharing, (b) grants and (c) loans. The first two items generally account for the bulk of transfers on the revenue account.

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1. Tax Sharing Formula-based tax sharing is a predictable source of revenue and the state governments automatically gain from the buoyancy of the shared central taxes. There are two types of tax sharing mechanism. Under the first method (called global sharing), the whole of the central tax revenue forms a pool for sharing with the state governments. A certain percentage of the total tax revenue of the centre is allocated to the state governments. The second method (called scheduler or itemized sharing) involves sharing of revenue from individual central taxes. Tax sharing may take the form of a fixed amount or a fixed proportion of tax revenue. Central government should share at least one buoyant tax (e.g. income tax) with state governments.

2. Grants Grants have the advantage of being targeted towards fiscally disadvantaged states to reduce horizontal fiscal imbalances. They can also be made conditional regarding their utilization. Grants are given mainly for the purpose of equalization, though they are often given to promote the objectives and priorities of the central government. It is noteworthy that while a state cannot be defined a part of a shared central tax even if it has no demonstrated financial need, grants are given upon genuine financial needs of a state. It is possible that even before tax devolution from the centre, some high-income states have surplus in their revenue account.

Keeping in mind the criteria of fiscal equity and efficiency, three types of grants may be given by the central government to states. 51

(a) General Purpose (or Unconditional) Grants These are given to offset fiscal disadvantages arising from lower taxable capacity and / or higher unit cost of the services provided (due to bad terrains etc.). Such equalizing grants have to be general and their basic purpose is to enable different states to come up to a minimum standard of services provided.

(b) Specific Purpose (or Conditional) Grants These are tied to the achievement of specific objectives. They may be with or without matching requirements. They are used to ensure minimum levels of specified public services to be provided by state governments. Such grants are justified also where services have spill over effects. Thus, a forestation, slum improvement and literacy drives create benefits not only to local residents but also to community as a whole. Such schemes should preferably be financed through grants from the centre to the states.

(c) Incentive Grants These are given for the purpose of encouraging states to streamline their operations. These grants should depends on the measures taken by the states to strengthen their financial position.

3. Loans Financial resources from the higher level of government to lower level of government also flow in the form of loans. These loans are generally given for capital projects 52

Principles of Transfer The designing of a sound system of transfers is a vital importance in this context of financial discipline and promotion of local initiatives. Central government may keep in mind the following broad principles so that amount transferred is equitably distributed among the states. 1. The scheme of transfers should be based on well-defined objective criteria so that financially weak states are adequately assisted. These may include size of population, level of economic development, availability of infrastructure, and minimum service standards. 2. The system of transfers should be so designed that states are not discouraged to mobilize resources on their own. Contrarily, the system should contain in-built mechanism to promote internal mobilization of resources and their judicious management. For this purpose, the following additional criteria may be adopted and given due weight- age: tax effort, adoption of sound financial management, innovations in the provision of public services, and economy in expenditure. 3. The amount and frequency of transfer should be reasonably predictable. They should be pre-determined rather than being open- ended. Transparency, through explicit and identifiable budget entries, should also be ensured.

Grants-in-aid of Revenues of states Even after the transfer to the states of a share of divisible taxes, the resource of some of the states may remain inadequate to meet their needs. Therefore, the constitution provides for grants-in-aids by the centre to such states as are in need of assistance. Two types of grants are provided 53 by the centre to the states the first under Article 275 which are routed through the Finance Commission and the second under Article 282 which have traditionally been determined by the Planning Commission.

Grants-in-aid to cover Non-Plan Gap on Revenue Account The commission recommended grants-in-aid to be given under Article 275(1) equal to the amount of deficits assessed for each year during the period 2000-01 to 2004-05. Grants-in-aid amounting to `35,359 crore were recommended to such states.

Grants-in-aid for upgradation of standards of administration and special problems of states The commission recommended grants totaling to `4,972 crore towards upgradation of standards of administration and special problems of state for the period 2000-01 to 2004-05. In this connection the Commission observed, “The power to sanction individual schemes as well as to determine the unit costs in respect of projects to be taken up under the upgradation and special problem grants should vest with the State Level Empowered Committee (SLEC). There is no need for any case to be sent to the Government of India for sanction of a project. Once a project has been sanctioned by the SLEC, a copy of the same indicating the time schedule for various states of the project and for requirement of funds should be submitted to the Government of India, who should release the funds according to the time schedule indicated in the project. The unutilized grants for a particular year may be carried forward to the next 54 year. However, the grants that remain unutilized as on March 31, 2005 shall lapse.

Grants to States for Financing Local Bodies The commission under study was the first to be required by the President, in terms of the 73rd and 74th Amendments to the Constitution, to recommend the measures needed to augment the Consolidated Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations of the State Finance Commissions.

The commission recommended grants totaling `10,000 crore for local bodies during 2000-01 to 2004-05, to be utilized mainly for maintenance of civic services. Of this, `1,600 crore per annum was for rural local bodies and `400 crore per annum was for urban local bodies.

National Calamity Contingency Fund The commission recommended that the Central assistance to the states in national calamities should be financed by levy of a special surcharge on Central taxes for a limited period. It opined that a surcharge instills a feeling of national participation for a national cause. Collection from such surcharge should be kept in a separate fund, to be known as National Calamity Contingency Fund (NCCP), created in the Public Account of the Government of India.

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Ceiling on Total Revenue Account Transfers While working out the total quantum of share in Central taxes and duties and grants-in-aid to states, the Commission considered the trends in total transfers from the centre to the states on revenue account. It recommended that tax devolution and Plan / Non-Plan grants from the centre to the states should not exceed 37.5 percent of total centre’s revenues (both tax and non-tax). The rationale of the ceiling was explained by the Commission as follows, “in deciding the level of revenue transfers, all transfers have to be taken in their totality and their components like tax devolution, grants-in-aid and grants in other forms like plan grants, should be decided in the light of the overall ceiling. Accordingly, after working out the likely profile of the revenue and expenditure of the centre for the five years 2000-05, we have set a national limit on the overall revenue transfers, taking into account the legitimate needs of the centre to meet its level of transfers that have taken place as a proportion of Centre’s revenues in recent years and postulated a proportion of 37.5 percent in order that there is no disruption in government finances at the two levels. This will serve to raise the volume of resource flow to the states over what has been prevailing of late but not beyond what can be accommodated within the Centre’s resource profile and the contemplated deficit levels.”

Sharing of Union Tax Revenues The Eightieth amendment of the Constitution altered the pattern of sharing of Union taxes in a fundamental way. Under this amendment, Article 272 was dropped and Article 270 was substantially changed. The 56 new Article 270 provided for sharing of all the taxes and duties referred to in the Union list, except the taxes and duties referred to in Articles 268 and 269 respectively, surcharges on taxes and duties referred to in Article 271 and any cess levied for specific purposes. The basis for this change was the alternative scheme of devolution recommended by the Tenth Finance Commission. There was considerable merit in the change, as it gave greater freedom and flexibility to the centre in pursuing the tax reforms in an integrated manner and enabled the states to share the aggregate buoyancy of Central taxes. The Eleventh Finance Commission was the first to take these changes into account, while recommending the share of the states in the divisible pool.

Another constitutional amendment that was a relevance to centre- state fiscal relation was the eighty-eighth amendment, enacted in January 2004 through the Constitution (Eighty-eight amendment) Act, 2003. This was relating to service tax. The amendment provided for a specific entry in the constitution to authorize levy of service tax. The Central Government had been imposing and collecting this tax as a residual item under Entry 97 in the Union List and the net proceeds thereof were distributed between the Centre and the States as per Article 270 of the constitution on the recommendation of the Finance Commission.

The Tenth Finance Commission in its alternative scheme of tax devolution suggested that instead of sharing of individual taxes, the states should have a share in the total net proceeds of all central taxes excluding surcharges and cesses. The Commission recommended that the share of 57 states in the gross receipts of central taxes should be 26 per cent, and until the tax rental arrangement was terminated, a further share of 3 per cent in the gross tax receipts of the centre be given to the states as compensation for additional excise duties in lieu of sale tax. Indian approach India being a country of numerous states and a heterogeneous population with a large part residing in the regions with lower fiscal capacity, requires greater redistribution for attaining horizontal equalization in fiscal transfers. The institutional arrangements in India are quite different from Canada. The sharing of resources and responsibilities are built into the constitution itself. The sharing of resources as between the central and state government’s has been entrusted to the finance commission. In addition, resources and transfers also take place through the planning commission and other central ministries. In India, the finance commission awards remain valid for a 5 years period. Data used are generally provided by a body such as the Central Statistical Organization (CSO) or the registrar general of India. When look at the taxation of India there is no direct tax base of sharing. Instead there is a constitutionally provided system of sharing of central tax revenues. The constitution assigns tax bases clearly either to the union or to the states. In India, vertical imbalance is sought to be corrected by revenue sharing and the horizontal imbalance through the formula of distribution of the shareable revenues amongst states supplemented by grants. The Indian system uses macro variables in correcting the horizontal imbalances.

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Vertical imbalance and horizontal imbalance are the two central problems in the system of fiscal transfers. The fiscal transfers system in India requires reforms concerning both its vertical and horizontal dimensions. The fiscal transfer mainly concerned of the following transfers such as:

Stability in vertical transfers Vertical transfers should be stabilized around an appropriate level. Vertical balance in India can be influenced by the proposed goods and service tax. The transfers should not change continuously in favour of one side or the other.

Gap filling approach in determining transfers In the case of horizontal transfers, the long term criticism of the Indian approach has been the so called gap filling approach in the assessment of needs and resources by the finance commission because of the implicit adverse incentives.

Measurement of fiscal capacity Measurement of fiscal capacity of state is an important key requirement in the equalization principle. In India, Gross State Domestic Product (GSDP) at factor cost estimates is used as proxy in the measurement of state level fiscal capacity. But Indian system needs a comprehensive fiscal capacity indicator.

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Bail outs and controls on borrowing In a system where states have been borrowing heavily from the centre, there is a built-in expectation that centre will provide a bail out from time to time this leads to strong adverse incentives for the states to finance current expenditure through borrowing from the centre and other sources and expect that either a gap-filling grant or a debt service write off will bail them out in future.

Inter governmental transfers According to the implementable rules of fiscal decentralization, finances should follow functional assignments. It should also be noted that a sound system of fiscal decentralization should ensure a clear linkage between revenue and expenditure decisions. It implies that decentralized levels of government should have powers to raise revenues to enable them to finance public service levels preferred by their residents. Assigning revenue powers and ensuring their effective use, therefore, is extremely important to ensure efficiency as well as accountability in the provision of local services.

The next step in the design of the transfer system is to estimate the fiscal requirement which cannot be covered by their own sources of revenue. Indeed revenue bases assigned to the local governments in all multi level fiscal systems are inadequate to meet their expenditure requirements because, local governments have comparable comparative disadvantage in raising revenues as all broad based, mobile and redistributive taxes can be effectively levied only by the higher level 60 governments. These vertical and horizontal fiscal imbalances have to be offset through a system of intergovernmental transfers. The functioning of the SFCs, the nature and quality of recommendations made by them and state attitude in implementation does not bring much cheer. In many of the states, SFCs are not constituted regularly, in some states the chairpersons and members are not drawn from among the experts, but from politicians and bureaucrats. There is hardly data on the revenues and expenditures of panchayats at three levels. There is hardly any analysis on the revenue capacities and expenditure needs of the panchayats wither in official or academic literature. The consequence of this has been that a scientific system of transfers from the states to panchayats is yet to be developed. As regards the general purpose transfers given on the recommendation of the union finance is concerned, it is at best, an exercise in tokenism. The volume of transfers is negligible in relation to the expenditure requirements. Thus in most of the states, general purpose unconditional transfers are not very significant and where they exist, they are given on the basis of a properly designed formula.

Reforms in the transfer system institutions If the assignment system has not helped to improve the decision making power of decentralized units, the transfer system has not helped to enhance their fiscal economy either. As already mentioned, much of the transfers to panchayats are earmarked to finance various scheme transferred them. Although to state governments are supposed to appoint state finance commissions and these commissions are required equitable system of transfers in actual practice a scientific transfer system is yet to 61 evolve some states which are yet to appoint the finance commissions. The finance commissions are yet to make the recommendations and even when they have made the recommendations very few states have actually implemented them.

The proliferation of the central transfers to rural local bodies has had the effect to tying the transfers to a variety of central schemes. As the states too have transferred functions in terms of various schemes, transfers have very little leeway in prioritizing their expenditure plans. In Karnataka for example, when all the three tiers of rural local bodies are taken into consideration, the local governments can exercise their discretion in respect of just about 3 per cent of the transfers received by them. The general purpose transfers consist of the transfers made by the central finance commission and some transfers made by the state of course the situation varies from state to state. In Kerala for example the degree of discretion exercised by the local bodies is substantially higher than in other states. By and large however, it is fair to characteristic the prevailing system of transfers as being specific purpose and more so schemefied.

Performing the transfer system As mentioned above the system of transfers to local governments should comprise of a combination of general purpose unconditional transfers to enable them to provide public services according to the activities assigned to them and specific purpose transfers to ensure prescribed minimum standards in services considered to be extremely 62 important (meritorious). The prevailing system of transfers in regard to both general purpose and scheme based is in urgent need of reform.

The direct transfer of funds to some of the central schemes without passing through the consolidated funds of the states can create serious problems. Besides upholding the federal principle transferring funds to the panchayats through the states consolidated funds are desirable from the view point of comprehensiveness of the state budgets. This will also enable the state governments to plan their own share in case involving them to make matching contributions and to provide comprehensive information on the spending on various activities supported through such schemes.

Another importance that needs to be undertaken is to ensure speedy transfers of funds to the panchayats at all tiers. While it is easy to transfer funds to district and block panchayats, transferring money to gram panchayats in a smooth manner could be difficult mainly due to the large number involved and their remoteness. In the case of district and block levels, transferring funds through the treasury could be done. At present, in many states the funds meant for village panchayats go through the district and sometimes even block levels. This could create additional bureaucracy and unnecessary delays in transferring funds. Direct transfer of funds from the state government to village panchayats are desirable to avoid the block and district levels. The state governments could directly transfer funds to the mercy of the block and district levels. The state 63 governments could directly transfer funds to the bank or post office accounts of the panchayats.

Fiscal reform of states The 13th finance commission has been required to take into account a number of considerations in making its recommendations. One such requirement is “the objective of not only balancing the receipts and expenditure on revenue account of all the states and the union, but also generating surpluses for capital investment” there were similar TOR for some of the previous commission as well and this usually taken to require prescriptions, particularly for the states, for balance, lower deficits and reduce indebtedness. Since the exact measures of fiscal reforms needed for each state can hardly be identified by the Finance Commissions themselves, not be least because it would be highly subjective the approach has been to adopt incentives based on the bottom line identified i.e., measures of deficit. In fact, the eleventh finance commission was asked to “draw a moniterable fiscal reforms programme aimed at reduction of revenue deficit of the state and recommend the manner in which the grants to the states may be linked to progress in implementing the programme.

The implicit assumption with taking deficits as an indicator of ill health of the states is to give primacy to the stabilization. Function, sometimes at the cost of development. The impact of incentive package induced to reduce debt has been to compress productive expenditure on social and economic services and show reduced deficits. As mentioned 64 earlier, in a situation where the transfer system fails to equalize expenditure on essential services, ceilings on deficits will prevent the poorer states from upgrading their infrastructure and this would have adverse implications for interstate disparities as well as development.

Economic rationale for transfers Intergovernmental transfers have been employed to fulfil a variety of objectives and the design of the transfer scheme depends on the purpose for which it is given. In the international practice and in India, federal transfers are designed.

Closing the fiscal gap An important reason for giving transfers is to compensate the sub national governments for a shortfall between expenditure responsibilities and revenue raising powers. In most countries decentralization is more developed on the expenditure side of the budget than on the revenue side. This is because the centre has a comparative advantage in raising revenues and the states in spending. The resulting vertical imbalance must be offset through a system of control transfers to states.

Equalization The imbalance between revenue capacity and expenditure need varies across states depending upon the size of their tax base, the size and the composition of population and other factors affecting the need and cost of providing public services. Arguments for transfers are made on the 65 grounds of offsetting fiscal disabilities arising from low revenue capacity and high unit cost of providing public services.

Transfers to correct spillovers When there is no perfect mapping the provision of public services by sub-central governments may spill over the jurisdictions and such externalities result in the non-optimal provision of public services. A.C.Pigovian subsidy is required to ‘set the prices right’ to be cost effective, specific purpose transfers made to the states to ensure optimal provision of public services require matching contributions from them.

Role of central transfers In all multilevel fiscal systems, assignment of revenue and expenditure powers to different levels of government according to their comparative advantage necessarily results in vertical fiscal imbalances (Oates, 1977, 1999). Furthermore, when there are differences in the capacity to raise revenues and unit cost of providing public services, there are horizontal imbalances. The inter governmental transfer system is designed to offset the fiscal disabilities of the states to provide a level playing field for them in their development effort.

The theoretical rationale for equalization on horizontal equity grounds was advanced by Buchanan (1950) and later reformulated by Broadway and Flatters, 1982. Taking comprehensive income as the index of well being, it is argued that the income tax, levied by the central governments. 66

Nature of Indian Federation The very first Article of the Constitution defines India as a Union of States. Though the word federation has been deliberately avoided in the Indian Constitution, the fiscal structure created under it is essentially federal in nature. The political system introduced by India’s constitution possesses all the essentials of a federal polity. India’s constitution is the supreme organic law of our land. Both the Centre and State Governments derive their authority from the constitution. The States are not allowed to secede from the union.

There is a division of legislative, administrative and financial powers between the Union and the State Governments. These are elaborated in lists I, II and III of the Seventh Schedule of the constitution. List I (Union List) describes the functions and powers of the Union Government. List II (State List) mentions the functions and powers of the State Governments. List III (Concurrent List) describes the subject matter on which both the Union and the State Governments can legislate.

India: A Federal Polity The Constitution of India adopted on November 29, 1949, became operative on January 26, 1950. It provides for two layers of Government, one at the Central level, and the other at the level of the States. A federal polity of this kind requires division of powers and responsibilities between the Centre and the States and generally brings in its wake problems and conflicts in Centre-State relations. Other important countries of the world 67 with federal set up of government are: US, Canada, Australia, Brazil and Nigeria.

Why did the framers of the Constitution opt for a federal set up? Answering this question, the Commission on Centre-State Relations, 1988 observed, “In a country too large and diverse for a unitary form of Government, they envisaged a system which would be worked in co- operation by the two levels of government-national and regional-as a common endeavours to serve the people. Such a system, it was conceived, would be most suited to Indian conditions as it would at once have the advantages of a strong unified central power, and the essential values of federalism.”

Centrally Biased Constitution and its Justification From its very inception, the Constitution is loaded in favour of the Centre. Constitutional amendments affected subsequently have titled the balance further in the favour of the Centre. The concept of a strong Centre has been incorporated in the anatomy of the Constitution through a variety of devices, among which the following are noteworthy.

Supremacy of Union Legislative Power Article 246 (2) and (3), and Article 254 (1) establish the supremacy of Union legislative power. Thus, where with respect to a matter, there is irreconcilable conflict or overlapping as between the three lists of the Seventh Schedule, the legislative power of the States must yield to that of the Union. This is how the non-obstante provisions of clauses (1) and (2) 68 of Article 246 are interpreted. Similarly, Article 254 (1) states that a law made by a State legislature, repugnant to a law made by the Parliament or an existing law applicable in that State, in regard to any matter enumerated in the Concurrent List, shall be avoided to the extent of repugnancy.

Union Control over State Legislation Articles 200 and 201 establish control of the Union executive over State legislation. Article 200 provides that a Bill passed by a State Legislature shall be presented to the Governor who may give his assent, withhold his assent or return the same for reconsideration by the legislature. However, if it is again passed by the State legislature, with or without amendment, he shall not withhold his assent. The Governor may also reserve the Bill for consideration of the president (in effect the Union Council of Ministers) who may in turn signify his assent, withhold the same or return it for reconsideration. However, in contrast to the position of the Governor, the President need not give his assent when such a Bill is returned with or without amendment after reconsideration by the legislature of the State.

Emergency Provisions Articles 352 and 360 provide for certain emergency provisions. Article 352 provides for proclamation by the President of a grave emergency whereby the security of India is threatened by war or external aggression are armed rebellion. When such a proclamation is in operation, the Union may assume for its organs all the legislative and executive 69 powers of the States. A proclamation of emergency has the effect of converting the State List into Concurrent List and therefore, if the Parliament legislates on any subject in the State List, the State laws, to the extent of repugnancy, shall be null and avoid and the law made by the Parliament shall prevail.

Article 360 envisages yet another type of emergency, i.e., financial emergency. If the President is satisfied that a situation has arisen whereby the financial stability or credit of India or of any part of its territory is threatened, he may proclaim a financial emergency. When such an emergency is in operation, the executive authority of the Union extends to directing any State for the purpose of securing observance of canons of financial propriety.

Restrictions on Borrowing Powers of the States Under Article 292 the executive power of the Centre extends to borrowing, either within or outside India, upon the security of the Consolidated Fund of India, within such limits, if any, as may from time to time be fixed by Parliament. However, the borrowing power of a State (Article 293) is subject to a number of restrictions: (i) it cannot borrow outside India; (ii) it can borrow within the territory of India subject to the following conditions (a) limitations as may be imposed to the State Legislature, (b) consent of the Union Government to raise fresh loan if the Union has guaranteed an outstanding loan of the State, (c) consent of the Union to raise fresh loan if a Union loan to the State remains outstanding. Since all the states are in debt to the Centre, they have to obtain Centre’s 70 permission for raising loans. These restrictions are meant to avoid uncontrolled borrowings by the State and thus to prevent the possibility of any state becoming defaulter or insolvent.

President’s Rule Lastly, there is the controversial Article 356. According to it, if the President on receipt of a report from the Governor of a State, or otherwise, is satisfied that a situation has arisen in which the Government of the State cannot be carried on in accordance with the provisions of the Constitutions, he may be proclamation assume to himself all or any of the functions of the State Government. He may also declare that the powers of the Legislature of the State shall be exercised by or under the authority of the Parliament.

In view of the above provisions of the Constitution, some experts call it unitary in extraordinary situations, such as was or emergency and federal in normal times. It is also called as a quasi-federal Constitution. Similarly, a scrutiny of the taxation powers contained in the Union List and the State List reveals the major and elastic sources of tax revenue belong to the Centre while relatively inelastic sources of revenue come under the purview of State Government.

Mechanism of Central Transfers to the States Though the Constitution creates a dual polity based on divided governmental powers and functions, this division is not watertight. As the Administrative Reforms Commission, 1968 observed, “Exact 71 correspondence of resources and functions is not possible to secure in any federal situation but in India the balance is titled rather heavily in favour of the Centre and the outstanding feature of the financial relationship between the Centre and the States consequently is that the former is always the giver and the latter the receivers. The favourable position given to the Centre in regard to financial resources reflects the strong-centre theme running through the Constitution and many feel that this has been an important factor in keeping the country united.

Emergence of imbalances between functional responsibilities and financial resources of different tiers of government is a characteristic feature of all federations, particularly of those whose economies are more dynamic. Even in older federations (like the United States and Canada), financial conflicts between the national and sub-national governments persist and their once-for-all solution is difficult to find. The mismatch between functions and taxation powers occurs partly because of changing responsibilities of governments at different levels and partly because of the dominant position of federal government in regard to taxation powers, which is often by design. Therefore, vertical imbalances in terms of resources and expenditure responsibilities emerge between different levels of government calling for transfer of resources from the Centre to the States. This is the familiar problem of federal finance.

Thus, intergovernmental transfers are an inherent part of a multi- level fiscal system. Such transfers are justified on horizontal equity considerations. Recognizing the fact that the financial resources of the 72

States may prove inadequate for undertaking welfare, maintenance and development activities, the framers of India’s Constitution did make elaborate, albeit complex, arrangements relating to flow of funds from the Centre to the States. The disequilibrium between proliferating functional responsibilities of the States and their own resources is corrected by Central transfers effected through three main channels. 1. Statutory transfers through the Finance Commission. 2. Plan transfers through the Planning Commission. 3. Discretionary transfers for Centrally Sponsored Schemes, relief from natural calamities and relief and rehabilitation of displaced persons. Apart from these direct transfers, resources also flow to the states indirectly through the following channels. 1. Establishment/expansion of Central Public sector enterprises. 2. Subsidized lending by banking and financial institutions 3. Subsidized borrowing by the States from the Central Government and the banking system.

Powers and Procedure The constitution authorizes the Commission to determine their procedure while the Finance Commission Miscellaneous Provisions Act, 1951, has conferred on the commission all the powers of the Civil Court under the Code of Civil Procedure, 1908. The commission have also been empowered to require any person to furnish information on such points or matters as, in the opinion of the commission, may be useful for, or any matter under the consideration of the commission. The powers conferred 73 on the commission are set out in detail in section 8 of the act mentioned earlier.

As the Sixth Finance Commission remarked, “The purpose of Finance Commission, as envisaged in the constitution, is primarily8 to facilitate a periodical assessment of the fiscal needs of the States and the formulation on an states through devolution of taxes and grants-in-aid. But an incidental and by no means insignificant advantage of the appointment of a Finance Commission has generally been to rekindle interest in issues pertaining to financial relations between the centre and the states and to promote an enlightened national debate on the several facts on our federal fiscal set up.”

Under Article 281 of the constitution, the report of the Finance Commission, together with the explanatory memorandum on the action taken on the recommendations of the commissions, is laid on the table of the house by the government. Though the president is not bound to accept the recommendations of the Finance Commission, they are generally accepted in view of the quasi-judicial nature of the commission. By and large, the Finance Commission has worked independently and some of them, particularly the recent ones, have been quite assertive. Award of a Finance Commission generates considerable interest in issues pertaining to financial relations between the centre and the states. Twelfth Finance Commission has reported since the commencement of the constitution. The work of the Thirteenth Finance Commission is under way. The years of establishment, years of reporting periods of award and the names of Chairman of various Finance Commissions (Table 3.1). 74

TABLE 3.1. Chronology of Finance Commission in India

Year and Year and Finance Period of Name of the month of month of commission award chairman establishment reporting November December 1952-53 to First K.C. Neogy 1951 1952 1956-57 September 1957-58 to Second June 1956 K. Santhanam 1957 1961-62 December December 1962-1963 to Third A.K. Chanda 1960 1961 1965-66 August 1966-67 to R.V. Fourth May 1964 1965 1968-69 Rajamannar February 1969-70 to Fifth July 1969 Mahavir Tyagi 1968 1973-74 K. October 1974-75 to Sixth June 1972 Brahmandanda 1973 1978-79 Reddy October 1979-80 to Seventh June 1977 J.M. Shelat 1978 1983-84 1984-85 to Eighth June 1982 April 1984 Y.B. Chavan 1988-89 July 1988* 1989-90* and and Ninth June 1987 1990-91 to N.K.P. Salve December 1994-95# 1989# November 1995-96 to Tenth June 1992 K.C. Pant 1994 1999-00 2000-01 to Eleventh July 1998 July 2000 A.M. Khusro 2004-05 November November 2005-06 to Twelfth C. Rangarajan 2002 2004 2009-10 October November 2010-11 to Thirteenth 2009 Vijay Kelkar 2007 2014-15 (Expected) 2015-16 to Fourteenth October 2012 April 2015 Y.V. Reddy 2019-2020 Source: Finance Commission Reports. 75

Finance Commission is a unique feature of the Indian constitution having no paralled in the existing federal constitutions of the world. As the Commission on Centre-State Relations, 1988 observed, “Unlike the commonwealth grants commission of Australia, the Indian Finance Commission is a constitutional body and the objectivity in its role has been facilitated by keeping it outside the union executive. Compared with its Australian counterpart, the Indian Finance Commission has a greater scope in a much as it recommends sharing of tax proceeds also, besides the grants-in-aid, and advises on other matters referred to it in the interest of sound finance. The absence of clear constitutional provisions for revenue sharing created many problems in other federations and they had to evolve a variety of arrangements to overcome them. For example, in Canada, tax-rental arrangements were resorted to. In Australian commonwealth grants commission was set up to consider allocation of grants the claimant states. Specific purpose grants, with strict enforcement conditions, came into existence in countries like USA.”

From itemized Sharing to Global Sharing The most important development in the field of centre-state financial relations pertains to the new system central taxes with the state governments. Prior to constitution Eightieth Amendment Act, 2000, income tax and union excise duties were the only taxes shared with the states, apart from the grants given in lieu of passenger tax and the collections from additional excise duty in the lieu of sales tax, sugar, tobacco and textiles. Taxes on income and union excise duties were shared with states under article 270 and 272 respectively. The aforesaid 76 amendment altered the pattern of sharing of central taxes between the centre and the states significantly. It substituted a new article for article 270 and omitted the old article 272. The new article 270 provides for the sharing of the net proceeds of all union taxes and duties with the states. However, the surcharge levied for purposes of the union under article 271 is excluded from the divisible pool.

Calamity Relief The commission recommended as follows. 1. The scheme of CRF is continued in its present form with contributions from the centre and the states in the ratio of 75:25. 2. The size of the CRE for our award period is worked out at `21,333,33 crore. 3. The scheme of CCF may continue in its present form with core corpus of `500 crore. The outgo from the fund may continue to be replenished by way of collection of National Calamity Duty and levy of special surcharges. 4. The definition of natural calamity, as applicable at present, may be expanded to cover landslides, a valances, cloud burst and pest attacks. 5. The centre may continue to make allocation of food grains to the needy states as a relief measures, but a transparent policy in this regard is required to be put in place. 6. A committee consisting of scientists, flood control specialists and other experts be set up to study and map the hazards to which several states are subject to. 77

7. The provision for disaster preparedness and mitigation needs to be built into the state plans, and not as a part of calamity relief.

Grants-in-aid to States The commission disfavoured the then existing system of imposing a 70:30 ration between loans and grants for extending plan assistance to non-special category states (10:90 in the case of special category states). Instead, it recommended that the centre should confine itself to extending plan grants to the states, leave it to the states to decide how much they wish to borrow and from whom.

It recommended a total non-plan revenue deficit grant of `56,855.87 crore during the award period for 15 states. Eight states were recommended for grants amounting to `10,171.65 crore over the award period for the education sector, with a minimum of `20 crore in a year for any eligible state. Seven states were recommended for grants amounting of `5,887.08 crore over the award period for the health sector, with a minimum of `10 crore a year for any eligible state. The grants for the education and health sectors were an additionality, over and above the normal expenditure to be incurred by the states in these sectors.

A grant of `15,000 crore over the award period was recommended for maintenance of roads and bridges. This amount was in addition to the normal expenditure which the states would be incurring on maintenance of roads and bridges. This amount was to be provided in equal installments over the last four years (i.e., 2006-07 to 2009-11) of the 78 award period, so that the states got a year for making preparations to absorb these funds. An amount of `5,000 crore was recommended as grants for maintenance of public buildings.

Permanent secretariat for the Finance Commission It has become almost a ritual for Finance Commission to suggest to the Central Government the need for a permanent secretariat in the ministry of finance for the work related to the Finance Commission on a continuing basis. Successive Finance Commission has argued that such an arrangement is necessary for effective functioning of the Finance Commission and for proper implementation of the recommendations made by it. Unfortunately, the recommendations of the Finance Commission is regard to creation of a permanent secretariat have not been taken seriously.

Although the Finance Commission Division (FCD) in the ministry of finance provides support to the new Finance Commission in the form of continuity of data, it falls short of the expectations of the commission. For example, the Eleventh Finance Commission complained that the sole job of the FCD had been to monitor the expenditure and release of up gradation grants to the states and that it had not devoted itself to building a database on central/state finance. It had only been keeping the record left over by previous finance commissions, without proper referencing. The commission recommended that there should be a permanent secretariat with core research staff placed under an officer of the level of an additional secretary to government of India and that this would facilitate 79 coordination with the Ministers/Departments of the Government of India as also with the sate governments at appropriate levels. This would also ensure an up-to-date building of data base on centre-state finances and documentation, which could be used by the commission when it is constituted.

The commission under study also lamented that FCD remained a small cell in the Ministry of finance and did not appear to be capable of providing the necessary assistance to it. Moreover, FCD is accountable only to the ministry of finance. Bulk of problems faced by successive finance commissions can be overcome by providing for a permanent secretariat for the purpose of doing the preliminary work both in terms of collecting data and organizing research. The commission, therefore, recommended that the finance commission division should be converted into a full fledged department serving as the permanent secretariat for finance commission. Legally and constitutionally, there is no infirmity in putting such an arrangement in place.

Nature of Plan Transfers Plan transfers by the planning commission are made under a set of clearly laid out objective criteria approved by the National Development Council and are subject to review by it. Therefore, it would be wrong to call plan transfers as discretionary, as is believed by some experts. Even in the case of other transfers (for natural calamities etc) there are standardized procedures as recommended by the seventh and the eighth finance commission. It is, of course, true that thought plan assistance to 80 states is formula-based, the total amount of such assistance to be transferred to the states each year is determined by the centre.

As regards the nature of plan transfers, the Commission on Centre- State Relations, 1988, observed, “The plan and other transfers which are labeled discretionary do not amount to subversion of the constitutional scheme. They cannot be considered either unreasonable or discretionary in a literal sense as their allocation follows predetermined criteria, or is tied to meet the specific requirements of the states. The large magnitude of plan transfers should not pose any controversy in this regard as the framers of the constitution could not anticipate the extent of development resource-needs under the plans of the states. The significant growth of central assistance to states for planned development is, indeed, a natural response to such needs. The crux of the matter is that the states’ participation in the planning process should be such that the plan transfers are treated by them as part of a commonly agreed programme for the deployment of the nation’s resources.” The commission further observed that the controversy regarding statutory versus discretionary transfers was more theoretical than realistic in nature.

Size and Pattern of Central Transfers Regarding the magnitude of central transfers to the states, it is natural to expect claims and counter claims by the two levels of the government. The states have often complained that resources allocated to them are inadequate to enable them to discharge their responsibilities. They complain against widening gap between their own resources and 81 needs, a trend indicating their increasing dependence on the centre for resources. They assert that their resources should be commensurate with their obligations and responsibilities. Similarly, the centre also feels constrained at the widening gap between its resources and needs, as reflected in the budgetary deficits. Since the early 1980s, the centre has been running considerable deficit on its revenue account. Its commitments towards defence, subsidies and interest payments claim a major chunk of its resources and there is little hope of any respite on these accounts in the near future.

Commission of Centre-State Relation, 1988 The Government of India appointed in 1983a Commission on Centre State Relations under the Chairmanship of Mr. Justice R.S Sarkaria, a retired justice of the supreme court. The commission was set up to review the whole gamut of centre-state relations in their legislative, administrative and financial aspects. The monumental report of the commission, submitted in 1988, basically accepted the existing framework of the constitution. It disfavoured any major changes in the provisions of the constitution including the financial arrangements. It stood for a strong centre to preserve the unity and integrity of the country.

An important recommendation of the commission pertained to the residuary power of legislation under the constitution. Article 248 read with entry 97 of List I (Union list) of the Seventh Schedule vests in Parliament the residuary powers of legislation with respect to any matter not enumerated in List II (State List) or List III (Concurrent List). Such 82 residuary powers include the power of making any law imposing a tax not mentioned in these lists.

Regarding residuary powers of legislation, the commission recommended, “that residuary power of legislation in regard to taxation should advisedly remain with parliament. But, the residuary field other than that of taxation may be transferred to the concurrent list… The constitution may be suitably amended to give effect to this recommendation.” Thus the commission recommended partial transfer of entry 97 to the concurrent list. Unfortunately, no action has been taken so for to implement this recommendation of the commission.

As regards financial relations between the centre and the states, the commission recommended as follows. 1. The commission disfavoured any major modification in the basic scheme of the constitution dividing the fields of taxation between the centre and the states. 2. It rejected almost all the suggestions to shift the taxation powers of the centre to the states. Such suggestions pertained mainly to the shifting of terminal taxes on goods and passengers carried by railway, estate duty and banking etc. 3. The commission was not in favour of making the devolution of funds from the centre to the states automatic. In its view the existing divisions of functions between the Finance Commission and Planning Commission was reasonable and must continue. 83

4. In its opinion the terms of reference of the Finance Commission should be drawn up in consultation with state Governments. 5. Significantly, the commission recommended the sharing of corporation tax between the centre and the States. Most other suggestions for enlarging the divisible pool were turned down. 6. It recommended legislation to levy consignment tax and constitutional amendment to enable levy of tax on advertisements in broadcasting. 7. As regards agricultural income tax, the commission observed that as opinions are divided the matter should be examined further in depth. 8. The commission recommended the settings up of the export committee to examine taxation reforms and resource mobilization. 9. Some other recommendations of the commission include review of the royalty paid to the states, modernization of treasury systems, making available foreign borrowings by states from the banks, the issue tax free municipal funds and assistance for natural calamities, shifting of additional excise duty from fabric to yarn and setting up of special courts for economic offences.

Normative Approach With a view to making the recommendations of the Finance Commission coterminus with the five year plans, the Ninth Finance Commission was asked to make two reports, the first covering one year period (1989-90), and the second covering five years period (1990-91 to 1994-95). 84

Alternative Formula of Devolution It is noteworthy that the government dropped the normative approach (which was in the guidelines of the Ninth Finance Commission) from the terms of reference of the commission under study. It was replaced by the gap-filling approach.

The commission recommended an alternative scheme of devolution, i.e. a system of vertical resource sharing under which central taxes were to be pooled and a proportion thereof developed to the States. It recommended a share of 26 percent for states in the gross receipts of central taxes. It further recommended that the tax rental arrangement (i.e., additional duties of excise in lieu of sales tax) should be terminated and additional excise duties merged with basic excise duties. If this was done, a further share of 3 per cent in the gross tax receipts of the centre should accrue to the States. This share 29 per cent based on the amounts currently accruing to the states, should be suitably provided for in the constitution and reviewed once in 15 years. The commission recommended that the alternative scheme of resource sharing suggested by it may be brought into force with effect from April 1, 1996 after necessary amendments to the constitution.

The commission claimed the following benefits of the alternative scheme of devolution suggested by it “(a) with a given share being allotted to the States in the aggregate revenues from central taxes, states will be able to share the aggregate buoyancy of central taxes. (b) the central government can pursue tax reforms without the need to consider 85 whether a tax is shareable with the states or not. (c) the impact of fluctuations in central tax revenues would be felt alike by the Central and state government. (d) the taxes should be mentioned in article 268 and / or 269 form part of this arrangement, there will be a greater likelihood of their being tapped.”

Sharing of Income Tax The commission recommended that the share attributable to the Union Territories in the net distribution proceeds of income tax for each of the financial years during 1995-96 to 1999-2000 should be 0.927 per cent. Regarding the share of the states in the net proceeds of income tax, it may be recalled that the states share out of the net proceeds of income tax was fixed at 55 per cent by the First Finance Commission. The succeeding three commissions enlarged the share progressively to 60 per cent, 66.66 per cent and 75 per cent. While recommending the increase in the states share, the Third and Fourth Commissions took due note of the representation of the states about the need for making good in some measure the loss sustained by then on account of the non-inclusion of corporation tax in the divisible pool consequent upon the reclassification brought about in the Income Tax Act in 1959.

The Fifth Commission did not recommend any further increase in the states’ share, on the ground that the divisible pool of income tax for the first tax collections were distributed among the States in three installments during the period covered by the recommendation of that commission. The Sixth Commission raised the states share from 75 to 80 86 per cent taking into consideration various factors including the fact that the arrears referred to above were no longer available. The share of the states was further increased to 85 per cent by the Seventh Commission keeping in view the states grievance in regard to the levy of surcharge by the centre as a normal tax revenue measure. The Eight and the Ninth Commissions maintained it at 85 per cent.

Sharing of Union Excise Duties To recapitulate, the sharing of union excise duties started with the First Finance commission itself, although the beginning was modest. It was restricted to 40 per cent of just three commodities, viz. tobacco, matches and vegetable products. After that the sharing of the net proceeds of union excise duties became a regular feature, with successive Finance Commission devolving larger amounts to the states, through either upward revisions of the coverage of the shareable items, or by increasing the magnitude of the states share. The Second Commission extended the list of sharable commodities to eight but reduced the states share to 25 per cent. The Third Commission reduced the states share to 20 per cent but enlarged the list of shareable items to 35, the yield from each of which was `50. lakh or more per year.

Beginning with the Fourth Finance Commission, the coverage of items for states’ share has been almost total, but the states share was limited to 20 per cent. The Seventh Finance Commission doubled the states share 40 per cent dependence on the centre would be reduced. The Eight Finance Commission raised this share to 45 per cent, but the 87 increment of 5 per cent was used for meeting the assessed post-devolution deficits of the states. The Ninth Finance Commission maintained the overall at 45 per cent, but used to per cent and 7.425 per cent from it for deficit based devolution, in its First and Second reports, respectively. In other words, the portion of the net proceeds of union excise duties from which all states received a share was 40 per cent for the Eight Finance Commission. It remained so in the one year (1989-90) report of the Ninth Finance Commission, but it was reduced to 37.57 per cent in its second report pertaining to the period 1990-91- to 1994-95.

Devolution of Central Taxes / Duties to the States Article 280(3) of the constitution requires the Finance Commission which makes recommendations as to the distribution of the net proceeds of shareable taxes between union and the states and the allocation between the states of their shares in such proceeds. Formulation of principles that should guide the assignment of share to the states and the determination of individual share of each state constitutes a central task of the commission.

The constitution (Eightieth Amendment) Act, 2000 altered the pattern of sharing of central taxes between the centre and the states in a fundamental way. Prior to this amendment, taxes on income other than agriculture income and union duties of excise were shared with states under Articles 270 and 272 respectively. The Eightieth Amendment Act substituted a new Article for Article 270 and omitted and the old Article 272. The new Article 270 provided as follows. “All taxes and duties referred to in the Union List, except the duties and taxes referred to in 88

Articles 268 and 26, respectively, surcharge on taxes and duties referred to in Article 271 and cess levied for specific purposes under any law made by parliament shall be levied and collected by the Government of India and shall be distributed between the union and the states.”

Share of States Under Article 280 (3) (a), the Commission was required to determine, first the aggregate share of the states in all Union taxes and duties. This task required a comprehensive view of (a) expenditure needs of the centre, (b) aggregate resources of the centre, (c) aggregate requirements of states on revenue account and (d) resources of the states from the own sources.

On the basis of the analysis and assessment of the budgetary requirements of the centre and the states, the commission fixed the share of states at 28 per cent of the net proceeds of sharable central taxes and duties for distribution amongst all such states where the central tax and duty was livable for each of the five year starting from April 1, 2000. Consequently, the recommendations made for the sharing of income tax and union excise duties in its interim report got modified. In addition, 1.5 per cent of the net proceeds for sharable central taxes and duties in a year was recommended for distribution amongst such states which did not levy sales tax on sugar, tobacco and textiles during the year, thus totaling 29.5 per cent of the net proceeds of all union taxes and duties. The distribution of this 1.5 per cent among the states was to be done in the same manner as the distribution of 28 per cent of the net proceeds. It was further 89 recommended that if any state levies and collects sales tax on sugar textile and tobacco, it would not be entitled to any share from this 1.5 per cent.

Distribution of the Share of States While states were almost unanimous in demanding an increase in the share of Union taxes, there were naturally wide divergences in their approach to the principles for determination of relative shares of the states in the divisible pool. Each state suggested a formula which it considered would benefit it the most, the richer states emphasizing the collection factor and the poorer states the backwardness factor. The various criteria, often conflicting, suggested by the states to the commission, included population, consumption, collection of revenue, economic backwardness, relative financial weakness, sales tax collections and percentage of scheduled castes and scheduled tribes. Not surprisingly, relatively industrialized states like Gujarat and Maharashtra argued in favour of collection factor because bulk of the tax revenue originated there. Poorer states like Uttar Pradesh, Orissa and Bihar wanted significant weightage for geographical area. I has rightly been said that fiscal federalism in India in a tug-of-war not only between the centre and the states but also among the states themselves.

After examining claims and counter-claims of the states, the commission recommended share of each state (in the share of all states) and indicated the criteria adopted in arriving at those percentage shares. The commission asserted that the basic emphasis in its approach was to evolve s suitable of incentives in all mechanism of fiscal transfers. It may 90 be recalled that the Tenth Finance Commission had made a beginning in this direction by utilizing an index of tax effort made by the states.

Centrally Sponsored Schemes The issue relating to CSS has been contentious since a long time. The National Development Council (NDC) appointed a Sub-Committee in 1966 to look into the question of proliferation of CSS. The sub-committee recommended that 52 of the then 92 CSS should be retained and the rest abolished. The First Administrative Reforms Commission (FARC) had also recommended that the number of CSS should be kept to the minimum. The FARC had laid down certain criteria for the continuation of CSS. The criteria suggested was that only those schemes which related to demonstration, pilot projects, surveys and research and having regional or inter-state character and over all significance from the all-India angle should be continued. These recommendations were obviously not followed upon. A decision was taken by the NDC in 1968 that no more than one-sixth of Central assistance for state plan should be outside the Gadgil formula based assistance.

The NDC appointed another Committee in 1978 to examine, inter alia, issues relating to CSS. The committee in turn appointed a working Group to discuss in detail its terms of reference. At this stage, it was agreed that a detailed review should be made of the CSS with a view to ensuring a substantial reduction in their number and to bring down the outlays on them. A committee of officials under the Chairmanship of Secretary, Planning Commission was appointed for this purpose. The 91 commission recommended that CSS of the magnitude of `600 crore need not be continued. At the meeting of the NDC held in February 1979. It was decided to reduce the number of CSS as well as the outlays on them. But in the sixth plan (1980-85), there was a further increase in the number of CSS.

Strengthening of the Finance Commission Division One of the criticisms against the working of the Finance Commission is that the transfers and more particularly the Inter se distribution of tax devolution recommended by them are based on past indicators and not on forward indicators. Undoubtedly, forward indicators are preferable as they reward future performance rather than past performance. For maintaining a sustainable fiscal situation, what matters more is future performance. 11th Finance Commission observed that since relevant data became available only with the passage of time, the Finance Commission could only define a formula, but could not determine the actual share of states. The successive Finance Commission has been recommending suitable strengthening of the Finance Commission Division in the Ministry of Finance. A full-fledged Finance Commission Division will ensure proper monitoring of the recommendation of the Commissions and even pave the way for the adoption of forward looking indicators by the Finance Commission Division in the ministry of finance should be converted into a full-fledged department. Serving as the permanent secretariat for the Finance Commission is strongly to endorse this recommendation of 12th Finance Commission.

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Borrowings by States Following the recommendations of 13th Finance Commission the centre terminated on lending to states from 2005-06 on account Central Plan assistance. Prior to 2005-06, the centre was dispensing normal plan assistance in the grant-loan ratio of 30:70 in the case of General Category States (GCS) and in the ratio of 90:10 in the case of Special Category States (SCS). States are now allocated additional market borrowings in lieu of loan component of normal central assistance. Termination of on lending by the centre has a burden on the States in terms shorter duration of the market borrowings. The central loans had a repayment period spread over 25 years with a moratorium of five years in repayment. In contrast, the market loans have a repayment period of 10 years with a bullet repayment at he end of the tenth year. This will result in bunching of repayments for the states.

Changing Pattern of Plan Assistance to States There are two distinct changes in Central Plan assistance to States. The first one is the reduced budgetary support to the State Plan and the second is the significant changes in the pattern of plan assistance. At the time of the formulation of the Tenth Plan, the Centre’s Gross Budgetary Support (GBS) to the Plan was distribution between the central plan the State Plan in the ratio of 58:42. The actual support turned out to be 66:34, indicating a shortfall even in the lower level of support to the State Plans by a substantial margin. Realized Central assistance to States and UTs was 67.6 per cent of the projected level. As indicated in the Eleventh Plan document, this was the result of increasing the resource transfers through 93

CSS, especially plan, the percentage of GBS envisaged for the State Plans in only 23 per cent. Central assistance to State Plans in envisaged to come down from 1.48 per cent of GDP during the Tenth Plan period to 1.20 per cent of GDP in the Eleventh Plan. In contrast, the gross budgetary support to the Central Plan in envisaged to go up from 2.77 per cent of GDP in the Tenth Plan period to 3.97 per cent in the Eleventh Plan.

Growing Inter-State Inequalities Disparities among States have been steadily increasing particularly since the initiation of economic reforms in the country. The Eleventh Five Year Plan document expressed concern over the widening income differentials between more developed and relatively poorer States. In the post reform period, private investment has gone mostly to Southern and Western States because of proximity to ports, better infrastructure and perceptions regarding better governance. Table 4.1 presents the trends in inter-State differentials in comparable estimates of per capita Gross State Domestic product (GSDP) over the years.

Background The Finance Commission is a constitutional body entrusted with the responsibility of recommending transfer of resources from the Centre to States to address both vertical and horizontal imbalance. In terms of the constitutional provisions, the Finance Commission recommends States share in shareable central taxes and grant-in-aid to states under article 275. With the initiation of five year plans for the development of the economy, transfers from the planning commission have gained in importance. In 94 addition, over the years, the Central Ministries have emerged as another channel of resource transfers to states. The emergence of two more parallel channels of resource transfers through the planning commission and the central ministries have made the system of resources transfers complex. Issues relating to the role the Finance Commission and the transfers recommended by the Finance Commission are discussed in this chapter. Chapter IV DATA ANALYSIS – FINANCE COMMISSION’S FISCAL TRANSFERS

The Finance Commission is appointed by the President of India for every five years mainly viz., tax sharing and grants from the centre to the states. The Finance Commission’s recommendations, once accepted by the parliament become mandatory, so that the transfers of funds executed in pursuance of these recommendations could be said to have a statutory sanction. These statutory transfers are unconditional transfers and the state governments can utilize them according to their own expenditure priorities based on local needs. However, given the system of transfers so evolved over the years, the transfer of resources have fallen largely outside the ambit of Finance Commission and it is the Planning Commission through which larger share of resources getting transferred to the states.

We have looked at a decomposition of the transfers in terms of their vertical and horizontal components from the centre to the states under the recommendation of the Finance Commissions. These transfers include state’s share in central taxes and statutory grants and grants for natural calamities. The special category states require a separate exercise for determining grants to ensure fairness within this group of states. Fiscal capacity equalization should be supplemented by a comprehensive equalization exercise taking into account both need and cost considerations for atleast two services, namely, health and education.

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The data analysis on Finance Commission Fiscal Transfers in India has been done on the following: 1. Twelfth Finance Commission total transfer to the states. 2. Twelfth Finance Commission transfer on taxes and duties. 3. Twelfth Finance Commission transfer on grants-in-aid. 4. Functional classifications of grants-in-aid. 5. Grants-in-aid for maintenance of roads and bridges. 6. Share of state allocation to Panchayts and Municipalities. 7. Eleventh Finance Commission total transfer. 8. Tenth Finance Commission total transfer. 9. Ninth Finance Commission total transfer. 10. Share in total grants-in-aid. 11. Percapita Finance Commission transfers.

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The following table 4.1 presents the shares of taxes and duties and grants-in-aid to the states as per the recommendations of the Twelfth Finance Commission for the years 2005-06 to 2009-10. TABLE 4.1 Twelfth Finance Commission total transfer to the states Total transfer S. No. States Percentage (` in crore) General Category States 646772.79 85.61 1. Andhra Pradesh 50353.26 6.67 2. Bihar 75646.83 10.01 3. Chhattisgarh 18273.24 2.42 4. Goa 1724.53 0.23 5. Gujarat 25608.75 3.39 6. Haryana 8042.44 1.06 7. Jharkhand 23656.84 3.13 8. Karnataka 31416.28 4.16 9. Kerala 19607.72 2.60 10. Madhya Pradesh 46321.96 6.13 11. Maharashtra 36194.25 4.79 12. Orissa 36942.77 4.89 13. Punjab 12884.59 1.71 14. Rajasthan 39062.47 5.17 15. Tamil Nadu 36688.13 4.85 16. Uttar Pradesh 133471.45 17.67 17. West Bengal 50877.28 6.73 Special Category States 108678.37 14.39 18. Arunachal Pradesh 3225.56 0.43 19. Assam 24329.40 3.21 20. Himachal Pradesh 14450.36 1.92 21. Jammu and Kashmir 20880.28 2.76 22. Manipur 6870.20 0.91 23. Meghalaya 4367.77 0.58 24. Mizoram 4660.91 0.62 25. Nagaland 7453.41 0.98 26. Sikkim 1829.14 0.24 27. Tripura 8417.00 1.12 28. Uttaranchal 12194.34 1.62 Grand total 755451.16 100.00 Source: Finance Commission Reports, Government of India. 98

The table 4.1 shows that the total Twelfth Finance Commission transfers to all the 28 states from the government of India, in terms of absolute amount comes to `755451.16 crore. Out of which `646772.79 crore has been distributed to 17 general category states which covers 85.61 per cent of the total transfer and the remaining `108678.37 crore has been distributed to 11 special category states which covers 85.61 per cent of the total transfer which covers 14.39 percentage of the total transfer. The highest share of `133471.45 crore goes to the largest state Uttar Pradesh which covers 17.66 per cent of the total transfers. The second largest share of total transfer `75646.83 crore goes to Bihar which covers 10.01 per cent of the total transfers. The lowest share of `1829.14 crore goes to Sikkim which covers 0.24 per cent of the total transfer. It is noteworthy to note that 14.39 per cent of the total transfer goes to 11 special category states and 85.61 per cent goes to the 17 general category states.

The following diagram shows the Twelfth Finance Commission Total Transfer to the states. Fig.1 Twelfth Finance Commission total transfer to the states

20 18 16 14 12 10

Percentage 8 6 4 2 0 Goa Bihar Orissa Kerala Assam Punjab Sikkim Gujarat Tripura Haryana Manipur Mizoram Nagaland Rajasthan Jharkhand Karnataka Meghalaya Uttaranchal Tamil Nadu Maharashtra Chhattisgarh West Bengal West Uttar Pradesh Andhra Pradesh Andhra Madhya Pradesh Himachal Pradesh Arunachal Pradesh Jammu and Kashmir Jammu

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The following table 4.2 presents the shares of sharable taxes and duties to the 28 states during the period of Twelfth Finance Commission transfer from the Government of India for the years 2005-06 to 2009-10. TABLE 4.2 Twelfth Finance Commission transfer-Taxes and Duties S. Shares taxes and States Percentage No. duties (` in crore) General Category States 572489.59 93.03 1. Andhra Pradesh 45138.68 7.26 2. Bihar 67671.04 10.88 3. Chhattisgarh 16285.76 2.62 4. Goa 1589.14 0.26 5. Gujarat 21900.47 3.52 6. Haryana 6596.46 1.06 7. Jharkhand 29624.02 4.76 8. Karnataka 27361.88 4.40 9. Kerala 16353.21 2.63 10. Madhya Pradesh 41180.59 6.62 11. Maharashtra 30663.21 4.93 12. Orissa 31669.47 5.09 13. Punjab 7971.00 1.28 14. Rajasthan 34418.56 5.53 15. Tamil Nadu 32552.74 5.23 16. Uttar Pradesh 118209.45 19.00 17. West Bengal 43303.91 6.96 Special Category States 49622.45 7.97 18. Arunachal Pradesh 1767.34 0.28 19. Assam 19850.69 3.19 20. Himachal Pradesh 3203.22 0.52 21. Jammu and Kashmir 7441.71 1.19 22. Manipur 2221.44 0.35 23. Meghalaya 2276.61 0.36 24. Mizoram 1466.52 0.24 25. Nagaland 1613.67 0.26 26. Sikkim 1392.94 0.23 27. Tripura 2626.09 0.42 28. Uttaranchal 5762.22 0.93 Grand total 622112.04 100.00 Source: Finance Commission Reports, Government of India. 101

The following are the deductions from the above table 4.2. 1. The total transfer of share in central taxes and duties of XII finance commission comes to `622113.04 crore for the years 2005 to 2010 out of which `572489.59 crore goes to 17 general category states, which covers 93.03 percentage of the total transfers and the remaining `49622.45 crore goes to 11 special category states, which covers 7.97 percentage of the total. 2. The higher share of central taxes and duties of `118209.45 crore goes to the largest state Uttar Pradesh which covers 19.00 per cent of the total. 3. The second highest share of central taxes and duties of `67671.04 crore goes to Bihar which covers 10.88 per cent of the total share in central taxes and duties. 4. The lowest share of central taxes and duties of `1392.94 crore goes to Sikkim which covers only 0.23 per cent of the total.

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The following table 4.3 presents the Twelfth Finance Commission transfer to 28 states in the form of grants-in-aid for the years 2005-06 to 2009-10. It is important to note that the amount received by the states from the centre in grants-in-aid need not be rapid to the centre whereas the amount received by the states from the centre in loan component should be rapid with interest. TABLE 4.3 Twelfth Finance Commission transfer - Grants-in-aid

Share in grants-in-aid S. No. States Percentage (` in crore) General Category States 83283.45 58.38 1. Andhra Pradesh 5214.58 3.65 2. Bihar 7975.56 5.59 3. Chhattisgarh 1987.94 1.39 4. Goa 135.39 0.09 5. Gujarat 3708.28 2.59 6. Haryana 1445.98 1.02 7. Jharkhand 3032.82 2.13 8. Karnataka 4054.40 2.84 9. Kerala 3254.51 2.28 10. Madhya Pradesh 5141.37 3.61 11. Maharashtra 5531.06 3.88 12. Orissa 5273.30 3.69 13. Punjab 4913.59 3.45 14. Rajasthan 4643.91 3.26 15. Tamil Nadu 4135.39 2.90 16. Uttar Pradesh 15262.00 10.70 17. West Bengal 7573.37 5.31 Special Category States 59356.34 41.62 18. Arunachal Pradesh 1758.22 1.23 19. Assam 4478.71 3.14 20. Himachal Pradesh 11247.14 7.88 21. Jammu and Kashmir 13438.76 9.42 22. Manipur 4648.76 3.26 23. Meghalaya 2091.39 1.47 24. Mizoram 3194.39 2.24 25. Nagaland 5839.74 4.09 26. Sikkim 436.20 0.31 27. Tripura 5790.91 4.02 28. Uttaranchal 6432.12 4.51 Grand total 142639.79 100.00 Source: Finance Commission Reports, Government of India. 103

The following notable points can be inferred from the above table 4.3. (i) The 17 general category states that is developed states which contribute higher revenue to the centre in the form of taxes and duties receive the less grants-in-aid revenue from the centre viz. 58.38 per cent during the Twelfth Finance Commission period. (ii) The special category states which contribute comparatively less revenue to the centre in the form of taxes and duties receive higher grants-in-aid revenue from the centre namely 41.62 per cent. (iii) The highest grants-in-aid revenue of `15262.00 crore received by Uttar Pradesh in terms of percentage it comes to 10.70. (iv) The lowest grants-in-aid revenue of `135.39 crore received by Goa. In terms of Percentage it comes to 0.09. (v) The 17 general category states received the grants-in-aid revenue of `83283.45 crore, whereas the 11 special category states received `59356.34 crore. (vi) The Jammu and Kashmir, the most disturbed states of India received the second larger amount of `13438.57 crore, which covers 9.42 per cent of the total grants-in-aid. (vii) The small states like Goa and Sikkim received the lowest grants-in- aid revenue of `135.39 crore and `436.20 crore respectively. It can be concluded from the above inferences that the finance commission of India follows the equitarion criteria than the efficient criteria for distribution of grants from the centre to the states hence backward special category states received more grants than developed general category states. 104

(viii) It is noteworthy to note that the highest tax collection capacity states that is developed states received higher the absolute amount in the form of taxes and duties from which the highest revenue goes to the centre whereas the lowest tax collection capacity states that is the backward states termed as special category states received higher the absolute amount in the form of grants-in-aid, which contribute the lowest revenue to the centre in the form of taxes and duties. 105

The following table 4.4 presents the functional classification of grants-in-aid transfer to the states. Shares of sharable taxes and duties to the 28 states during the period of Twelfth Finance Commission transfer from the Government of India for the years 2005-2006 to 2009-2010.

TABLE 4.4 Functional classifications of grants-in-aid

S. No. Particulars ` in crore Percentage 1. Non-plan revenue deficit 56855.87 39.85 2. Health sector 5887.08 4.13 3. Education 10171.65 7.13 4. Maintanance of roads and bridges 15000.00 10.51 5. Maintenance of buildings 5000.00 3.51 6. Maintenance of forests 1000.00 0.71 7. Heritage conservation 625.00 0.44 8. State specific needs 7100.00 4.98 9. Local bodies 25000.00 17.52 10. Calamity relief 16000.00 11.22 Total 142639.60 100.00

Source: Finance Commission Reports Twelfth Finance Commission - Government of India.

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The following are the observations of the above the table 4.4. (i) The total grants-in-aid transfer to the states during the Twelfth Finance Commission in absolute amount comes to `142639.60 crore. (ii) The highest amount transfers to the heads of non-plan revenue deficit in absolute amount it comes to `56855.87 crore in terms of percentage it comes to 39.85 (iii) The second highest amount goes to local bodies namely `25000.00 crore in terms of percentage it comes to 17.52. (iv) A transfer of `10171.65 crore goes to education in terms of percentage it comes to 7.13. (v) The third highest transfer of `16000.00 crore and `15000.00 crore goes to natural calamity relief and maintenance of roads and bridges respectively. (vi) The lowest transfer of `1000.00 crore and `625.00 crore goes to maintenance of forests and heritage conservation respectively. 107

The following table 4.5 presents the grants-in-aid for maintenance of roads and bridges to the states as per the recommendations of the Twelfth Finance Commission for the years 2005-06 to 2009-10. TABLE 4.5 Grants-in-aid for maintenance of Roads and Bridges

S. No. States ` in crore Percentage 1. Andhra Pradesh 980.12 6.53 2. Arunachal Pradesh 44.36 0.29 3. Assam 330.12 2.20 4. Bihar 309.36 2.06 5. Chhattisgarh 262.40 1.74 6. Goa 39.48 0.26 7. Gujarat 895.20 5.96 8. Haryana 182.72 1.21 9. Himachal Pradesh 261.64 1.74 10. Jammu and Kashmir 117.68 0.78 11. Jharkhand 409.04 2.72 12. Karnataka 1458.12 9.72 13. Kerala 642.32 4.28 14. Madhya Pradesh 586.88 3.91 15. Maharashtra 1189.68 7.93 16. Manipur 76.96 0.51 17. Meghalaya 86.40 0.57 18. Mizoram 42.12 0.28 19. Nagaland 120.88 0.80 20. Orissa 1475.08 9.83 21. Punjab 420.96 2.80 22. Rajasthan 633.32 4.22 23. Sikkim 18.64 0.12 24. Tamil Nadu 1214.40 8.09 25. Tripura 61.48 0.40 26. Uttar Pradesh 2403.16 16.02 27. Uttaranchal 324.56 2.16 28. West Bengal 412.92 2.75 Total 15000.00 100.00 Source: Finance Commission Reports, Government of India. 108

The following are the observations of the table 4.5. (i) The total grants-in-aid for maintenance of roads and bridges transfer to the southern states during the Twelfth Finance Commission in absolute amount comes to `15000.00 crore. (ii) The highest amount transfer of grants-in-aid for maintenance of roads and bridges viz. `2403.16 crore goes to Uttar Pradesh. In terms of percentage it comes to 16.02. (iii) The second highest transfer of `1475.08 crore goes to Orissa. In terms of percentage it comes to 9.83. (iv) The lowest transfer of grants-in-aid for maintenance of roads and bridges namely `18.64 crore goes to Sikkim. In terms of percentage it comes to 0.12. (v) A transfer of `1214.40 crore of grants-in-aid for maintenance of roads and bridges goes to Tamil Nadu in terms of percentage it comes to 8.09. 109

The following table 4.6 presents the share of state allocation to the states during the period of Twelfth Finance Commission transfer from the Government of India for the years 2005-06 to 2009-10. TABLE 4.6 Share of state allocation to Panchayats and Municipalities

Panchayats Municipalities S. States ` in ` in No. Per cent Per cent crore crore 1. Andhra Pradesh 1587 7.936 374 7.487 2. Arunachal Pradesh 68 0.340 3 0.060 3. Assam 526 2.630 55 1.101 4. Bihar 1624 8.121 142 2.842 5. Chhattisgarh 615 3.075 88 1.761 6. Goa 18 0.090 12 0.240 7. Gujarat 931 4.656 414 8.288 8. Haryana 388 1.940 91 1.821 9. Himachal Pradesh 147 0.735 3 0.060 10. Jammu and Kashmir 281 1.405 38 0.760 11. Jharkhand 482 2.410 98 1.961 12. Karnataka 888 4.440 323 6.466 13. Kerala 985 4.925 149 2.982 14. Madhya Pradesh 1663 8.316 361 7.227 15. Maharashtra 1983 9.916 791 15.835 16. Manipur 46 3.230 9 0.180 17. Meghalaya 50 0.250 8 0.160 18. Mizoram 20 0.100 10 0.200 19. Nagaland 40 0.200 6 0.120 20. Orissa 803 4.016 104 2.082 21. Punjab 324 1.620 171 3.423 22. Rajasthan 1230 6.151 220 4.404 23. Sikkim 13 0.065 1 0.020 24. Tamil Nadu 870 4.350 572 11.451 25. Tripura 57 0.285 8 0.160 26. Uttar Pradesh 2925 14.627 517 10.350 27. Uttaranchal 162 0.810 34 0.680 28. West Bengal 1271 6.356 393 7.868 Total 19997 100.000 4995 100.000 Source: Finance Commission Reports, Government of India. 110

The following are the deductions from the above table 4.6. (i) The shares of states in allocation of total actual amount to Panchayats comes to `19997 crore. The shares of state allocation to Municipalities the actual amount comes to `5000 crore during the period 2005-06 to 2009-10. (ii) The higher share of states allocation to Panchayats `2925 crores goes to the largest state Uttar Pradesh which covers 14.627 per cent of the total. Share of state allocation to Municipalities higher share of `791 crores goes to the Maharashtra. It comes to 15.835 per cent. (iii) The second highest share of states allocation to Panchayats `1983 crores goes to Maharashtra which covers 9.916 per cent. Share of state allocation to Municipalities of `572 crore goes to Tamil Nadu. It covers 11.450 per cent of the total. (iv) The lowest share of states allocation to Panchayats comes to `13 crore goes to Sikkim. It covers 0.065 per cent. Share of state allocation to Municipalities of `1 crore goes to Sikkim. It covers 0.020 per cent. (v) The share of state allocation of panchayats ranging from `13 crore to `2925 crore. The share of state allocation to Municipalities ranging from `1 crore to `791 crore.

The following diagram shows the Twelfth Finance Commission share of state allocation to Panchayats and Municipalities.

Fig.2 Share of state allocation to Panchayats and Municipalities

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8 Percentage 6

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0 Goa Bihar Orissa Kerala Assam Punjab Sikkim Gujarat Tripura Haryana Manipur Mizoram Nagaland Rajasthan Karnataka Jharkhand Jharkhand Meghalaya Uttaranchal Tamil Nadu Maharashtra Chhattisgarh West Bengal West Uttar Pradesh Andhra Pradesh Andhra Madhya Pradesh Arunachal Pradesh Arunachal Pradesh Himalachal Pradesh Jammu and Kashmir Jammu 111

112

The following table 4.7 presents the Eleventh Finance Commission total transfer to 25 states for the years 2000-01 to 2004-05. TABLE 4.7 Eleventh Finance Commission total transfer Total transfer S. No. States Percentage (` in crore) 1. Andhra Pradesh 31011.18 7.24 2. Bihar 56727.90 13.24 3. Goa 821.56 0.19 4. Gujarat 12000.22 2.80 5. Haryana 4205.77 0.98 6. Karnataka 19691.98 4.59 7. Kerala 12316.72 2.87 8. Madhya Pradesh 34998.38 8.17 9. Maharashtra 19387.49 4.52 10. Orissa 20754.50 4.84 11. Punjab 5428.53 1.27 12. Rajasthan 23588.63 5.50 13. Tamil Nadu 21601.43 5.04 14. Uttar Pradesh 78509.30 18.32 15. West Bengal 32219.82 7.52 16. Arunachal Pradesh 2315.18 0.54 17. Assam 13280.86 3.09 18. Himachal Pradesh 7460.43 1.74 19. Jammu and Kashmir 16428.22 3.83 20. Manipur 3215.91 0.75 21. Meghalaya 2961.41 0.69 22. Mizoram 2535.27 0.59 23. Nagaland 1119.76 0.26 24. Sikkim 1633.96 0.38 25. Tripura 4361.04 1.01 Total 428575.45 100.00 Source: Finance Commission Reports, Government of India. 113

From the above table 4.7, it can be deducted that the highest total share of `78509.30 crore received by Uttar Pradesh through the eleventh finance commission transfer from the centre for the years 2000-01 to 2004-05. In terms of percentage it comes to 18.32. The total transfer to all the 25 states in absolute amount comes to `428575.45 crore. The low income special category states receive more funds from the centre than the developed general category states. The lowest share of `821.56 crore received by Goa, which covers only 0.19 per cent of the total transfers of eleventh finance commission.

The following diagram shows the Eleventh Finance Commission Total Transfer.

Fig.3 Eleventh Finance Commission total transfer

20 18 16 14 12 10

Percentage 8 6 4 2 0 Goa Bihar Orissa Kerala Assam Punjab Sikkim Gujarat Tripura Haryana Manipur Mizoram Nagaland Rajasthan Karnataka Meghalaya Tamil Nadu Maharashtra West Bengal West Uttar Pradesh Andhra Pradesh Andhra Madhya Pradesh Himachal Pradesh Arunachal Pradesh Jammu and Kashmir Jammu 114

115

The following table 4.8 presents the total fiscal transfers to the 25 states from the Government of India for the years 1995-96 to 1999-2000 during the Tenth Finance Commission period. TABLE 4.8 Tenth Finance Commission total transfer

Total transfer S. No. States Percentage (` in crore) 1. Andhra Pradesh 18081.54 7.97 2. Arunachal Pradesh 1768.36 0.78 3. Assam 8328.05 3.67 4. Bihar 24655.56 10.88 5. Goa 622.25 0.27 6. Gujarat 8875.59 3.91 7. Haryana 2793.11 1.23 8. Himachal Pradesh 4761.66 2.10 9. Jammu and Kashmir 7322.08 3.23 10. Karnataka 10520.83 4.64 11. Kerala 7721.81 3.40 12. Madhya Pradesh 16093.97 7.10 13. Maharashtra 13709.08 6.04 14. Manipur 2136.62 3.94 15. Meghalaya 1888.85 0.83 16. Mizoram 1802.01 0.79 17. Nagaland 2793.04 1.23 18. Orissa 9706.55 4.28 19. Punjab 3589.47 1.58 20. Rajasthan 11400.87 5.03 21. Sikkim 689.89 0.31 22. Tamil Nadu 13360.57 5.89 23. Tripura 2873.21 1.26 24. Uttar Pradesh 36158.91 15.95 25. West Bengal 14980.42 6.60 Total 226634.30 100.00 Source: Finance Commission Reports, Government of India. 116

The followings are the deductions from the above table 4.8. The total fiscal transfers from the government of India to the 25 states in absolute amount comes to `226634.30 crore for the years 1995-96 to 1999-2000, through the recommendations of the tenth finance commission. The highest total fiscal transfers from the centre viz. `36158.91 crore goes to the largest state Uttar Pradesh. It comes to 15.95 per cent of the total transfers. The second highest fiscal transfer namely `24655.56 crore goes to Bihar. It covers 10.88 per cent of the total fiscal transfer from the centre. The third highest fiscal transfers viz. `18081.54 crore goes to Andrha Pradesh. It covers 7.97 per cent of the total transfers from the centre. The lowest fiscal transfers viz. `622.25 crore from the centre goes to Goa. It covers only 0.27 per cent of the total transfers. Sikkim received `689.89 crore from the centre. It covers only 0.31 per cent of the total fiscal transfers. 117

The following table 4.9 presents the Ninth Finance Commission total transfers for the years 1990-91 to 1994-95. TABLE 4.9 Ninth Finance Commission total transfer

Total transfer S. No. States Percentage (` in crore) 1. Andhra Pradesh 7239.00 6.8 2. Arunachal Pradesh 835.00 0.8 3. Assam 3956.00 3.7 4. Bihar 11176.00 10.3 5. Chhattisgarh ------6. Goa 509.00 0.5 7. Gujarat 3713.00 3.5 8. Haryana 1195.00 1.1 9. Himachal Pradesh 1860.00 1.8 10. Jammu and Kashmir 3359.00 3.2 11. Jharkhand ------12. Karnataka 4063.00 3.8 13. Kerala 3448.00 3.2 14. Madhya Pradesh 7843.00 7.3 15. Maharashtra 6201.00 5.8 16. Manipur 1085.00 1.0 17. Meghalaya 822.00 0.8 18. Mizoram 1021.00 1.0 19. Nagaland 1244.00 1.2 20. Orissa 5223.00 4.2 21. Punjab 1674.00 1.6 22. Rajasthan 6256.00 6.2 23. Sikkim 252.00 0.2 24. Tamil Nadu 6198.00 5.8 25. Tripura 4334.00 4.0 26. Uttar Pradesh 17449.00 16.1 27. Uttaranchal ------28. West Bengal 7409.00 7.0 Total 108364.00 100.0 Source: Finance Commission Reports, Government of India. 118

The followings are the deductions from the above table 4.9 the total fiscal transfers from the government of India to the 28 states, in absolute amount comes to `108364.00 crore for the years 1990-91 to 1994-95, through the recommendations of the ninth finance commission. The highest total fiscal transfers from the centre viz. `17449.00 crore goes to the largest state Uttar Pradesh. It covers 16.1 per cent of the total transfers. The second highest fiscal transfer namely `11176.00 crore goes to Bihar. It covers 10.3 per cent of the total fiscal transfer from the centre. The third highest fiscal transfer viz. `7843.00 crore goes to Madhya Pradesh. It covers 7.3 per cent of the total transfers from the centre. The lowest fiscal transfers viz. `252.00 crore from the centre goes to Sikkim. It covers only 0.2 per cent of the total transfers. Goa received `509.00 crore from the centre. It covers only 0.5 per cent of the total fiscal transfers.

The following diagram shows the Ninth Finance Commission total transfer.

Fig.4 Ninth Finance Commission total transfer

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0 Goa Bihar Orissa Kerala Assam Punjab Sikkim Gujarat Tripura Haryana Manipur Mizoram Nagaland Rajasthan Karnataka Jharkhand Jharkhand Meghalaya Uttaranchal Tamil Nadu Maharashtra Chhattisgarh West Bengal West Uttar Pradesh Andhra Pradesh Andhra Madhya Pradesh Himachal Pradesh Arunachal Pradesh Jammu and Kashmir Jammu 119

120

The following table 4.10 presents the percentage share in total grants-in-aid recommended by the Ninth, Tenth, Eleventh and Twelfth Finance Commission for the year 1990-91 to 2009-10 to the 28 states.

TABLE 4.10 Share in total Grants-in-aid (Percentage) S. No. State Ninth Tenth Eleventh Twelfth General Category States 58.6 67.4 46.7 58.4 1. Andhra Pradesh 3.2 8.6 3.5 3.7 2. Bihar 6.4 6.7 3.1 5.6 3. Chhattisgarh 0.0 0.0 0.0 1.4 4. Goa 1.0 0.5 0.1 0.1 5. Gujarat 1.3 4.2 2.4 2.6 6. Haryana 1.0 1.2 1.1 1.0 7. Jharkhand 0.0 0.0 0.0 2.1 8. Karnataka 0.7 2.4 1.9 2.8 9. Kerala 1.7 2.5 1.4 2.3 10. Madhya Pradesh 4.8 4.0 2.3 3.6 11. Maharashtra 2.0 4.2 3.3 3.9 12. Orissa 6.4 4.5 2.9 3.7 13. Punjab 3.0 2.1 1.9 3.4 14. Rajasthan 7.3 5.6 5.1 3.3 15. Tamil Nadu 1.6 3.6 2.3 2.9 16. Uttar Pradesh 12.2 13.0 6.8 10.7 17. West Bengal 6.0 4.3 8.6 5.3 Special Category States 41.4 32.6 53.3 41.4 18. Arunachal Pradesh 3.2 2.0 2.4 1.2 19. Assam 6.9 6.2 1.6 3.1 20. Himachal Pradesh 4.7 5.0 8.3 7.9 21. Jammu and Kashmir 9.5 7.0 19.8 9.4 22. Manipur 3.0 2.2 3.1 3.3 23. Meghalaya 2.2 1.7 2.9 1.5 24. Mizoram 3.7 2.0 3.1 2.2 25. Nagaland 3.9 2.9 6.2 4.1 26. Sikkim 0.7 0.7 1.6 0.3 27. Tripura 3.6 2.7 4.3 4.1 28. Uttaranchal 0.0 0.0 0.0 4.5 Grand Total 100.0 100.0 100.0 100.0 Source: Finance Commission Reports, Government of India. 121

The above table 4.10 presents the percentage share in total grants- in-aid from the centre Ninth Finance Commission share in total grants-in- aid the highest percentage comes to 12.2 per cent. The Twelfth Finance Commission highest percentage comes to 10.7 per cent, Tenth Finance Commission highest percentage comes to 13.0 per cent goes to Uttar Pradesh. The second highest share in total grants-in-aid ninth finance commission the percentage comes to 9.5 percent goes to Jammu and Kashmir. Eleventh finance commission grants-in-aid the percentage comes to 8.3 per cent goes to Himachal Pradesh. Twelfth finance commission grants-in-aid percentage comes to 9.4 per cent goes to Jammu and Kashmir. The third highest share in total grants-in-aid percentage of ninth finance commission comes to 6.9 per cent goes to Assam. The Twelfth Finance Commission grants-in-aid percentage comes to 7.9 per cent goes to Himachal Pradesh. The lowest percentage of Ninth Finance Commission share in total grants-in-aid comes to 0.7 per cent goes to Sikkim. Twelfth Finance Commission share in total grants-in-aid comes to 0.3 per cent goes to Sikkim. Ninth, Tenth, Eleventh and Twelfth Finance Commission highest percentage of eleventh finance commission grants- in-aid comes to 19.8 per cent, goes to Jammu and Kashmir.

The following diagram shows the share in total grants-in-aid. Fig.5 Share in total Grants-in-aid

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20

15

Percentage 10

5

0 Goa Bihar Orissa Kerala Assam Punjab Sikkim Gujarat Tripura Haryana Manipur Mizoram Nagaland Rajasthan Jharkhand Karnataka Meghalaya Uttaranchal Tamil Nadu Maharashtra Chhattisgarh West Bengal West Uttar Pradesh Andhra Pradesh Andhra Madhya Pradesh Himachal Pradesh Arunachal Pradesh Jammu and Kashmir Jammu 122

123

The following table 4.11 presents the per capita transfers from the Ninth to Twelfth Finance Commission. The per capita transfer to the special category states are several times higher than the per capita transfers to the general category states. TABLE 4.11 Per capita Finance Commission transfers Per capita finance commission devolution S.No. States 1990-95 1995-00 2000-05 2005-08 Average Average Average Average General Category States 231.8 386.3 622.0 1119.4 1. Andhra Pradesh 241.4 454.8 629.6 1100.7 2. Bihar 284.2 433.1 867.4 1398.8 3. Chhattisgarh - - 605.6 1277.7 4. Goa 870.5 838.6 878.0 1854.3 5. Gujarat 164.6 327.3 432.4 739.4 6. Haryana 151.8 245.6 267.4 601.1 7. Jharkhand - - 687.9 1283.3 8. Karnataka 202.0 358.8 612.0 954.4 9. Kerala 236.4 423.2 626.8 1147.2 10. Madhya Pradesh 224.1 386.4 713.3 1160.3 11. Maharashtra 176.7 255.0 299.6 592.0 12. Orissa 328.1 480.6 855.1 1579.7 13. Punjab 191.9 288.6 303.1 620.7 14. Rajasthan 272.5 407.7 683.5 1208.1 15. Tamil Nadu 249.4 403.3 538.1 1024.9 16. Uttar Pradesh 233.8 412.9 700.2 1369.5 17. West Bengal 216.2 366.2 725.0 1193.1 Special Category States 714.0 1135.7 1567.5 2891.7 18. Arunachal Pradesh 1901.7 2890.6 3193.6 5978.8 19. Assam 336.9 579.4 758.9 1388.9 20. Himachal Pradesh 715.6 1389.1 2039.4 4383.2 21. Jammu and Kashmir 980.4 1381.1 2860.2 3797.8 22. Manipur 1180.9 1742.4 2391.2 5947.5 23. Meghalaya 910.1 1555.2 1668.8 1772.2 24. Mizoram 2885.3 3684.8 4000.4 9017.2 25. Nagaland 2014.6 2681.5 4009.8 6295.4 26. Sikkim 1012.5 1863.4 4000.0 5347.4 27. Tripura 1045.5 1582.3 2171.5 4227.4 28. Uttarakhand - - 490.9 2565.0 Total 945.83 1522.01 2189.42 4011.05 Source: RBI, Study of State Finance and Central Statistical Organization.

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The following points can be inferred from the above table 5.1. The percentage transfers have increased from `945.83 to `4011.05 from the Ninth Finance Commission period to the Twelfth Finance Commission period. It represents an increase of 4.24 times. The Finance Commission per capita devolution of general category states has increased from `231.8 to `1119.4 form the Ninth Finance Commission period to the Twelfth Finance Commission period. It represents an increase of 4.83 times. The per capita transfer of special category states has increased from `714.0 to `2891.7 between the Ninth Finance Commission period and the Twelfth Finance Commission period. It represents an increase of 4.05 times.

The highest per capita transfer goes to Mizoram in all cases. The lowest per capita transfers goes to Haryana for all the finance commission except the Twelfth Finance Commission. The fifteen general category states per capita transfer in terms of percentage it comes to 24.51, whereas the 10 special category states per capita transfer comes to 75.49 per cent of the total per capita devolution of all the 25 states during the Ninth Finance Commission period. The per capita transfers of the special category states is 3.41 times higher than the general category states during the Eleventh Finance Commission period.

The per capita finance commission transfer to the fifteen general category states in terms of percentage comes to 25.38, whereas the ten special category states it comes to 74.62 per cent of the total per capita transfer of all the 25 states during the Tenth Finance Commission period. The per capita transfer of special category states is 2.94 times higher than 125 the general category states. The per capita transfer of seventeen general category states in terms of percentage it comes to 28.41 and 27.91 during the Eleventh and Twelfth Finance Commission period respectively, whereas the per capita transfer of the eleven special category states comes to 71.59 and 72.09 percentage respectively.

The per capita transfer of special category states is 2.52 times and 2.58 times higher than the general category states during the eleventh and Twelfth Finance Commission period respectively.

Among the general category states Goa has always got the highest per capita even though it is highest per capita income state. This is because of cost considerations as Goa is a very small state in terms of area. Leaving Goa, within the remaining group of general category states, the highest per capita transfers goes to Orissa, in the case of Ninth and Twelfth Finance Commission and Bihar in the case of Eleventh Finance Commission. The relativity between the highest and the lowest per capita transfers in the group of general category states excluding Goa has been as follows. Ninth Finance Commission (2. 2) Tenth Finance Commission (1.98), Eleventh Finance Commission (3.24) and Twelfth Finance Commission (2.67). Chapter V DATA ANALYSIS – FINANCE COMMISSION’S FISCAL TRANSFERS TO SOUTHERN STATES

This chapter deals with the Finance Commission issue of fiscal transfers, it is useful to look at three basic features of the four southern states and their contribution in the economic activities of the country, share of excise duties, grants-in-aid and relative position of Income tax. The issues of fiscal transfers relate to their vertical and horizontal dimensions. The vertical dimensions relates to the relative shares of resources between the centre and the states taken as a group. The horizontal dimension relates to the inter-state distribution of the resources.

There are issues both of inter-state and intra-state imbalance. Here we look at some dimensions of inter-district imbalances in the case of Tamil Nadu. Similar problems are therefore the southern states. Tamil Nadu has thirty two districts. In about 2/3rd of the districts, the per capita income is below the per capita income of the state.

Here the data analysis has been done on the following lines. 1. Twelfth Finance Commission total transfer to the Southern States. 2. Twelfth Finance Commission transfer taxes and duties. 3. Twelfth Finance Commission transfer grants-in-aid. 4. Share of state allocation for Panchayats and Municipalities. 5. Grants-in-aid for maintenance of roads and bridges. 6. Eleventh Finance Commission total transfer among the southern states. 7. Share in central taxes and duties of Eleventh Finance Commission. 127

8. Eleventh Finance Commission transfer grants-in-aid. 9. Sharable taxes and duties and grants-in-aid to the southern states. 10. Eleventh and Twelfth Finance Commission transfer grants-in-aid to the southern states. 11. Eleventh and Twelfth Finance Commission transfer taxes and duties. 12. Tenth, Eleventh and Twelfth Finance Commission total transfer to the southern states. 13. Tenth Finance Commission total transfer to southern states. 14. Share of income tax from the centre to the southern states. 15. Share of excise duties. 16. Grants-in-aid. 17. Devolution of taxes and deficit grants to southern states. 18. Taxes and duties. 19. Grants-in-aid. 20. Ninth Finance Commission total transfers. 21. Income tax share of southern states. 22. Share of excise duties of southern states. 23. Taxes and duties of southern states. 24. Grants-in-aid. 25. Finance Commission total central transfer to southern states. 26. Share in taxes and Grants-in-aid. 27. Share in total grants-in-aid. 128

The following table 5.1 presents the total transfer to the Southern states as per the recommendations of the Twelfth Finance Commission for the years 2005-06 to 2009-10.

TABLE 5.1 Twelfth Finance Commission total transfer to the Southern states

Total transfer S. No. States Percentage (` in crore) 1. Tamil Nadu 36688.13 26.57 2. Andhra Pradesh 50353.26 36.47 3. Karnataka 31416.28 22.75 4. Kerala 19607.72 14.21 Total 138065.39 100.00 Source: Finance Commission Reports, Government of India.

The table 5.1 shows that the twelfth finance commission total transfer to the southern states from the Government of India in terms of absolute amount comes to `138065.39 crore. The highest share of `50353.26 crore goes to the largest state Andhra Pradesh which covers 36.47 per cent of the total transfers. The second highest share of `36688.13 crore has received by Tamil Nadu, which covers 26.57 per cent of the total transfers. The lowest share of `19607.72 crore has received Kerala which covers 14.21 per cent of the total transfers. In total transfer of the Twelfth Finance Commission period, Southern states received viz. 18.27 per cent and over states in India received 81.73 per cent.

The following diagram shows the Twelfth Finance Commission total transfer to the southern states. 129

Fig.6 Twelfth Finance Commission total transfer to the Southern states

Kerala 14.21 Tamil Nadu 26.57

Karnataka 22.75

Andhra Pradesh 36.47

130

The following table 5.2 presents the share of sharable taxes and duties to the Southern states during the period of Twelfth Finance Commission transfer from the Government of India for the years 2005-06 to 2009-10. TABLE 5.2 Twelfth Finance Commission transfer – Taxes and Duties

Share in central S. No. States taxes and duties Percentage (` in crore) 1. Tamil Nadu 32552.74 26.81 2. Andhra Pradesh 45138.68 37.18 3. Karnataka 27361.88 22.54 4. Kerala 16353.21 13.47 Total 121406.51 100.00 Source: Finance Commission Reports, Government of India. The followings are the deductions from the above table 5.2. 1. The highest share of Twelfth Finance Commission transfer taxes and duties of `45138.68 crore among the southern states. The largest state of Andhra Pradesh which covers only 37.18 per cent of the total. 2. The second highest share of taxes and duties of `32552.74 crore has received by Tamil Nadu which covers 26.81 per cent of the total share in taxes and duties. 3. The lowest share of taxes and duties of `16353.21 crore has received by Kerala which covers only 13.47 per cent of the total. 4. The total transfer of share in taxes and duties of Twelfth Finance Commission for southern states in absolute amount comes to `121406.51 crore for the years 2005-06 to 2009-10. In total transfer of taxes and duties the southern states received 19.08 per cent and all other states in India received 80.92 per cent of the Twelfth Finance Commission period. 131

The following table 5.3 presents the Twelfth Finance Commission transfer to the southern states in the form of Grants-in-aid for the years 2005-06 to 2009-10. It is important to note that the amount received by the states from the centre in grants-in-aid need not be repaid to centre whereas the amount received by the states from the centre on loan component should be repaid with interest.

TABLE 5.3 Twelfth Finance Commission transfer – Grants-in-aid

Share in grants-in-aid S. No. States Percentage (` in crore) 1. Tamil Nadu 4135.39 24.82 2. Andhra Pradesh 5214.58 31.30 3. Karnataka 4054.40 24.34 4. Kerala 3254.51 19.54 Total 16658.91 100.00 Source: Finance Commission Reports, Government of India.

The followings are the deductions from the above table 5.3. 1. The highest share of Twelfth Finance Commission transfer grants-in- aid of `5214.58 crore received by Andhra Pradesh. In terms of percentage it comes to 31.30. 2. The second highest grants-in-aid of `4135.39 crore received by Tamil Nadu. In terms of percentage it comes to 24.82. 3. The third highest grants-in-aid of `4054.40 crore received by Karnataka. In terms of percentage it comes to 24.34.

132

4. The lowest grants-in-aid of `3254.51 crore received by Kerala. In terms of percentage it comes to 19.54. In terms of absolute amount of `16658.88 crore has been distributed to all the southern states. In total transfers of share of grants-in-aid in the Twelfth Finance Commission period, the southern states received 11.67 per cent and all other states in India received 88.33 per cent.

The following diagram shows the Twelfth Finance Commission transfer Grants-in-aid. 133

Fig.7 Twelfth Finance Commission transfer – grants-in-aid

Kerala 19.54 Tamil Nadu 24.82

Karnataka 24.34

Andhra Pradesh 31.3

134

The following table 5.4 shows the share of state allocation for panchayats and municipalities to the southern states during the period of Twelfth Finance Commission transfer from the Government of India for the years 2005-06 to 2009-10. TABLE 5.4 Share of state allocation for Panchayats and Municipalities

Panchayts Municipalities States ` crore Percentage ` crore Percentage Tamil Nadu 870 20.09 572 40.34 Andhra Pradesh 1587 36.65 374 26.37 Karnataka 888 20.51 323 22.78 Kerala 985 22.75 149 10.51 Total 4330 100.00 1418 100.00 Source: Finance Commission Reports, Government of India. The followings are the deductions from the above table 5.4. 1. The highest share of Twelfth Finance Commission transfer state allocation among the southern states for Panchayats `1587 crore received by the largest state Andhra Pradesh which covers 36.65 per cent. The highest share of state allocation among the southern states received by the municipalities `572 crore goes to Tamil Nadu which covers 40.34 per cent share of state allocation. 2. The second highest share of state allocation among the southern states of Panchayats `985 crore receivd Kerala which covers 22.75 per cent. The second highest share of state allocation for municipalities `374 crore goes to Andhra Pradesh which covers only 26.37 per cent share of state allocation. 135

3. The lowest share of state allocation for Panchayats `870 crore has received Tamil Nadu which covers 20.09 per cent. The lowest share of state allocation among the southern states of municipalities `149 crore received by Kerala which covers 10.51 per cent of the total. 4. The total share of state allocation to the Southern states for Panchayats `4330 crore and for municipalities `1418 crore for the years 2005-06 to 2009-10. In terms of percentage it comes to 21.65 per cent for panchayats and 28.36 per cent for municipalities.

136

The following table 5.5 shows the shares of states grants-in-aid among the southern states for maintenance of roads and bridges for the period of 2005-06 to 2009-10 Twelfth Finance Commission.

TABLE 5.5 Grants-in-Aid for maintenance of Roads of Bridges Total S. No. States Percentage (` in crore) 1. Tamil Nadu 1214.40 28.27 2. Andhra Pradesh 980.12 22.82 3. Karnataka 1458.12 33.95 4. Kerala 642.32 14.96 Total 4294.96 100.00 Source: 12th Finance Commission Reports, Government of India.

The followings are the observations of the table 5.5. 1. The total grants-in-aid for maintenance of roads and bridges to southern states during the Twelfth Finance Commission in absolute amount comes to `4294.96 crore. 2. The highest amount of grants-in-aid among the southern states for maintenance of roads and bridges `1458.12 crore received by Karnataka. Which covers 33.95 per cent. 3. The second highest transfer of `1214.40 crore received by Tamil Nadu. Which covers 28.27 per cent. 4. The lowest transfer of Grants-in-aid among the southern states for maintenance of Roads and Bridges `642.32 crore received by Kerala. In terms of percentage it comes to 14.96. 137

5. A transfer of `980.12 crore goes to Andhra Pradesh in the form of Grants-in-aid for maintenance of Roads and bridges in terms of percentage it comes to 22.82. In total transfer of grants-in-aid for maintenance of roads and bridges of the Twelfth Finance Commission period the southern states received 28.62 per cent and all other states in India received 71.38 per cent.

138

The following table 5.6 presents the Eleventh Finance Commission to the southern states in the total transfer for the years 2000-01 to 2004-05.

TABLE 5.6 Eleventh Finance Commission total transfer among the Southern states

Total transfer S. No. States Percentage (` in crore) 1. Tamil Nadu 21601.43 25.52 2. Andhra Pradesh 31011.18 36.65 3. Karnataka 19691.98 23.27 4. Kerala 12316.72 14.56 Total 84621.31 100.00 Source: Finance Commission Reports, Government of India. From the above table 5.6 it can be deducted that the highest total share of `31011.18 crore received by Andhra Pradesh through the Eleventh finance commission transfer for the years 2000-01 to 2004-05. Which covers 36.65 per cent. The total transfer in absolute amount comes to `84621.31 crore. The second highest total share of `21601.43 crore received by Tamil Nadu, which covers only 25.52 per cent of the total transfer to the states. The lowest share of `12316.72 crore received by Kerala, which covers 14.56 per cent of the total transfer of Eleventh Finance Commission for southern states. In total transfer of the Eleventh Finance Commission period the southern states received 19.58 and all other states in India received 80.42 per cent.

139

The following table 5.7 presents the Eleventh Finance Commission transfer to the southern states in the share at sharable taxes and duties for the years 2000-01 to 2004-05.

TABLE 5.7 Share in central Taxes and Duties of Eleventh Finance Commission

Share in central S. No. States taxes and duties Percentage (` in crore) 1. Tamil Nadu 20264.72 25.56 2. Andhra Pradesh 28980.25 36.54 3. Karnataka 18552.48 23.39 4. Kerala 11504.04 14.51 Total 79301.49 100.00 Source: Finance Commission Reports, Government of India.

The following points can be taken from the above table 5.7. The highest share of taxes and duties of `28980.25 crore among the southern states. The largest state Andhra Pradesh through Eleventh Finance Commission for the years 2000-01 to 2004-05. In terms of percentage it comes to 36.54. The second highest share in taxes and duties `20264.72 crore received by Tamil Nadu which covers 25.56 per cent of the total. The third highest share in taxes and duties of `18552.48 crore received by Karnataka. In terms of percentage it comes to 23.39. The lowest share in taxes and duties of `11504.04 crore received by Kerala. In terms of percentage it comes to 14.51. The total share in taxes and duties for southern state through Eleventh Finance Commission in terms of absolute 140 amount comes to `79301.49 crore. In total transfer of share in taxes and duties of the Eleventh Finance Commission period, the southern states received 19.52 per cent and all over states in India received 80.48 per cent.

The following diagram shows the Eleventh Finance Commission share in central taxes and duties. 141

Fig.8 Share in Central Taxes and Duties Eleventh Finance Commission

Kerala 14.51 Tamil Nadu 25.56

Karnataka 23.39

Andhra Pradesh 36.54

142

The following table 5.8 presents the Eleventh Finance Commission transfer to the Southern states through grants-in-aid for the years 2000-01 to 2004-05.

TABLE 5.8 Eleventh Finance Commission transfer – Grants-in-aid

Grants-in-aid S. No. States Percentage (` in crore) 1. Tamil Nadu 1336.71 25.13 2. Andhra Pradesh 2030.93 38.17 3. Karnataka 1139.50 21.42 4. Kerala 812.68 15.28 Total 5319.82 100.00 Source: Finance Commission Reports, Government of India.

The followings are the deductions from the above table 5.8. The highest share of grants-in-aid of `2030.93 crore received by Andhra Pradesh through the Eleventh Finance Commission transfer for the years 2000-01 to 2004-05. In terms of percentages it comes to 38.17. It is note worthy to note that in case of share in total transfer, Tamil Nadu received only `1336.71 crore. It covers 25.13 per cent of the total and in case of share in taxes and duties. The lowest share in grants-in-aid from the Southern states received by Kerala namely `812.68 crore which covers only 15.28 per cent of the total. In total transfer of grants-in-aid of the Eleventh Finance Commission period of the southern states in India received 9.01 per cent and all other states in India received viz., 90.09 per cent. 143

The following table 5.9 presents shares of the Southern states from the sharable taxes and duties and grants-in-aid as per the Eleventh Finance Commission for the years 2000-01 to 2004-05. TABLE 5.9 Sharable Taxes and Duties and Grants-in-aid to the Southern states

Grants- Share in taxes in-aid S.No. States and duties Percentage Percentage (` in (` in crore) crore)

1. Tamil Nadu 20264.72 25.56 1336.71 25.13 2. Andhra0Pradesh 28980.25 36.54 2030.93 38.17 3. Karnataka 18552.48 23.39 1139.50 21.42 4. Kerala 11504.04 14.51 812.68 15.28

Total 79301.49 100.00 5319.82 100.00 Source: Finance Commission Reports, Government of India. The followings are the inferences of the above table 5.9 the sharable taxes and duties and grants-in-aid to the southern states for the years 2000-01 to 2004-05, through the recommendations of the Eleventh Finance Commission amount in absolute terms to amount received `79301.49 crore and `5319.82 crore. The highest sharable taxes and duties and grants-in-aid namely `28980.25 crore and `2030.93 crore goes to the largest state Andhra Pradesh. It covers 36.54 and 38.17 per cent of the sharable taxes and duties and per cent of the sharable taxes and duties and grants-in-aid. The second higher sharable taxes and duties and grants- in-aid namely `20264.72 crore and `1336.71 crore goes to Tamil Nadu. It covers 25.56 and 25.13 per cent of the sharable taxes and duties and grants-in-aid. The lowest sharable taxes and duties and grants-in-aid 144

`11504.04 crore and `812.68 crore goes to Kerala. It covers 14.51 and 15.28 per cent of the sharable taxes and duties and grants-in-aid for Southern states. In total transfer of taxes and duties and grants-in-aid of the Eleventh Finance Commission period, the southern states received taxes and duties viz., 19.52 per cent, and 9.91 per cent grants-in-aid and all other states in India received taxes and duties viz., 80.48 per cent, and 90.09 per cent grants-in-aid.

The following diagram shows the sharable taxes and duties and grants-in-aid. 145

Fig.9 Sharable Taxes and Duties and Grants-in-aid

40

35

30

25

20 Percentage

15

10

5

0 Tamil Nadu Andhra Pradesh Karnataka Kerala

Share in taxes and duties Grants‐in‐aid

146

The following table 5.10 presents the eleventh and Twelfth Finance Commission transfer to the Southern states through grants-in-aid for the years 2000-01 to 2009-10.

TABLE 5.10 Eleventh and Twelfth Finance Commission transfer Grants- in-Aid to the Southern states

Eleventh finance Twelfth finance commission commission S. States No. Grants-in- Grants-in- aid Percentage aid Percentage (` in crore) (` in crore)

1. Tamil Nadu 1336.71 25.13 4135.39 24.82 2. Andhra0Pradesh 2030.93 38.17 5214.58 31.30 3. Karnataka 1139.50 21.42 4054.40 24.34 4. Kerala 812.68 15.28 3254.51 19.54

Total 5319.82 100.00 16658.88 100.00 Source: Finance Commission Reports, Government of India.

The followings are the deductions from the above table 5.10. Among the southern states Andhra Pradesh received highest share of grants-in-aid for the Eleventh and Twelfth Finance Commission `2030.93 crore and `5214.58 crore which covers 38.17 per cent and 31.30 per cent for the years 2000-01 to 2009-10. The second highest transfer of grants- in-aid for Eleventh Finance Commission `1336.71 crore and Twelfth Finance Commission `4135.39 crore received by Tamil Nadu. Which covers to 25.13 per cent and 24.82 per cent. The absolute amount received `5319.82 crore Eleventh Finance Commission, `16658.88 crore and 147

Twelfth Finance Commission transfer to grants-in-aid. The lowest transfer of grants-in-aid the Eleventh Finance Commission `812.68 crore and twelfth finance commission `3254.51 crore received by Kerala. Which covers comes to 15.28 per cent in the Eleventh Finance Commission, 19.54 per cent Twelfth Finance Commission transfer grants-in-aid for the Southern states. In Eleventh and Twelfth Finance Commission period the southern states received only 9.01 per cent and 11.67 per cent of grants-in- aid from the total transfer and remaining states received 90.09 per cent and 88.33 per cent of the grants-in-aid from the total transfer of funds. 148

The following table 5.11 presents the share of sharable taxes and duties to the Southern states during the period of Eleventh Finance Commission and Twelfth Finance Commission transfer from the Government of India for the years 2000-01 to 2009-10.

TABLE 5.11 Eleventh and Twelfth Finance Commission transfer - Taxes and Duties

Eleventh finance Twelfth finance commission commission

Share in S.No. States Share in central central taxes Percentage taxes and duties Percentage and duties (` in crore) (` in crore)

1. Tamil Nadu 20264.72 25.56 32552.74 26.81

2. Andhra0Pradesh 28980.25 36.54 45138.68 37.18

3. Karnataka 18552.48 23.39 27361.88 22.54

4. Kerala 11504.04 14.51 16353.21 13.47

Total 79301.49 100.00 121406.51 100.00 Source: Finance Commission Reports, Government of India.

The following points can be taken from the above table 5.11. The highest share in taxes and duties of `28980.25 crore and `45138.68 crore received by Andhra Pradesh through Eleventh Finance Commission and Twelfth Finance Commission for the years 2000-01 to 2009-10. In terms of percentage it comes to 36.54 per cent and 37.18 per cent. The second highest share in taxes and duties of `20264.72 crore and `32552.74 crore received by Tamil Nadu which covers 25.56 per cent and 26.81 per cent of the total. The third highest share in taxes and duties `18552.48 crore and 149

`27361.88 crore received by Karnataka, which covers 23.39 per cent and 22.54 per cent. The lowest share in taxes and duties `11504.04 crore and 16353.21 crore received by Kerala. In terms of percentage it comes to 14.51 per cent and 13.47 per cent. The total share in taxes and duties of Southern states through Eleventh and Twelfth Finance Commission in terms of absolute amount comes to `79301.49 crore and `121406.51 crore. In total transfer of taxes and duties of the Eleventh and Twelfth Finance Commission period of the southern states received 19.52 and 19.08 per cent and all other states in India received 80.48 and 80.92 per cent. 150

The following table 5.12 presents the total transfer of the Tenth, Eleventh and Twelfth Finance Commission to the southern states for the years 1995-96 to 2009-10.

TABLE 5.12 Tenth, Eleventh and Twelfth Finance Commission total transfer to the Southern states

10th finance 11th finance 12th finance S. commission commission commission States % % % No. Total transfers Total transfers Total transfers (` in crore) (` in crore) (` in crore) 1. Tamil Nadu 13360.57 26.89 21601.43 25.52 36688.13 26.57

2. Andhra0Pradesh 18081.54 36.39 31011.18 36.65 50353.26 36.47

3. Karnataka 10520.83 21.18 19691.98 23.27 31416.28 22.75

4. Kerala 7721.81 15.54 12316.72 14.56 19607.72 14.21

Total 49684.75 100.00 84621.31 100.00 138065.39 100.00 Source: Finance Commission Reports, Government of India.

From the above table 5.12 it can be deducted that the highest total share of explained share of total transfer Tenth Finance Commission to Twelfth Finance Commission. Among the four states highest amount received by Andhra Pradesh which is `18081.54 crore, `31011.18 crore and `50353.26 crore respectively interest of percentage it comes 36.39 per cent, 36.65 per cent and 36.47 per cent only. The total transfer in absolute amount comes to `49684.75 crore, `84621.31 crore and `138065.39 crore, received by 10th, 11th and 12th finance commission. The lowest share of 10th finance commission `7721.81 crore, 11th finance commission `12316.72 crore and 12th finance commission `138065.39 crore received by Kerala. It covers 15.54 per cent, 14.56 per cent and 14.21 per cent of the total transfers of 10th finance commission 11th finance commission and 151

Twelfth Finance Commission to the Southern states. All other states received from Tenth to Twelfth Finance Commission are southern states in India, received only 21.9, 19.58 and 18.27 per cent remaining states of India received 78.1, 80.42 and 81.73 per cent.

The following diagram shows the Tenth, Eleventh and Twelfth Finance Commission total transfer to the southern states. 152

Fig.10 Tenth, Eleventh and Twelfth Finance Commission total transfer to the Southern states

40

35

30

25

20 Percentage 15

10

5

0 Tamil Nadu Andhra Pradesh Karnataka Kerala

10th Finance Commission total transfers 11th finance commission total transfers 12th finance commission total transfers

153

The following table 5.13 presents the total fiscal transfer to the southern states for 1995-96 to 1999-2000 during the Tenth Finance Commission period.

TABLE 5.13 Tenth Finance Commission fiscal transfer to Southern states

Transfer S. No. States Percentage (` in crore) 1. Tamil Nadu 13360.57 26.89 2. Andhra Pradesh 18081.54 36.39 3. Karnataka 10520.83 21.18 4. Kerala 7721.81 15.54 Total 49684.75 100.00 Source: Finance Commission Reports, Government of India. The following are the deductions from the above table 5.13. The total fiscal transfers from the government of India to the Southern states in absolute amount comes to `49684.75 crore for the years 1995-96 to 1999- 2000, through the recommendations of the Tenth Finance Commission. The highest total fiscal transfer viz. `18081.54 crore goes to largest state Andhra Pradesh. It covers 36.39 per cent of the total transfers. The second highest fiscal transfer namely `13360.57 crore goes to Tamil Nadu. It covers 26.89 per cent of the total fiscal transfers. The lowest fiscal transfers viz. `7721.81 crore among the Southern states Kerala received which covers only 15.54 per cent of the total transfers. During Tenth Finance Commission only 21.9 per cent of total transfer received by the southern state and remaining 78.1 per cent given to other states of India.

The following diagram shows the Tenth Finance Commission total transfer to southern states. 154

Fig.11 Tenth Finance Commission total transfer to Southern states

Kerala 15.54 Tamil Nadu 26.89

Karnataka 21.18

Andhra Pradesh 36.39

155

The following table 5.14 presents the share of income tax to the southern states from the centre through the recommendations of the Tenth Finance Commission for the years 1995-96 to 1999-2000. TABLE 5.14 Share of income-tax from the centre to the Southern states

Income tax S. No. States Percentage (` in crore) 1. Tamil Nadu 4165.71 27.29 2. Andhra Pradesh 5313.06 34.81 3. Karnataka 3351.02 21.96 4. Kerala 2432.14 15.94 Total 15261.93 100.00 Source: Finance Commission Reports, Government of India. The following are the observation from the above table 5.14. The total income tax share in absolute amount comes to `15261.93 crore through the recommendations of the Tenth Finance Commission for the years 1995-96 to 1999-2000. The highest share of income tax viz. `5313.06 crore received by the largest state Andhra Pradesh which covers 34.81 per cent of the total income tax shares. The second highest share of income tax namely `4165.71 crore received by Tamil Nadu, which covers 27.29 per cent 70 the total income tax shares. The third highest share of income tax viz. `3351.02 crore goes to Karnataka which covers 21.96 per cent of the total income tax shares. The lowest share of income tax `2432.14 crore received by Kerala, which covers only 15.94 per cent of the total shares. The share of income tax from the Southern states in highest ranging from `2432.14 crore to lowest `5313.06 crore. Share of income-tax from the centre to the southern states received 24.31 per cent and remain 75.69 per cent for all other states. 156

The following table 5.15 presents the shares of Southern states in the net proceeds of all sharable union taxes and duties for the years 1995- 96 to 1999-2000 during the Tenth Finance Commission. TABLE 5.15 Share of Excise Duties

S. No. States Excise duties (` in crore) Percentage 1. Tamil Nadu 6801.40 26.63 2. Andhra Pradesh 9291.43 36.39 3. Karnataka 5471.25 21.43 4. Kerala 3970.98 15.55 Total 25535.06 200.00 Source: Finance Commission Reports, Government of India.

The following points can be taken from the above table 5.15. The highest share of excise duties of `9291.43 crore among the southern states. The largest state of Andhra Pradesh through Tenth Finance Commission for the years 1995-96 to 1999-2000. In terms of percentage it comes to 36.39. The second highest excise duties of `6801.40 crore received by Tamil Nadu which covers 26.63 per cent of the total. The third highest share in excise duties of `5471.25 crore received by Karnataka. In terms of percentage, it comes to 21.43. The lowest share in excise duties of `3970.98 crore received by Kerala. In terms of percentage it comes to 15.55. The total share in excise duties for southern state through Tenth Finance Commission in terms of absolute amount comes to `25535.06 crore has been distributed to all the southern states. In total transfer of share in excise duties of the Tenth Finance Commission period the southern states received 20.97 per cent and all other states in India received 79.03 per cent. 157

The following table 5.16 presents the share of southern states in the net proceeds of all grants-in-aid for the years 1995-96 to 1999-2000 during the Tenth Finance Commission.

TABLE 5.16 Grants-in-aid

S. No. States Grants-in-aid (` in crores) Percentage 1. Tamil Nadu 10084.57 27.59 2. Andhra Pradesh 15387.63 42.09 3. Karnataka 2900.00 7.93 4. Kerala 8182.93 22.39 Total 36555.13 100.00 Source: Finance Commission Reports, Government of India.

The following are the deductions from the above table 5.16. 1. The highest share of Tenth Finance Commissions grants-in-aid of `15387.63 crore received by Andhra Pradesh. In terms of percentage it comes to 42.09. 2. The second highest grants-in-aid of `10084.57 crore received by Tamil Nadu. In terms of percentage it comes to 27.59. 3. The third highest grants-in-aid of `8182.93 crore received by Kerala. In terms of percentage it comes to 22.39. 4. The lowest grants-in-aid of `2900.00 crore received by Karnataka. In terms of percentage it comes to 7.93. In terms of absolute amount `36555.13 crore has been distributed to all the southern states. In total transfer of share in grants-in-aid of the Tenth Finance Commission period, the southern states received 15.00 per cent and all other states in India received 85.00 per cent. 158

The following table 5.17 presents the devolution of taxes and duties and deficit grants to the Southern state in Tenth Finance Commission for the years 1995-96 to 1999-2000.

TABLE 5.17 Devolution of taxes and deficit grants to Southern states

Total S. No. States Percentage (` in crore) 1. Tamil Nadu 9323.11 32.48 2. Andhra Pradesh 1821.39 06.35 3. Karnataka 14074.13 49.04 4. Kerala 3482.48 12.13 Total 28701.11 100.00 Source: Finance Commission Reports, Government of India.

The following are the deductions from the above table 5.17. The devolution of taxes and duties and deficit grants from the Government of India to the Southern states in absolute amount comes to `2870.11 crore for the years 1995-96 to 1999-2000 through the recommendations of the Tenth Finance Commission. The highest devolution of taxes and duties and deficit grants viz. `14074.13 crore goes to largest state Karnataka. It covers 49.04 per cent of the devolution of taxes and duties and deficit grants. The second highest devolution of taxes and deficit grants `9323.11 crore goes to Tamil Nadu. It covers 32.48 per cent of the deficit grants. The lowest devolution of taxes and duties and deficit grants viz. `1821.39 crore from the Southern state goes to Andhra Pradesh. It covers only 06.35 per cent of the devolution of taxes and duties and deficit grants. 159

The following table 5.18 presents the share of sharable taxes and duties from the Southern states for the years 1995-96 to 1999-2000, through the recommendations of the Tenth Finance Commission. The sharable taxes and duties includes, income taxes, basic excise duties, additional duties of excise and tax on railway passenger fares.

TABLE 5.18 Taxes and Duties

Income tax and duties Tax on Basic Additional States Income railway excise duties of Total Percentage tax passenger duties excise fares Tamil Nadu 4165.71 6801.40 1532.73 122.70 12622.54 27.32

Andhra0Pradesh 5313.06 9291.43 1562.90 158.55 16325.94 35.34

Karnataka 3351.02 5471.25 1147.99 64.38 10034.64 21.72

Kerala 2432.14 3970.98 747.48 66.40 7217.00 15.62

Total 15261.93 25535.06 4991.01 412.03 46200.12 100.00 Source: Finance Commission Reports, Government of India.

The following are the inferences of the above table 5.18. The shares of total sharable taxes and duties to the states for the years 1995-96 to 1999-2000, through the recommendations of the Tenth Finance Commission in absolute amount comes to `46200.12 crore. The highest amount of transfer of taxes and duties of `16325.94 crore goes to the largest state Andhra Pradesh. It covers 35.34 per cent of the total transfers of taxes and duties. The second highest amount of transfer of taxes and duties of `12622.54 crore goes to Tamil Nadu. It covers 27.32 per cent of the total transfer of the taxes and duties. The third highest amount transfer to Karnataka `10034.64 crore it covers 21.72 per cent of the total transfer 160 of taxes and duties. The lowest transfer of taxes and duties goes to Kerala `7217.00 crore which covers 15.62 per cent of the total transfers of taxes duties to the Southern states. During Twelfth Finance Commission only 22.38 per cent of share of sharable taxes and duties received by the southern states and remaining 77.62 given to other states of India.

The following figure shows the Taxes and duties. 161

Fig.12 Taxes and Duties

Kerala 15.62 Tamil Nadu 27.32

Karnataka 21.72

Andhra Pradesh 35.34

162

The following table 5.19 presents the grants-in-aid revenue of the states from the Southern states through recommendations of the Tenth Finance Commission for the years 1995-96 to 1999-2000. The grants-in- aid transfer from the centre to the states for the purpose of clear to the non-plan revenue deficit, for upgradation, to solve the special problem, to meet out the relief expenditure states and for development of local bodies.

TABLE 5.19 Grants-in-aid

Grants-in-aid Non States plan Up Special Local Relief Total Percentage revenue gradation problems bodies expenditure deficit Tamil Nadu 0.00 40.84 60.00 402.86 234.33 738.03 21.18

Andhra0Pradesh 686.45 88.88 65.00 424.94 490.33 1755.60 50.38

Karnataka 0.00 0.00 29.00 291.96 165.23 486.19 13.95

Kerala 0.00 29.83 52.00 204.24 218.74 504.81 14.49

Total 686.45 159.55 206 1324.00 1108.63 3484.63 100.00 Source: Finance Commission Reports, Government of India.

The following are the deduction of the above table 5.19. The total grants-in-aid revenue in absolute amount comes to `3483.63 crore. The total transfers through the recommendation of the Tenth Finance Commission for the years 1995-96 to 1999-2000. The highest grants-in- aid revenue viz. `1755.60 crore goes to Andhra Pradesh, which covers 50.38 per cent of the total grants-in-aid. The second highest grants-in-aid revenue of `738.03 crore goes to Tamil Nadu, which covers 21.18 per cent of the total grants-in-aid of the southern state. The lowest grants-in- aid viz. `486.19 crore goes to Karnataka which covers only 13.95 per cent of the total grants-in-aid among the Southern states. In total transfer of 163 grants-in-aid of the Tenth Finance Commission period of the southern states received namely 17.16 per cent all other states in India received namely 82.84 per cent.

The following diagram shows the Tenth Finance Commission Grants-in-aid. 164

Fig.13 Grants-in-aid

Kerala 14.49 Tamil Nadu 21.18

Karnataka 13.95

Andhra Pradesh 50.38

165

The following table 5.20 presents the Ninth Finance Commission total transfer to the Southern states for the years 1990-1991 to 1994-1995. TABLE 5.20 Ninth Finance Commission total transfers to Southern states

Total S. No. States Percentage (` in crore) 1. Tamil Nadu 6198.00 29.58 2. Andhra Pradesh 7239.00 34.56 3. Karnataka 4063.00 19.40 4. Kerala 3448.00 16.46 Total 20948.00 100.00 Source: Finance Commission Reports, Government of India. The following are the deductions from the above table 5.20. The total fiscal transfers from the Government of India to the Southern states in absolute amount comes to `20948.00 crore for the years 1990-91 to 1999-2000 through the recommendations of the Ninth Finance Commission. The highest total fiscal transfers viz. `7239.00 crore goes to the largest state Andhra Pradesh. It covers 34.56 per cent of the total transfers. The second highest fiscal transfer namely `6198.00 crore goes to Tamil Nadu. It covers 29.58 per cent of the total fiscal transfer. The third highest fiscal transfers viz. `4063.00 crore goes to Karnataka. It covers 19.40 per cent of the total transfers. The lowest fiscal transfer viz. `3448.00 crore from the Southern state goes to Kerala. It covers only 16.46 per cent of the total transfers. In total transfer of the Ninth Finance Commission period of the southern states received 19.97 per cent and all other states in India received 80.93 per cent. The following diagram shows the Ninth Finance Commission total transfers to southern states. 166

Fig.14 Ninth Finance Commission total transfers

Kerala 16.46

Tamil Nadu 29.58

Karnataka 19.4

Andhra Pradesh 34.56

167

The following table 5.21 presents the percentage shares of states in the net proceeds of income tax assigned to the Southern states as recommended by the Ninth Finance Commission for the period 1990-91 to 1994-95. TABLE 5.21 Income Tax share of Southern states

S.No. States Share (%) 1. Tamil Nadu 7.931 2. Andhra Pradesh 8.208 3. Karnataka 4.928 4. Kerala 3.729 Total 24.796 Other states75.204 Grand Total100.00 Source: Finance Commission Reports, Government of India. The following are the inferences of the above table 5.21. The table gives the percentage shares of the net proceeds of income tax through the recommendations of the Ninth Finance Commission for the years 1990-91 to 1994-95. The highest percentage share of income tax of 8.208 per cent goes to Andhra Pradesh. The lowest percentage share of income tax viz. 3.729 per cent goes to Kerala. Tamil Nadu received 7.931 percentage share of income tax. The total percentage of income tax to the southern states is 24.796 per cent. All Other states centre 75.204 percentage share of income tax. 168

The following table 5.22 presents the percentage shares of excise duties to the Southern states as recommended by the Ninth Finance Commission for the period 1990-91 to 1994-95.

TABLE 5.22 Share of Excise duties of Southern states

S. No. States Share (%) 1. Tamil Nadu 6.379 2. Andhra Pradesh 7.170 3. Karnataka 4.104 4. Kerala 3.087 Total 20.74 Other states79.26 Grand Total100.00 Source: Finance Commission Reports, Government of India.

The following are the deductions deducted from the above table 5.22. It gives the percentage share of excise duties to the southern states of recommended by the Ninth Finance Commission for the period 1990-91 to 1994-95. The ranging from 3.087 per cent to 7.170 per cent. The highest percentage of the share of union excise duties viz. 7.170 per cent goes to Andhra Pradesh. The lowest percentage share of union excise duties 3.087 per cent goes to Kerala. Tamilnadu received 6.379 per cent share of union excise duties. The total share of percentage to the Southern states union excise duties 20.74 per cent. All other states share of union excise duties comes to 79.26 per cent. 169

The following table 5.23 presents the percentage shares of Southern states in the net proceeds of all sharable union taxes and duties through the recommendations of Ninth Finance Commission for the years 1990-91 to 1994-95. TABLE 5.23 Taxes and Duties of Southern states

S. No. States Share (%) 1. Tamil Nadu 5.385 2. Andhra Pradesh 1.701 3. Karnataka 4.930 4. Kerala 3.057 Total 15.073 Other states84.927 Grand Total100.00 Source: Report of the Finance Commission Government of India.

The following inferences are taken from the above table 5.23. The table gives the percentage shares of the net proceeds of sharable union taxes and duties. The highest percentage share of taxes and duties namely 5.385 per cent goes to Tamil Nadu. The second highest percentage share of taxes and duties namely 4.930 per cent goes to Karnataka. The lowest percentage share of taxes and duties viz. 1.701 per cent goes to Andhra Pradesh. The total percentage of 15.073 share of net proceeds of sharable taxes and duties distributed to southern states and remaining 84.927 per cent to all other states of India.

The following diagram shows the Taxes and duties of southern states. 170

Fig.15 Taxes and Duties of Southern states

Kerala 3.057

Tamil Nadu 5.385

Karnataka 4.93 Andhra Pradesh 1.701

171

The following table 5.24 presents the grants-in-aid revenues of the Southern states as recommended by the Ninth Finance Commission for the years 1990-91 to 1994-95.

TABLE 5.24 Grants-in-aid

Total S. No. States Percentage (` in crore) 1. Tamil Nadu 43.79 5.49 2. Andhra Pradesh 341.25 42.79 3. Karnataka - - 4. Kerala 412.54 51.72 Total 797.58 100.00 Source: Finance Commission Reports, Government of India.

The following are the observations from the above table 5.24, Southern states received grants-in-aid revenue from the during the Ninth Finance Commission for the years 1990-91 to 1994-95. The total grants- in-aid to the southern states was `797.58 crore during the Ninth Finance Commission period. The highest amount of `412.54 crore grants-in-aid revenue received by Kerala which covers 51.72 per cent of the total. The second highest amount of `341.25 crore of grants-in-aid revenue received by Andhra Pradesh which covers 42.79 per cent of the total. The lowest amount of `43.79 crore was received by Tamil Nadu, which covers 5.49 per cent of the total grants-in-aid transfer of the Southern states. 172

The following table 5.25 present the finance commission-wise Ninth to Twelfth Commission percentage of total central fiscal transfers to state recommended for the year 1990-91 to 2009-10. TABLE 5.25 Finance Commission total central transfer to States

Finance General Special S. No. Total Commission Category states Category states 1. Ninth 85.2 14.8 100 2. Tenth 84.7 15.3 100 3. Eleventh 85.4 14.6 100 4. Twelfth 86.0 14.0 100 Source: Finance Commission Reports, Government of India. The above table shows the finance commission-wise total transfer from centre to the state as per the recommendations of Ninth Finance Commission to twelfth finance commission. The total finance commission transfer of the special category states was the order increased from 14.8 per cent in the first finance commission to 14.0 per cent in Twelfth Finance Commission. The total transfer of general category states have increased from 85.2 in Ninth Finance Commission and 86.0 per cent in Twelfth commission. Among the general category states, the low income states received the higher level share from the another income states received the lower level of share from the centre. Among the general category states Uttar Pradesh and Bihar receive the highest share of 17.8 per cent and 10.1 per cent respectively during the Twelfth Finance Commission. In case of special category states Jammu and Kashmir and Uttaranchal received the higher share of 2.7 per cent and 1.6 per cent respectively during twelfth finance commission period. The following diagram shows the Finance Commission total central transfer to states. 173

Fig.16 Finance Commission total Central transfer to states

90

80

70

60

50

40 Percentage

30

20

10

0 Ninth Tenth Eleventh Twelfth

General category states Special category states

174

The following table 5.26 presents the share in taxes and grants-in- aid for the years 1990-91 to 2009-10. TABLE 5.26 Shares in Taxes and Grants-in-aid

Share in Grants-in- S. Finance taxes Percentage aid Percentage No. Commission (` in crore) (` in crore) 1. Ninth 56284 89.05 70135 10.95 2. Tenth 190520 90.20 20585 9.08 3. Eleventh 310721 84.20 58335 15.08 4. Twelfth 670274 82.05 142640 17.05 Source: Finance Commission Reports, Government of India. The above table 5.26 shows the share in taxes and grants-in-aid of various finance commission like Ninth to Twelfth Finance Commission it shows that flexible changes in the percentage of share in taxes and grants- in-aid. The state share in taxes `56284 crore. Which covers of 89.05 per cent and grants-in-aid from `70135 crore goes to Ninth Finance Commission period. In terms of percentage comes to 10.95 percent. The Tenth Finance Commission share in taxes and grant-in-aid from the centre namely viz. ` 190520 crore goes to Tenth Finance Commission which covers 90.02 per cent. The grants-in-aid from ` 20585 crore goes to Tenth Finance Commission which covers 9.08 per cent. The Twelfth Finance Commission share in taxes and grants-in-aid to the centre viz., ` 670274 crore. In terms of percentage it comes to 82.05 per cent. The grants-in-aid from `42640 crore goes to Twelfth goes to Twelfth Finance Commission which covers 17.05 per cent of share in taxes and grants-in-aid to the Ninth Finance Commission to Twelfth Finance Commission. 175

The following table 5.27 presents the Southern states share in total grants-in-aid recommended by the Ninth, Tenth, Eleventh and Twelfth Finance Commission for the years 1990-91 to 2009-10. TABLE 5.27 Share in total Grants-in-aid

State Ninth Tenth Eleventh Twelfth Tamil Nadu 1.6 3.6 2.3 2.9 Andhra0Pradesh 3.2 8.6 3.5 3.7 Karnataka 0.7 2.4 1.9 2.8 Kerala 1.7 2.5 1.4 2.3 Total 7.2 17.1 9.1 11.7 Other states 92.8 82.9 90.9 88.3 Grand total 100.00 100.00 100.00 100.00 Source: Finance Commission Reports, Government of India. The following points are taken from the above table 5.25. It gives the percentage share total grants-in-aid in the net proceeds of Ninth, Tenth, Eleventh and Twelfth Finance Commissions during the period 1990-91 to 2009-10. The highest percentage share in total grants-in-aid 8.6 percentage goes to Andhra Pradesh in Tenth Finance Commission. The second highest percentage share of 3.6 per cent in total grants-in-aid goes to Tamil Nadu in Tenth Finance Commission. Twelfth finance commission highest share in total grants-in-aid 3.7 percentage goes to Andhra Pradesh. The lowest percentage share in total grants-in-aid Ninth Finance Commission 0.7 percentage goes to Karnataka and Twelfth Finance Commission 2.3 percentage goes to Kerala. The total percentage of Ninth Finance Commission 7.2 share of net proceeds of grants-in-aid distributed to southern states and remaining 92.8 per cent to all other states of India. 176

STATISTICAL INFERENCES Hypothesis 1 There is an increasing trend on the share of the taxes and duties to the southern states. TABLE 5.28 Taxes and Duties – Tamil Nadu

Finance Commission y x b x2 xy a bx Yt

10th 6801 -1 12876 1 -6801 19873 -12876 69997

11th 20265 0 12876 0 0 19873 0 19873

12th 32553 1 12876 1 32553 19873 12876 32749

Total 59619 2 25752 59619 Yt = 19873 +12876x The statistical table 5.31 explains the taxes and duties of Tamil Nadu has an upward trend. The predicted taxes and duties for 13th finance commission is `45625 crores. This indicates the taxes and a duty to Tamil Nadu has an increasing trend. The following trend diagram is also shown the fact.

35000 30000 25000 20000 15000 10000 5000 0 10th 11th 12th

Y Yt

177

TABLE 5.29 Taxes and Duties - Andhra Pradesh

Finance Commission y x b x2 xy a bx Yt

10th 9291 -1 17924 1 -9291 27803.3 -17924 9879.33

11th 28980 0 17924 0 0 27803.3 0 27803.3

12th 54139 1 17924 1 53139 27803.3 17924 45727.3

Total 83410 2 35848 83410 Yt = 27803.3 + 17924x

The statistical table 5.32 shows the taxes and duties of Andhra Pradesh has in increasing trend. The anticipated taxes and duties for 13th finance commission is `63651.3 crores. This indicates that taxes and duties to Andhra Pradesh has an upward trend. The following trend diagram is also shown the fact.

50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 10th 11th 12th

Y Yt

178

TABLE 5.30 Taxes and Duties - Karnataka

Finance y x b x2 xy a bx Yt Commission

10th 5471 -1 10945.5 1 -5471 17128.3 -10946 6182.83

11th 18552 0 10945.5 0 0 17128.3 0 17128.3

12th 27362 1 10945 1 27362 17128.3 10945.5 28073.8

Total 51385 2 21891 51385 Yt = 17128.3 + 10945.5x

The statistical table 5.30 shows the taxes and duties of Karnataka has an increasing trend. The anticipated taxes and duties for 13th finance commission is `39019.3 crores. This indicates that taxes and duties to Karnataka has up upward trend. The following trend diagram is also shown the fact.

30000

25000

20000

15000

10000

5000

0 10th 11th 12th

Y Yt

179

TABLE 5.31 Taxes and Duties - Kerala

Finance y x b x2 xy a bx Yt Commission

10th 3971 -1 6191 1 -3971 10609.3 -6191 4418.33

11th 11504 0 6191 0 0 10609.3 0 10609.3

12th 16353 1 6191 1 16353 10609.3 6191 16800.3

Total 31828 2 21382 31828 Yt = 10609.3 + 6191x

The statistical table 5.34 explains the taxes and duties of Kerala has an increasing trend. The predicted taxes and duties for 13th finance commission is `22991.3 crores. This indicates that taxes and duties to Kerala has an upward trend. From the statistical tables 1, 2, 3 and 4 reveals that the taxes and duties to the southern states show on increasing trends. Therefore first hypothesis is accepted.

18000 16000 14000 12000 10000 8000 6000 4000 2000 0 10th 11th 12th

Y Yt

180

Hypothesis 2 Grants-in-aid to the southern states show on increasing trends. TABLE 5.32 Grants-in-aid –Tamil Nadu

Finance y x b x2 xy a bx Yt Commission

9th 44 -15 1350.94 2.25 -66 1404.25 -20264 -622.16

10th 101 -0.5 1350.94 0.25 -50.5 1404.25 -675.47 728.78

11th 1337 0.5 1350.94 0.25 668.5 1404.25 675.47 2079.72

12th 4135 1.5 1350.94 2.25 6202.5 1404.25 2026.41 3430.66

Total 5617 5 6754.5 5617 Yt = 1404.25 + 1350x

The grant in aid of Tamil Nadu has an increasing trend. The anticipated grants-in-aid for 13th finance commission is `4781.6 crores. This indicates that grants-in-aid to Tamil Nadu has an increasing trend. The following trend diagram is also shown the fact.

5000

4000

3000

2000

1000

0 9th 10th 11th 12th ‐1000

Y Yt

181

TABLE 5.33 Grants-in-aid –Andhra Pradesh

Finance y x b x2 xy a bx Yt Commission

9th 341 1.5 1649.9 2.25 -511.5 1935.25 -2026.4 -91.16

10th 154 -0.5 1649.9 0.25 -77 1935.25 -675.47 1259.78

11th 2031 0.5 1649.9 0.25 1015.5 1935.25 675.47 2610.72

12th 5215 1.5 1649.9 2.25 7822.5 1935.25 2026.41 3961.66

Total 7741 5 8249.5 7741 Yt = 1935.25 + 1649.9x

The grants-in-aid of Andhra Pradesh has an increasing trend. The estimated grants-in-aid for 13th Finance Commission is `5611.56 crores. This indicates that grants-in-aid to Andhra Pradesh has an increasing trend. The following trend diagram is also shown the fact.

6000

5000

4000

3000

2000

1000

0 9th 10th 11th 12th ‐1000

Y Yt

182

TABLE 5.34 Grants-in-aid - Karnataka

Finance y x b x2 xy a bx Yt Commission

9th 0 -1.5 1327.3 2.25 0 1305.75 -1991 -685.2

10th 29 -0.5 1327.3 0.25 -14.5 1305.75 -663.65 642.1

11th 1140 0.5 1327.3 0.25 570 1305.75 663.65 1969.4

12th 4054 1.5 1327.3 2.25 6081 1305.75 1990.95 3296.7

Total 5223 5 6636.5 5223 Yt = 1305.75 + 1327.3x

The above statistical table 5.37 illustrate the grants-in-aid of Karnataka has an increasing trend. The predicted grants-in-aid for 13th finance commission is `4624 crores. This indicates that grants-in-aid to Karnataka has an increasing trend. The following trend diagram is also shown the fact.

5000

4000

3000

2000

1000

0 9th 10th 11th 12th ‐1000

Y Yt

183

TABLE 5.35 Grants-in-aid - Kerala

Finance y x b x2 xy a bx Yt Commission

9th 412 -1.5 926 2.25 -618 1140.5 -1389 -248.5

10th 82 -0.5 926 0.25 -41 1140.5 -463 677.5

11th 813 0.5 926 0.25406.5 1140.5 463 1603.5

12th 3255 1.5 926 2.25 4882.5 1140.5 1389 2529.5

Total 4562 5 4630 4562 Yt = 1305.75 + 1327.3x The above statistical table 5.38 illustrate the grants-in-aid of Kerala has an upward trend. The predicted grants-in-aid for 13th finance commission is `3455.5 crores. This indicates that grants-in-aid to Karnataka has an increasing trend. From the statistical tables 5.35, 5.36, 5.37 and 5.38 reveals that the grants-in-aid to the southern states shown an increasing trends. Therefore second hypothesis is accepted. The following trend diagram is also shown the fact.

3500 3000 2500 2000 1500 1000 500 0 ‐500 9th 10th 11th 12th

Y Yt

184

Hypothesis: 3 To study the relationship between general category states and southern states on receiving central fund regression analysis was used.

Variables entered/removedb

Model Variables entered Variables removed Method 1. Generala Enter

a. All requested variables entered. b. Dependent variable: Southern

Model Summary

Model R R Square Adjusted R Square Std. Error of the estimate 1. .912a .832 .748 6400.68009 a. Predictors (Constant), general

ANOVAb

Model Sum of squares df Mean square F Sig. 1. Regression 4.055EB 1 4.055EB 9.897 .088a Residual 8.194E7 2 4.097E7 Total 4.874E8 3

a. Predictors (Constant), general b. Dependent variable: Southern

185

Coefficientsa

Unstandardized Standardized Mean Model coefficients coefficients square t Sig. B Std. Error Beta 1. (Constant) 15179.437 6929.876 .912 2.190 .160 Genera .480 .153 .912 3.146 .088

a. Dependent variable: Southern

It is observed that there is high positive correlation (R = 0.92) between general category states and southern states on receiving central fund. t-statistic and F – statistic values indicate that the correlation is significant one. It is inferred that there is a positive correlation between general category states and southern states on receiving central fund. Therefore the third hypothesis is proved/accepted.

Chapter VI FINDINGS, SUGGESTIONS AND CONCLUSIONS

The following are the leading findings and conclusions of the study as well as the suggestions.

The total Twelfth Finance Commission transfers to all the 28 states from the government of India, in terms of absolute amount comes to `755451.16 crore. Out of which `646772.79 crore has been distributed to 17 general category states which covers 85.61 per cent of the total transfer and the remaining `108678.37 crore has been distributed to 11 special category states which covers 14.39 percentage of the total transfer. The highest share of `133471.45 crore goes to the largest state Uttar Pradesh which covers 17.66 per cent of the total transfers. The second largest share of total transfer `75646.83 crore goes to Bihar which covers 10.01 per cent of the total transfers. The lowest share of `1829.14 crore goes to Sikkim which covers 0.24 per cent of the total transfer.

The total transfer of share in central taxes and duties of Twelfth Finance Commission comes to `622113.04 crore for the years 2005 to 2010 out of which `572489.59 crore goes to 17 general category states which covers 93.03 percentage of the total transfers and the remaining `49622.45 crore goes to 11 special category states, which covers 7.97 percentage of the total. The higher share of central taxes and duties of `118209.45 crore goes to the largest state Uttar Pradesh which covers 19.00 per cent of the total. The second highest share of central taxes and 187 duties of `67671.04 crore goes to Bihar which covers 10.88 per cent of the total share in central taxes and duties. The lowest share of central taxes and duties of `1392.94 crore goes to Sikkim which covers only 0.23 per cent of the total.

The 17 general category states that is developed states which contribute higher revenue to the centre in the form of taxes and duties receive the less grants-in-aid revenue from the centre viz. 58.38 per cent during the XII Finance Commission period. The special category states which contribute comparatively less revenue to the centre in the form of taxes and duties receive highest grants-in-aid revenue from the centre namely 41.62 per cent. The highest grants-in-aid revenue of `15262.00 crore received by Uttar Pradesh in terms of percentage it comes to 10.70. The lowest grants-in-aid revenue of `135.39 crore received by Goa, in terms of Percentage it comes to 0.09. The 17 general category states received the grants-in-aid revenue of `83283.45 crore, whereas the 11 special category states received `59356.34 crore. The Jammu and Kashmir, the most disturbed states of India received the second larger amount of `13438.57 crore, which covers 9.42 per cent of the total grants- in-aid. The small states like Goa and Sikkim received the lowest grants- in-aid revenue of `135.39 crore and `436.20 crore respectively. It can be concluded from the above inferences that the finance commission of India follows the equitarion criteria than the efficient criteria for distribution of grants from the centre to the states hence backward special category states received more grants than developed general category states.

188

The total grants-in-aid transfer to the states during the Twelfth Finance Commission in absolute amount comes to `142639.60 crore. The highest amount transfers to the heads of non-plan revenue deficit in absolute amount it comes to `56855.87 crore in terms of percentage it comes to 39.85. The second highest amount goes to local bodies namely `25000.00 crore in terms of percentage it comes to 17.52. A transfer of `10171.65 crore goes to education in terms of percentage it comes to 7.13. The third highest transfer of `16000.00 crore and `15000.00 crore goes to natural calamity relief and maintenance of roads and bridges respectively. The lowest transfer of `1000.00 crore and `625.00 crore goes to maintenance of forests and heritage conservation respectively.

The total grants-in-aid for maintenance of roads and bridges transfer to the southern states during the Twelfth Finance Commission in absolute amount comes to `15000.00 crore. The highest amount transfer of grants-in-aid for maintenance of roads and bridges viz. `2403.16 crore goes to Uttar Pradesh. In terms of percentage it comes to 16.02. The second highest transfer of `1475.08 crore goes to Orissa. In terms of percentage it comes to 9.83. The lowest transfer of grants-in-aid for maintenance of roads and bridges namely `18.64 crore goes to Sikkim. In terms of percentage it comes to 0.12. A transfer of `1214.40 crore of grants-in-aid for maintenance of roads and bridges goes to Tamil Nadu in terms of percentage it comes to 8.09.

The shares of states in allocation of total actual amount to Panchayats comes to `19997 crore. The shares of state allocation to 189

Municipalities the actual amount comes to `5000 crore during the period of 2005-06 to 2009-10. The higher share of states allocation to Panchayats `2925 crore goes to the largest state Uttar Pradesh which covers 14.627 per cent of the total. Share of state allocation to Municipalities higher share in `791 crore goes to Maharashtra. It comes to 15.835 per cent.

The second highest share of states allocation to Panchayats `1983 crores goes to Maharashtra which covers 9.92 per cent. Share of state allocation to Municipalities of `572 crores goes to Tamil Nadu. It covers 11.45 per cent of the total. The lowest share of states allocation to Panchayats `13 crore goes to Sikkim. It covers 0.065 per cent. Share of state allocation to Municipalities of `1 crore goes to Sikkim. It covers 0.020 per cent. The share of state allocation of panchayats ranging from `13 crore to `2925 crore. The share of state allocation to Municipalities ranging from `1 crore to `791 crore.

The highest total share of `78509.30 crore received by Uttar Pradesh through the eleventh finance commission transfer from the centre for the years 2000-01 to 2004-05. In terms of percentage it comes to 18.32. The total transfer to all the 25 states in absolute amount comes to `428575.45 crore. The low income special category states receive more funds from the centre than the developed general category states. The lowest share of `821.56 crore received by Goa, which covers only 0.19 per cent of the total transfers of eleventh finance commission.

190

The total fiscal transfers from the government of India to the 25 states in absolute amount comes to `226634.30 crore for the years 1995- 96 to 1999-2000, through the recommendations of the tenth finance commission. The highest total fiscal transfers from the centre viz. `36158.91 crore goes to the largest state Uttar Pradesh. It comes to 15.95 per cent of the total transfers. The second highest fiscal transfer namely `24655.56 crore goes to Bihar. It covers 10.88 per cent of the total fiscal transfer from the centre. The third highest fiscal transfers viz. `18081.54 crore goes to Andrha Pradesh. It covers 7.97 per cent of the total transfers from the centre. The lowest fiscal transfers viz. `622.25 crore from the centre goes to Goa. It covers only 0.27 per cent of the total transfers. Sikkim received `689.89 crore from the centre. It covers only 0.31 per cent of the total fiscal transfers.

The total fiscal transfers from the government of India to the 28 states in absolute amount comes to `108364.00 crore for the years 1990- 91 to 1994-95, through the recommendations of the ninth finance commission. The highest total fiscal transfers from the centre viz. `17449.00 crore goes to the largest state Uttar Pradesh, it covers 16.1 per cent of the total transfers. The second highest fiscal transfer namely `11176.00 crore goes to Bihar, it covers 10.3 per cent of the total fiscal transfer from the centre. The third highest fiscal transfer viz. `7843.00 crore goes to Madhya Pradesh, it covers 7.3 per cent of the total transfers from the centre. The lowest fiscal transfers viz. `252.00 crore from the centre goes to Sikkim. It covers only 0.2 per cent of the total transfers. 191

Goa received `509.00 crore from the centre, it covers only 0.5 per cent of the total fiscal transfers.

The percentage share in total grants-in-aid from the centre Ninth Finance Commission share in total grants-in-aid the highest percentage comes to 12.2 per cent. The Twelfth Finance Commission highest percentage comes to 10.7 per cent, Tenth Finance Commission highest percentage comes to 13.0 per cent goes to Uttar Pradesh. The second highest share in total grants-in-aid Ninth Finance Commission the percentage comes to 9.5 percent goes to Jammu and Kashmir. Eleventh finance commission grants-in-aid the percentage comes to 8.3 per cent goes to Himachal Pradesh. Twelfth finance commission grants-in-aid percentage comes to 9.4 per cent goes to Jammu and Kashmir. The third highest share in total grants-in-aid percentage of Ninth Finance Commission comes to 6.9 per cent goes to Assam. The Twelfth Finance Commission grants-in-aid percentage comes to 7.9 per cent goes to Himachal Pradesh. The lowest percentage of Ninth Finance Commission share in total grants-in-aid comes to 0.7 per cent goes to Sikkim. Twelfth Finance Commission share in total grants-in-aid comes to 0.3 per cent goes to Sikkim. Ninth, Tenth, Eleventh and Twelfth Finance Commission highest percentage of eleventh finance commission grants-in-aid comes to 19.8 per cent, goes to Jammu and Kashmir.

The percentage transfers have increased from `945.83 to `4011.05 from the Ninth Finance Commission period to the Twelfth Finance Commission period. It represents an increase of 4.24 times. The finance 192 commission per capita devolution of general category states has increased from `231.8 to `1119.4 form the ninth finance commission period to the Twelfth Finance Commission period. It represents an increase of 4.83 times. The per capita transfer of special category states has increased from `714.0 to `2891.7 between the Ninth Finance Commission period and the Twelfth Finance Commission period. It represents an increase 4.05 times.

The highest per capita transfer goes to Mizoram in all cases. The lowest per capita transfers goes to Haryana for all the finance commission except the Twelfth Finance Commission. The fifteen general category states per capita transfer in terms of percentage comes to 24.51, whereas the 10 special category states per capita transfer comes to 75.49 per cent of the total per capita devolution of all the 25 states during the Ninth Finance Commission period. The per capita transfers of the special category states is 3.41 times higher than the general category states during the Eleventh Finance Commission period.

The per capita finance commission transfer to the fifteen general category states in terms of percentage comes to 25.38, whereas the ten special category states it comes to 74.62 per cent of the total per capita transfer of all the 25 states during the Tenth Finance Commission period. The per capita transfer of special category states is 2.94 times higher than the general category states. The per capita transfer of seventeen general category states in terms of percentage it comes to 28.41 and 27.91 during the Eleventh and Twelfth Finance Commission period respectively, 193 whereas the per capita transfer of the eleven special category states comes to 71.59 and 72.09 per cent respectively.

The per capita transfer of special category states is 2.52 times and 2.58 times higher than the general category states during the eleventh and Twelfth Finance Commission period respectively.

Among the general category states Goa has always got the highest per capita even though it is highest per capita income state. This is because of cost considerations as Goa is a very small state in terms of area. Leaving Goa, within the remaining group of general category states, the highest per capita transfers goes to Orissa in the case of Ninth and Twelfth Finance Commission and Bihar in the case of Eleventh Finance Commission. The relativity between the highest and the lowest per capita transfers in the group of general category states excluding Goa has been as follows. Ninth Finance Commission (2. 2) Tenth Finance Commission (1.98), Eleventh Finance Commission (3.24) and Twelfth Finance Commission (2.67).

The twelfth finance commission total transfer to the southern states from the Government of India in terms of absolute amount comes to `138065.39 crore. The highest share of `50353.26 crore goes to the largest state Andhra Pradesh which covers 36.47 per cent of the total transfers. The second highest share of `36688.13 crore has received by Tamil Nadu, which covers 26.57 per cent of the total transfers. The lowest share of `19607.72 crore has received Kerala which covers 14.21 per cent 194 of the total transfers. In total transfer of the Twelfth Finance Commission period, Southern states received viz. 18.27 per cent and over states in India received 81.73 per cent.

The highest share of Twelfth Finance Commission transfer taxes and duties of `45138.68 crore among the southern states. The largest state of Andhra Pradesh which covers only 37.18 per cent of the total. The second highest share of taxes and duties of `32552.74 crore has received by Tamil Nadu which covers 26.81 per cent of the total share in taxes and duties. The lowest share of taxes and duties of `16353.21 crore has received by Kerala which covers only 13.47 per cent of the total. The total transfer of share in taxes and duties of Twelfth Finance Commission for southern states in absolute amount. comes to `121406.51 crore for the years 2005-06 to 2009-10. In total transfer of taxes and duties the southern states received 19.08 per cent and all other states in India received 80.92 per cent of the Twelfth Finance Commission period.

The highest share of Twelfth Finance Commission transfer grants- in-aid of `5214.58 crore received by Andhra Pradesh. In terms of percentage it comes to 31.30. The second highest grants-in-aid of `4135.39 crore received by Tamil Nadu. In terms of percentage it comes to 24.82. The third highest grants-in-aid of `4054.40 crore received by Karnataka. In terms of percentage it comes to 24.34. The lowest grants-in- aid of `3254.51 crore received by Kerala. In terms of percentage it comes to 19.54. In terms of absolute amount of `16658.88 crore has been distributed to all the southern states. In total transfers of share of grants- 195 in-aid in the Twelfth Finance Commission period, the southern states received 11.67 per cent and all other states in India received 88.33 per cent.

The highest share of Twelfth Finance Commission transfer state allocation among the southern states for Panchayats `1587 crore received by the largest state Andhra Pradesh which covers 36.65 per cent. The highest share of state allocation among the southern states received by the municipalities `572 crore goes to Tamil Nadu which covers 40.34 per cent share of state allocation. The second highest share of state allocation among the southern states of Panchayats `985 crore receivd Kerala which covers 22.75 per cent. The second highest share of state allocation for municipalities `374 crore goes to Andhra Pradesh which covers only 26.37 per cent share of state allocation. The lowest share of state allocation for Panchayats `870 crore has received Tamil Nadu which covers 20.09 per cent. The lowest share of state allocation among the southern states of municipalities `149 crore received by Kerala which covers 10.51 per cent of the total. The total share of state allocation to the Southern states for Panchayats `4330 crore and for municipalities `1418 crore for the years 2005-06 to 2009-10. In terms of percentage it comes to 21.65 per cent for panchayats and 28.36 per cent for municipalities.

The total grants-in-aid for maintenance of roads and bridges to southern states during the Twelfth Finance Commission in absolute amount comes to `4294.96 crore. The highest amount of grants-in-aid among the southern states for maintenance of roads and bridges `1458.12 196 crore received by Karnataka which covers 33.95 per cent. The second highest transfer of `1214.40 crore received by Tamil Nadu which covers 28.27 per cent. The lowest transfer of Grants-in-aid among the southern states for maintenance of Roads and Bridges `642.32 crore received by Kerala. In terms of percentage it comes to 14.96. A transfer of `980.12 crore goes to Andhra Pradesh in the form of Grants-in-aid for maintenance of Roads and bridges in terms of percentage it comes to 22.82. In total transfer of grants-in-aid for maintenance of roads and bridges of the Twelfth Finance Commission period the southern states received 28.62 per cent and all other states in India received 71.38 per cent.

The highest total share of `31011.18 crore received by Andhra Pradesh through the Eleventh finance commission transfer for the years 2000-01 to 2004-05. Which covers 36.65 per cent. The total transfer in absolute amount comes to `84621.31 crore. The second highest total share of `21601.43 crore received by Tamil Nadu, which covers only 25.52 per cent of the total transfer to the states. The lowest share of `12316.72 crore received by Kerala, which covers 14.56 per cent of the total transfer of Eleventh Finance Commission for southern states. In total transfer of the Eleventh Finance Commission period the southern states received 19.58 and all other states in India received 80.42 per cent.

The highest share of taxes and duties of `28980.25 crore among the southern states. The largest state Andhra Pradesh through Eleventh Finance Commission for the years 2000-01 to 2004-05. In terms of percentage it comes to 36.54. The second highest share in taxes and duties 197

`20264.72 crore received by Tamil Nadu which covers 25.56 per cent of the total. The third highest share in taxes and duties of `18552.48 crore received by Karnataka. In terms of percentage it comes to 23.39. The lowest share in taxes and duties of `11504.04 crore received by Kerala. In terms of percentage it comes to 14.51. The total share in taxes and duties for southern state through Eleventh Finance Commission in terms of absolute amount comes to `79301.49 crore. In total transfer of share in taxes and duties of the Eleventh Finance Commission period, the southern states received 19.52 per cent and all over states in India received 80.48 per cent.

The highest share of grants-in-aid of `2030.93 crore received by Andhra Pradesh through the Eleventh Finance Commission transfer for the years 2000-01 to 2004-05. In terms of percentages it comes to 38.17. It is note worthy to note that in case of share in total transfer, Tamil Nadu received only `1336.71 crore. It covers 25.13 per cent of the total and in case of share in taxes and duties. The lowest share in grants-in-aid from the Southern states received by Kerala namely `812.68 crore which covers only 15.28 per cent of the total. In total transfer of grants-in-aid of the Eleventh Finance Commission period of the southern states in India received 9.01 per cent and all other states in India received viz., 90.09 per cent.

The sharable taxes and duties and grants-in-aid to the southern states for the years 2000-01 to 2004-05, through the recommendations of the Eleventh Finance Commission amount in absolute amount received 198

`79301.49 crore and `5319.82 crore. The highest sharable taxes and duties and grants-in-aid namely `28980.25 crore and `2030.93 crore goes to the largest state Andhra Pradesh. It covers 36.54 and 38.17 per cent of the sharable taxes and duties and per cent of the sharable taxes and duties and grants-in-aid. The second higher sharable taxes and duties and grants- in-aid namely `20264.72 crore and `1336.71 crore goes to Tamil Nadu. It covers 25.56 and 25.13 per cent of the sharable taxes and duties and grants-in-aid. The lowest sharable taxes and duties and grants-in-aid `11504.04 crore and `812.68 crore goes to Kerala. It covers 14.51 and 15.28 per cent of the sharable taxes and duties and grants-in-aid for Southern states. In total transfer of taxes and duties and grants-in-aid of the Eleventh Finance Commission period, the southern states received taxes and duties viz., 19.52 per cent, and 9.91 per cent grants-in-aid and all other states in India received taxes and duties viz., 80.48 per cent, and 90.09 per cent grants-in-aid.

Among the southern states Andhra Pradesh received highest share of grants-in-aid for the Eleventh and Twelfth Finance Commission `2030.93 crore and `5214.58 crore which covers 38.17 per cent and 31.30 per cent for the years 2000-01 to 2009-10. The second highest transfer of grants-in-aid for Eleventh Finance Commission `1336.71 crore and Twelfth Finance Commission `4135.39 crore received by Tamil Nadu. Which covers to 25.13 per cent and 24.82 per cent. The absolute amount received `5319.82 crore Eleventh Finance Commission, `16658.88 crore and Twelfth Finance Commission transfer to grants-in-aid. The lowest transfer of grants-in-aid the Eleventh Finance Commission `812.68 crore 199 and twelfth finance commission `3254.51 crore received by Kerala. Which covers comes to 15.28 per cent in the Eleventh Finance Commission, 19.54 per cent Twelfth Finance Commission transfer grants- in-aid for the Southern states. In Eleventh and Twelfth Finance Commission period the southern states received only 9.01 per cent and 11.67 per cent of grants-in-aid from the total transfer and remaining states received 90.09 per cent and 88.33 per cent of the grants-in-aid from the total transfer of funds.

The highest share in taxes and duties of `28980.25 crore and `45138.68 crore received by Andhra Pradesh through Eleventh Finance Commission and Twelfth Finance Commission for the years 2000-01 to 2009-10. In terms of percentage it comes to 36.54 per cent and 37.18 per cent. The second highest share in taxes and duties of `20264.72 crore and `32552.74 crore received by Tamil Nadu which covers 25.56 per cent and 26.81 per cent of the total. The third highest share in taxes and duties `18552.48 crore and `27361.88 crore received by Karnataka, which covers 23.39 per cent and 22.54 per cent. The lowest share in taxes and duties `11504.04 crore and 16353.21 crore received by Kerala. In terms of percentage it comes to 14.51 per cent and 13.47 per cent. The total share in taxes and duties of Southern states through Eleventh and Twelfth Finance Commission in terms of absolute amount comes to `79301.49 crore and `121406.51 crore. In total transfer of taxes and duties of the Eleventh and Twelfth Finance Commission period of the southern states received 19.52 and 19.08 per cent and all other states in India received 80.48 and 80.92 per cent. 200

The highest total share of explained share of total transfer Tenth Finance Commission to Twelfth Finance Commission. Among the four states highest amount received by Andhra Pradesh which is `18081.54 crore, `31011.18 crore and `50353.26 crore respectively interest of percentage it comes 36.39 per cent, 36.65 per cent and 36.47 per cent only. The total transfer in absolute amount comes to `49684.75 crore, `84621.31 crore and `138065.39 crore, received by 10th, 11th and 12th finance commission. The lowest share of 10th finance commission `7721.81 crore, 11th finance commission `12316.72 crore and 12th finance commission `138065.39 crore received by Kerala. It covers 15.54 per cent, 14.56 per cent and 14.21 per cent of the total transfers of 10th finance commission 11th finance commission and Twelfth Finance Commission to the Southern states. All other states received from Tenth to Twelfth Finance Commission are southern states in India, received only 21.9, 19.58 and 18.27 per cent remaining states of India received 78.1, 80.42 and 81.73 per cent.

The total fiscal transfers from the government of India to the Southern states in absolute amount comes to `49684.75 crore for the years 1995-96 to 1999-2000, through the recommendations of the Tenth Finance Commission. The highest total fiscal transfer viz. `18081.54 crore goes to largest state Andhra Pradesh. It covers 36.39 per cent of the total transfers. The second highest fiscal transfer namely `13360.57 crore goes to Tamil Nadu. It covers 26.89 per cent of the total fiscal transfers. The lowest fiscal transfers viz. `7721.81 crore among the Southern states Kerala received which covers only 15.54 per cent of the total transfers. 201

During Tenth Finance Commission only 21.9 per cent of total transfer received by the southern state and remaining 78.1 per cent given to other states of India.

The total income tax share in absolute amount comes to `15261.93 crore through the recommendations of the Tenth Finance Commission for the years 1995-96 to 1999-2000. The highest share of income tax viz. `5313.06 crore received by the largest state Andhra Pradesh which covers 34.81 per cent of the total income tax shares. The second highest share of income tax namely `4165.71 crore received by Tamil Nadu, which covers 27.29 per cent 70 the total income tax shares. The third highest share of income the viz. `3351.02 crore goes to Karnataka which covers 21.96 per cent of the total income tax shares. The lowest share of income tax `2432.14 crore received by Kerala, which covers only 15.94 per cent of the total shares. The share of income tax from the Southern states in highest ranging from `2432.14 crore to lowest `5313.06 crore. Share of income-tax from the centre to the southern states received 24.31 per cent and remain 75.69 per cent for all other states.

The highest share of excise duties of `9291.43 crore among the southern states. The largest state of Andhra Pradesh through Tenth Finance Commission for the years 1995-96 to 1999-2000. In terms of percentage it comes to 36.39. The second highest excise duties of `6801.40 crore received by Tamil Nadu which covers 26.63 per cent of the total. The third highest share in excise duties of `5471.25 crore received by Karnataka. In terms of percentage, it comes to 21.43. The 202 lowest share in excise duties of `3970.98 crore received by Kerala. In terms of percentage it comes to 15.55. The total share in excise duties for southern state through Tenth Finance Commission in terms of absolute amount comes to `25535.06 crore has been distributed to all the southern states. In total transfer of share in excise duties of the Tenth Finance Commission period the southern states received 20.97 per cent and all other states in India received 79.03 per cent.

The highest share of Tenth Finance Commissions grants-in-aid of `15387.63 crore received by Andhra Pradesh. In terms of percentage it comes to 42.09. The second highest grants-in-aid of `10084.57 crore received by Tamil Nadu. In terms of percentage it comes to 27.59. The third highest grants-in-aid of `8182.93 crore received by Kerala. In terms of percentage it comes to 22.39. The lowest grants-in-aid of `2900.00 crore received by Karnataka. In terms of percentage it comes to 7.93. In terms of absolute amount `36555.13 crore has been distributed to all the southern states. In total transfer of share in grants-in-aid of the Tenth Finance Commission period, the southern states received 15.00 per cent and all other states in India received 85.00 per cent.

The devolution of taxes and duties and deficit grants from the Government of India to the Southern states in absolute amount comes to `2870.11 crore for the years 1995-96 to 1999-2000 through the recommendations of the Tenth Finance Commission. The highest devolution of taxes and duties and deficit grants viz. `14074.13 crore goes to largest state Karnataka. It covers 49.04 per cent of the devolution of 203 taxes and duties and deficit grants. The second highest devolution of taxes and deficit grants `9323.11 crore goes to Tamil Nadu. It covers 32.48 per cent of the deficit grants. The lowest devolution of taxes and duties and deficit grants viz. `1821.39 crore from the Southern state goes to Andhra Pradesh. It covers only 06.35 per cent of the devolution of taxes and duties and deficit grants.

The shares of total sharable taxes and duties to the states for the years 1995-96 to 1999-2000, through the recommendations of the Tenth Finance Commission in absolute amount comes to `46200.12 crore. The highest amount of transfer of taxes and duties of `16325.94 crore goes to the largest state Andhra Pradesh. It covers 35.34 per cent of the total transfers of taxes and duties. The second highest amount of transfer of taxes and duties of `12622.54 crore goes to Tamil Nadu. It covers 27.32 per cent of the total transfer of the taxes and duties. The third highest amount transfer to Karnataka `10034.64 crore it covers 21.72 per cent of the total transfer of taxes and duties. The lowest transfer of taxes and duties goes to Kerala `7217.00 crore which covers 15.62 per cent of the total transfers of taxes duties to the Southern states. During Twelfth Finance Commission only 22.38 per cent of share of sharable taxes and duties received by the southern states and remaining 77.62 given to other states of India.

The total grants-in-aid revenue in absolute amount comes to `3483.63 crore. The total transfers through the recommendation of the Tenth Finance Commission for the years 1995-96 to 1999-2000. The 204 highest grants-in-aid revenue viz. `1755.60 crore goes to Andhra Pradesh, which covers 50.38 per cent of the total grants-in-aid. The second highest grants-in-aid revenue of `738.03 crore goes to Tamil Nadu, which covers 21.18 per cent of the total grants-in-aid of the southern state. The lowest grants-in-aid viz. `486.19 crore goes to Karnataka which covers only 13.95 per cent of the total grants-in-aid among the Southern states. In total transfer of grants-in-aid of the Tenth Finance Commission period of the southern states received namely 17.16 per cent all other states in India received namely 82.84 per cent.

The total fiscal transfers from the Government of India to the Southern states in absolute amount comes to `20948.00 crore for the years 1990-91 to 1999-2000 through the recommendations of the Ninth Finance Commission. The highest total fiscal transfers viz. `7239.00 crore goes to the largest state Andhra Pradesh. It covers 34.56 per cent of the total transfers. The second highest fiscal transfer namely `6198.00 crore goes to Tamil Nadu. It covers 29.58 per cent of the total fiscal transfer. The third highest fiscal transfers viz. `4063.00 crore goes to Karnataka. It covers 19.40 per cent of the total transfers. The lowest fiscal transfer viz. `3448.00 crore from the Southern state goes to Kerala. It covers only 16.46 per cent of the total transfers. In total transfer of the Ninth Finance Commission period of the southern states received 19.97 per cent and all other states in India received 80.93 per cent.

The percentage shares of the net proceeds of income tax through the recommendations of the Ninth Finance Commission for the years 205

1990-91 to 1994-95. The highest percentage share of income tax of 8.208 per cent goes to Andhra Pradesh. The lowest percentage share of income tax viz. 3.729 per cent goes to Kerala. Tamil Nadu received 7.931 percentage share of income tax. The total percentage of income tax to the southern states is 24.796 per cent. All Other states centre 75.204 percentage share of income tax.

The highest percentage share of taxes and duties namely 5.385 per cent goes to Tamil Nadu. The second highest percentage share of taxes and duties namely 4.930 per cent goes to Karnataka. The lowest percentage share of taxes and duties viz. 1.701 per cent goes to Andhra Pradesh. The total percentage of 15.073 share of net proceeds of sharable taxes and duties distributed to southern states and remaining 84.927 per cent to all other states of India.

The total grants-in-aid to the southern states was `797.58 crore during the Ninth Finance Commission period. The highest amount of `412.54 crore of grants-in-aid revenue received by Kerala which covers 51.72 per cent of the total. The second highest amount of `341.25 crore of grants-in-aid revenue received by Andhra Pradesh which covers 42.79 per cent of the total. The lowest amount of `43.79 crore was received by Tamil Nadu, which covers 5.49 per cent of the total grants-in-aid transfer of the Southern states.

The total finance commission transfer of the special category states was the order increased from 14.8 per cent in the first finance commission 206 to 14.0 per cent in Twelfth Finance Commission. The total transfer of general category states have increased from 85.2 in Ninth Finance Commission and 86.0 per cent in Twelfth commission. Among the general category states, the low income states received the higher level share and the high income states received the lower level of share from the centre. Among the general category states Uttar Pradesh and Bihar receive the highest share of 17.8 per cent and 10.1 per cent respectively during the Twelfth Finance Commission. In case of special category states Jammu and Kashmir and Uttaranchal received the higher share of 2.7 per cent and 1.6 per cent respectively during twelfth finance commission period.

The share in taxes and grants-in-aid of various finance commission Ninth to Twelfth Finance Commission shows that flexible changes in the percentage share in taxes and grants-in-aid. The state share in taxes `56284 crore. Which covers of 89.05 per cent and grants-in-aid from `70135 crore goes to Ninth Finance Commission period. In terms of percentage comes to 10.95 percent. The Tenth Finance Commission share in taxes and grant-in-aid from the centre namely viz. ` 190520 crore goes to Tenth Finance Commission which covers 90.02 per cent. The grants-in- aid from ` 20585 crore goes to Tenth Finance Commission which covers 9.08 per cent. The Twelfth Finance Commission share in taxes and grants- in-aid to the centre viz., ` 670274 crore. In terms of percentage it comes to 82.05 per cent. The grants-in-aid from `42640 crore goes to Twelfth goes to Twelfth Finance Commission which covers 17.05 per cent of share in taxes and grants-in-aid to the Ninth Finance Commission to Twelfth Finance Commission. 207

The highest percentage share in total grants-in-aid 8.6 percentage goes to Andhra Pradesh in Tenth Finance Commission. The second highest percentage share of 3.6 per cent in total grants-in-aid goes to Tamil Nadu in Tenth Finance Commission. Twelfth finance commission highest share in total grants-in-aid 3.7 percentage goes to Andhra Pradesh. The lowest percentage share in total grants-in-aid Ninth Finance Commission 0.7 percentage goes to Karnataka and Twelfth Finance Commission 2.3 percentage goes to Kerala. The total percentage of Ninth Finance Commission 7.2 share of net proceeds of grants-in-aid distributed to southern states and remaining 92.8 per cent to all other states of India.

CONCLUSIONS The present study analyse the Finance Commission Fiscal transfers to the Southern states such as Tamil Nadu, Andhra Pradesh, Kerala and Karnataka. Out of the above four states the highest fiscal transfer goes to Andhra Pradesh and lowest fiscal transfers from the centre such as shares of sharable taxes and duties and the Grants-in-aid from the Government of India. Generally Finance Commissions follow the equitarian criteria than the efficient based criteria for distribution of funds from the centre to the states, hence the less developed backward states, i.e., the north and northeast hill states termed as special category states receive more funds from the centre, whereas the developed states receive less fund. As per the revenue realization is concerned, the highest revenue from taxes and duties goes to the centre from the developed General category states – than the Special category states. This is the contradictory position of the Indian Federal financial system. All the Special category states are in need 208 of more funds from the centre for their developments and defence purpose as well as the emergency expenditures. If the all funds may be used for infrastructural development alone, which would be the green signal to the development of the nation.

SUGGESTIONS The present study focus only on the fiscal transfers to Southern States from the centre. Indian Federal Finance includes Planning Commission Fiscal transfer, Finance Commission fiscal transfers, fiscal transfers on central sectors and centrally sponsored schemes and special transfers of Parlimentarian and Central Ministers. Further study can be focussed the Finance Commission fiscal transfer of all the states from the centre and the above topics.