CHAPTER 3 Issues and Approach Introduction considerations in mind while undertaking its core task. Thus, the Thirteenth Finance Commission 3.1 The overall task of the Finance has to take account of: Commission is to discharge the mandate laid down in articles 270, 275 and 280 of the i) The need to balance the receipts and Constitution, consistent with the principles of expenditure on revenue account of all the federal finance, taking into account the current states and the Union and generating and likely future macroeconomic and fiscal surpluses for capital investment. scenarios, so as to secure fiscal stability and ii) The impact of the proposed adequate resource availability for the Centre, the states and the local bodies. implementation of the Goods and Services Tax (GST) from 1 April 2010, including its 3.2 The Presidential orders that provide the impact on the country’s foreign trade. Terms of Reference (ToR) for the Thirteenth Finance Commission can be viewed as setting iii) The need to improve the quality of public the Commission three different types of tasks. expenditure. The first or ‘core’ task of the Commission is to iv) The need to manage ecology, environment recommend distribution, between the Union and climate change consistent with and the states, of the net proceeds of taxes to sustainable development. be divided between them under Chapter I, Part XII of the Constitution of India, commonly v) The need to ensure commercial viability termed as the ‘divisible pool’. Second, the of public sector and departmental Commission has also to recommend the undertakings, as also of irrigation and allocation between the states of such proceeds. power projects. Under Article 275 of the Constitution the vi) The taxation efforts of the Central Commission may provide general purpose Government and each State Government grants to states which are ‘in need of assistance’ and the potential for additional resource and other specific purpose grants. Third, the mobilisation to improve the tax-Gross Commission has been asked to recommend State Domestic Product/Gross Domestic measures to supplement the resources of the Product ratio. panchayats and municipalities in different states by augmenting the consolidated funds of 3.4 These specific considerations are taken individual states, taking into account the account of by the Commission in the assessment recommendations of the respective State of the financial needs of the Centre and the states Finance Commissions (SFCs). and in the design of specific purpose grants. 3.3 Every Commission is required by its 3.5 The ToR assign FC-XIII a specific ‘macro Terms of Reference to keep specific policy policy task’, which is to review the state of the 21 Thirteenth Finance Commission finances of the Union and the states and the fiscal framework has to serve the purposes of the operation of the states’ Debt Consolidation and contemporary development project, while at the Relief Facility (DCRF) 2005-10 and suggest same time, ensuring that it functions within the measures to maintain a stable fiscal environment, regulatory framework defined, in our time, by consonant with equitable growth. A subsequent the Constitution of India. addition to our ToR mandates us to review the 3.10 Inclusive growth is the cornerstone of roadmap for fiscal adjustment and suggest a India’s development project. India’s recent suitably revised roadmap that would maintain the economic growth performance has, indeed, been gains of fiscal consolidation through 2010-15. creditable. However, such growth must make a 3.6 The issues that we have to consider, demonstrable difference to the lives of the therefore, directly emanate from the ToR of this poorest and most vulnerable citizens. On this, as Commission. In this chapter we will outline the reflected in the Millennium Development Goals broad considerations that inform the (MDGs) there is global consensus, of which our Commission’s approach to its core and policy nation is a part. India has the potential and the tasks. We also discuss the main issues and our means to secure such a future for its citizens. The proposed approach. stress laid on inclusive growth in the Eleventh Plan has meant that such growth has been 3.7 The overall approach of the Commission accompanied by a concerted effort, by all levels is to foster ‘inclusive and green growth promoting of government, to invest in the delivery of public fiscal federalism’. This is the vision underlying services, particularly those which promote the Commission’s recommendations on progress in achievement of the MDGs. But, to inter-governmental fiscal arrangements and on achieve this potential, it is necessary that the roadmap for fiscal adjustment. This vision resources be mobilised and deployed in such a has to be given effect within the overall structure manner that the recent high rates of growth are of inter-governmental fiscal arrangements, maintained and even increased. Thus, sustainable whose contours are Constitutionally specified. and inclusive growth are prerequisites for 3.8 The federalist development State is a domain achieving the MDGs. for evolutionary policymaking, responsive to 3.11 Inclusivity informs our recommendations internal and external policy imperatives such as in every sphere. In our formula for horizontal political integration and globalisation, with devolution, the highest weightage amongst all the sovereign powers to fulfil its mandate. These variables is for correcting the fiscal disability of powers are, however, not absolute. The a state vis-a-vis those of the top-ranked states. development project of the state is enabled by Further, we also recognise the fiscal disability of evolutionary policy making, while circumscribed the special category states by computing their by the laws that mandate the exercise of its fiscal distance from the top-ranked states after sovereignty in the formulation and implementation setting their tax effort at the average for the of policy. special category alone, in place of an all-state 3.9 Kautilya argued for a social contract average. Inclusivity is justified, not merely to defined by laws, principles and doctrines in ensure equal treatment of citizens by Dharmasastra and Arthasastra, delimiting the governments, but also for long term economic Constitutional metes and bounds of Monarch and efficiency reasons, so as to minimise the burden State. The Indian Constitution can, thus, be seen of fiscally-induced migration on high-income from a variety of perspectives, as providing a states. It also underlies our attempt to prescribe regulatory framework within which the a fiscal roadmap targeting elimination of the developmental federalist State undertakes its revenue deficit so that net new borrowing is project. The structure of the inter-governmental directed towards creation of public 22 Chapter 3: Issues and Approach infrastructure which would benefit all. It also 3.14 A high growth economy minimises the risk underlies many of our grant provisions, for of ‘crowding out’ of the private sector, by allowing instance, maintenance for the new village the government to increase fiscal space for public connectivity roads financed under Pradhan investment consistent with fiscal prudence. In Mantri Gram Sadak Yojana (PMGSY). And finally, fact, in such an environment, the private sector inclusivity underlies our substantially enhanced becomes a valuable actor. Better targeted public grant for local bodies, including those of the good delivery systems can be used to engage the Schedule V and VI areas, so as to enable provision private sector in the provision of key public of sanitation and other public goods. goods, particularly infrastructure. Effective fiscal consolidation ensures that the government gets 3.12 Fiscal consolidation promotes growth. By the best value for money from such engagement. fiscal consolidation we do not mean a reduction In assessing the resources available for overall in the role of the State. In a complex and transfers the Commission has also taken into developing economy like India, the government account the total resources available, including will continue to mobilise and deploy a significant potential inflows from disinvestment. proportion of resources to promote public welfare. Rather, fiscal consolidation refers to 3.15 Green growth involves rethinking growth measures to improve the quality and effectiveness strategies with regard to their impact on of the processes of public expenditure and environmental sustainability and the resource mobilisation. We are of the view that environmental resources available to poor and there are feasible pathways for fiscal consolidation vulnerable groups. It is significant to note that with high growth, as a study by the NIPFP for this many stimulus packages announced globally to Commission shows analytically. In the present combat recession incorporated a green context, this also means providing the fiscal space component. International experience is that to promote both public and private investment, green growth promotes inclusivity. Further, the so as to secure the highest possible sustainable, renewable energy sector is relatively labour green and inclusive rate of growth for the Indian intensive, with the potential for generating more economy. For the Commission, this involves jobs than the oil and gas industries. proposing ways to incentivise such consolidation 3.16 Securing the environment is critical for within the mandate and instruments at our India’s future generations and not just a matter