Planning Commission vs. Finance Commission
In India, resources can be transferred from the centre to states in many ways. The Finance Commission and the Planning Commission are the two institutions responsible for centre-state financial relations. There has been serious debate in the country regarding the role of the Finance Commission vis-a-vis the Planning Commission. Finance Commission is a Constitutional body whereas the Planning Commission is a non-statutory institution. Over a period of time, the working of both the institutions led to friction among them due to lack of clear-cut guidelines demarcating their areas of work. The relative roles of the Planning Commission and Finance Commission have come to be demarcated in the terms of reference of the Finance Commission. Scrutiny of plan expenditure and transfer of capital to the states have been left to the Planning
The Finance Commission assesses the non-plan requirements of the State Governments and recommends a share in the net yield from the Central and Grants-in-aid (presently 32.5%). The divisible sum of Central taxes is distributed inter se among the states based on independent criteria. In addition, the Finance Commission recommends the principles governing non-plan grants and loans to states. Examples of grants would include funds for disaster relief, maintenance of roads and other state-specific requests.
Among states, the distribution of tax revenue and grants is determined through a formula accounting for population (25%), area (10%), fiscal capacity (47.5%) and fiscal discipline (17.5%). Unlike the Planning Commission, the Finance Commission does not distinguish between special and non-special category states in its allocation.
The most significant centre-state transfer is the distribution of central tax revenues among states. The Finance Commission decides the actual distribution and the current Finance Commission have set aside 32.5% of central tax revenue for states. In 2011-12, this amounted to Rs 2.5 lakh crore (57% of total transfers), making it the largest transfer from the centre to states.
The Planning Commission allocates funds to states through central assistance for state plans. Central assistance can be broadly split into three components Normal Central Assistance (NCA), Additional Central Assistance (ACA) and Special Central Assistance.
NCA, the main assistance for state plans, is split to favour special category states the 11 states get 30% of the total assistance while the other states share the remaining 70%. The nature of the assistance also varies for special category states; NCA is split into 90% grants and 10% loans for special category states, while the ratio between grants and loans is 30 70 for other states.
The Planning Commission also allocates funds for ACA (assistance for externally aided projects and other
funds are prescribed by the centre.
on the basis of the state’s plan size and previous plan expenditures. Allocation between non special category states
is determined by the Gadgil Mukherjee formula which gives weight to population (60%), per capita income (25%), fiscal performance (7.5%) and special problems (7.5%).
As a proportion of total centre-state transfers NCA typically accounts for a relatively small portion (around 5% of total transfers in 2011-12). However, Planning Commission allocations can be important for states, especially for the functioning of certain schemes.
Finance Commission and Fiscal Federalism
Finance Commission has a crucial role in the following areas
Cooperative financial relations between the centre and states
Level the inequality among the states- bridge horizontal imbalances by giving more to the backward states as a part of the mandate to create equity
Bridge the vertical imbalances between the centre and the states by recommending adequate devolution to the states
Promote state fiscal autonomy and efficiency
Various reforms, on being referred by the President, for infrastructure and good governance
Article 275 Statutory Grants
After the devolution of the taxes and duties from the divisible pool, if some states still face revenue deficits, Article 275 empowers the Parliament to make grants to the states which are in need of financial assistance. These are not given to every state and also, different sums may be fixed for different states. These sums are charged on the Consolidated Fund of India every year. These statutory grants under Article 275 are given to the states on the recommendation of the Finance Commission
8. 6 Tenth FC and Alternative Scheme of Devolution
The Constitution (Eightieth Amendment) Act, 2000, which seeks to provide an alternative scheme for sharing taxes between the Union and States, is based on the recommendations of the Tenth FC. Constitution was amended to give the recommendations a legal effect. Under this, amendments have been made in Article 270 to essentially make all Union taxes and duties shareable with States unlike earlier when the Union had some taxes and duties exclusively to it. Now, only surcharges go to the Union exclusively.
8.6.1 The advantages of this system are
States will be able to share the buoyancy of Central taxes
The Central Government can pursue tax reforms and expect states to cooperate
Economic Reforms in general will have wider consensus as the country takes steps towards a common market
Creates conditions for Cooperative federalism in other spheres
In India, resources can be transferred from the centre to states in many ways. The Finance Commission and the Planning Commission are the two institutions responsible for centre-state financial relations. There has been serious debate in the country regarding the role of the Finance Commission vis-a-vis the Planning Commission. Finance Commission is a Constitutional body whereas the Planning Commission is a non-statutory institution. Over a period of time, the working of both the institutions led to friction among them due to lack of clear-cut guidelines demarcating their areas of work. The relative roles of the Planning Commission and Finance Commission have come to be demarcated in the terms of reference of the Finance Commission. Scrutiny of plan expenditure and transfer of capital to the states have been left to the Planning
The Finance Commission assesses the non-plan requirements of the State Governments and recommends a share in the net yield from the Central and Grants-in-aid (presently 32.5%). The divisible sum of Central taxes is distributed inter se among the states based on independent criteria. In addition, the Finance Commission recommends the principles governing non-plan grants and loans to states. Examples of grants would include funds for disaster relief, maintenance of roads and other state-specific requests.
Among states, the distribution of tax revenue and grants is determined through a formula accounting for population (25%), area (10%), fiscal capacity (47.5%) and fiscal discipline (17.5%). Unlike the Planning Commission, the Finance Commission does not distinguish between special and non-special category states in its allocation.
The most significant centre-state transfer is the distribution of central tax revenues among states. The Finance Commission decides the actual distribution and the current Finance Commission have set aside 32.5% of central tax revenue for states. In 2011-12, this amounted to Rs 2.5 lakh crore (57% of total transfers), making it the largest transfer from the centre to states.
The Planning Commission allocates funds to states through central assistance for state plans. Central assistance can be broadly split into three components Normal Central Assistance (NCA), Additional Central Assistance (ACA) and Special Central Assistance.
NCA, the main assistance for state plans, is split to favour special category states the 11 states get 30% of the total assistance while the other states share the remaining 70%. The nature of the assistance also varies for special category states; NCA is split into 90% grants and 10% loans for special category states, while the ratio between grants and loans is 30 70 for other states.
The Planning Commission also allocates funds for ACA (assistance for externally aided projects and other
funds are prescribed by the centre.
on the basis of the state’s plan size and previous plan expenditures. Allocation between non special category states
is determined by the Gadgil Mukherjee formula which gives weight to population (60%), per capita income (25%), fiscal performance (7.5%) and special problems (7.5%).
As a proportion of total centre-state transfers NCA typically accounts for a relatively small portion (around 5% of total transfers in 2011-12). However, Planning Commission allocations can be important for states, especially for the functioning of certain schemes.
Finance Commission and Fiscal Federalism
Finance Commission has a crucial role in the following areas
Cooperative financial relations between the centre and states
Level the inequality among the states- bridge horizontal imbalances by giving more to the backward states as a part of the mandate to create equity
Bridge the vertical imbalances between the centre and the states by recommending adequate devolution to the states
Promote state fiscal autonomy and efficiency
Various reforms, on being referred by the President, for infrastructure and good governance
Article 275 Statutory Grants
After the devolution of the taxes and duties from the divisible pool, if some states still face revenue deficits, Article 275 empowers the Parliament to make grants to the states which are in need of financial assistance. These are not given to every state and also, different sums may be fixed for different states. These sums are charged on the Consolidated Fund of India every year. These statutory grants under Article 275 are given to the states on the recommendation of the Finance Commission
8. 6 Tenth FC and Alternative Scheme of Devolution
The Constitution (Eightieth Amendment) Act, 2000, which seeks to provide an alternative scheme for sharing taxes between the Union and States, is based on the recommendations of the Tenth FC. Constitution was amended to give the recommendations a legal effect. Under this, amendments have been made in Article 270 to essentially make all Union taxes and duties shareable with States unlike earlier when the Union had some taxes and duties exclusively to it. Now, only surcharges go to the Union exclusively.
8.6.1 The advantages of this system are
States will be able to share the buoyancy of Central taxes
The Central Government can pursue tax reforms and expect states to cooperate
Economic Reforms in general will have wider consensus as the country takes steps towards a common market
Creates conditions for Cooperative federalism in other spheres
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