DR. RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY

ECONOMICS PROJECT

ON

FINANCIAL REALTIONS BETWEEN CENTRE AND STATES

UNDER THE SUPERVISION OF: SUBMITTED BY:

Ms. MITHALI TIWARI TRIVENDRA KUMAR SINGH

Asst. Professor Roll No. - 152

Department Of ECONOMICS Section- B

ACKNOWLEDGEMENT

I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals. I would like to extend my sincere thanks to all of them.

 I am highly indebted to thank Ms. MITHALI TIWARI (Asst. Professor, economics) for her guidance and constant supervision as well as for providing necessary information regarding the project & also for her support in completing the project.

I would like to express my gratitude towards my parents & librarian for their kind co-operation and encouragement which helped me in completion of this project.

My thanks and appreciations also go to my colleague in developing the project and people who have willingly helped me out with their abilities.

TRIVENDRA KUMAR SINGH

TABLE OF CONTENTS

1 PLAN OF STUDY AND INTRODUCTION .................................................................

2 FINANCE COMMISSION AND ITS ROLE .................................................................

a. Reports and recommendation of thirteenth and fourteenth finance commission

3 CENTRE AND STATE FINANCIAL CONFLICT.......................................................

a. Sources of conflicts stated by the states

b. Regional imbalance

4 CENTRE’S STAND...................................................................................................

a. Sarkaria commission

5 PRESENT SCENARIO .....................................................................................

RESEARCH PROBLEM

1 HOW ARE FINANCIAL RELATIONS DEFINED IN THE CONSTITUTION OF

INDIA ANDWHAT HAS CHANGED SINCE THEN?

2 WHAT ARE THE MAJOR LOOPHOLES IN THE PRESENT SYSTEM THAT

OBSTRUCTS THE DEVELOPMENT OF THE NATION?

3 WHAT IS THE SOLUTION?

OBJECTIVE

The objective of this project is to make the reader aware of the present financial relations

between the centre and the states and enquire what are the successes and failures of the

system. And if there are failures then what are the possible reasons.

Research Method:

The doctrinal method of research is used to make the final project. To complete the project I

depended upon the theoretical books, articles from eminent economic personalities. Using the

same, I developed the project and tried to solve the objectives mentioned. Both primary and

secondary sources were used to arrive at the useful conclusions. The study of data of various

countries and their development bank are also referred.

INTRODUCTION

The Indian Constitution has all the features of a federation with the specification of financial

powers and functional responsibilities of the Centre and the States and the institutions needed

for a federal structure and a well defined mechanism for intergovernmental transfers to

address imbalances which characterise most federations.

In the Constitution, there is a clear demarcation of the taxation powers of the Union and the

States. Under Article 246 of the Constitution, there are three Lists, namely, the Union List,

the State List and the Concurrent List. In respect of the subjects listed in the Union List

including taxes, Centre has the exclusive power to make laws. Similarly, for the taxes listed

in the State List, States have exclusive power to make laws. No taxes are listed in the

Concurrent List. Thirteen taxes are listed in the Union List. The important taxes listed in the

Union List or those assigned to the Centre are taxes on income other than agricultural land,

duties of custom, duties of excise except those on alcoholic liquor for human consumption,

corporation tax, estate duty in respect of property other than agricultural land, terminal taxes

on goods and passengers carried by railways, sea or air, taxes other than stamp duty on

transactions in stock exchanges and futures markets and taxes on sale and purchase of goods

other than newspapers, when such sale takes place in the course of inter-State trade or

commerce. Nineteen taxes are listed in the State List. The important taxes listed in the State

List are land revenue, taxes on agricultural income, taxes on land and buildings, taxes on

mineral rights subject to restrictions imposed by Parliament, duties of excise on alcoholic

liquor for human consumption, taxes on sale and purchase of goods other than newspapers,

taxes on goods and passengers carried by road, taxes on vehicles, taxation on professions,

taxes on luxuries including on entertainments, taxes on entry of goods into a local area and

taxes on advertisements other than those published in newspapers and broadcast by radio or

television.

Financial resources transferred to the state are of three kinds:-

1 Taxes

2 grants

3 loans

TAXES

There are certain taxes which are levied by the union but the entire proceeds of which are

assigned to the states in proportion determined by the parliament. These taxes include

successions and estate duties, taxes on railway fares etc.

Central taxes on income and union excise duties are levied and collected by the Union but

shared but the states

Grants to States

There are two Articles governing the grants-in-aid from the Union to the States. Article 275

(1) provides for grants-in-aid of the revenues of such States as Parliament may determine to

be in need of assistance and different sums may be fixed for different States. There are two

provisos to clause (1) of this Article. These deal with the promotion of the welfare of

Scheduled Tribes in the State of Assam. Under clause (2) of Article 275, no order with regard

to grants under clause (1) shall be made except after considering the recommendations of the

Finance Commission. Keeping in view these provisions, the terms of reference of Finance

Commissions stipulate that the Commission shall make recommendations for the purposes

other than those specified in provisions to clause (1). Thus, the Finance Commissions

recommend grants under the substantive provision of Article 275 (1). Grants under Article

275 are charged on the Consolidated Fund of India. Under Article 282, the Union or a State

can make any grants for any public purpose, not withstanding that the purpose is not one with

respect to which Parliament or the Legislature of a State, as the case may be, may make laws.

Unlike the grants under Article 275 which can be dispensed only on the recommendations of

the Finance Commission and are charged, grants under Article 282 can be made with no such

restriction and are voted.

Loans

The states are authorised to raise loans in the market but they borrow it from centre also

which gives the centre considerable control over state borrowing and expenditure.the rate of

annual borrowing by the state has increased considerably.

THE FINANCE COMMISSION

The Finance Commission of India was formed on 22nd November, 1951. The Finance

Commission has been provided for by the Indian constitution as part of the scheme of

division of financial resources between the two different sets of governments.

o The role Finance Commission in India is to act as an instrument to divide proceeds of

divisible taxes between the states and the Union government or in cases of taxes that

are collected by the centre but the proceeds of which are allocated between the states, to

determine the principles of such allocation.

o  The Finance commission of India also determines the principles of governing the

grants-in-aids of the revenues of states out of the consolidated fund of India. It is an

important function of the Indian Finance Commission.

o Thirdly the commission has the duty of considering any matter referred to the

commission by the President in the interest of sound finance.

The President under Article 280 lays the recommendations of the finance commission before

each House of the Parliament with an explanatory note as to the action to be taken on the

recommendations.

It should be noted that chapter XII, Article 280 of the Indian constitution do not exhaust the

entire scope of financial relations between the Union and the States. The Finance

Commission distributes of proceeds of Income tax between the union and the states.

But, taxes on the emoluments of the central government are attributable only to the union

territories.

Under Article 280 (C), the President may refer any matter to the Finance commission in the

interest of “sound finance.”  Till now the President of India has asked the commission to

make recommendations on the principles governing distribution of the net proceeds of estate

duty in respect of property Tax on Railway fare and excise duties on sugar and tobacco etc.

The President also sought recommendations on the rates of interest, and terms of repayment

of loans to the various states by the government of India. The Finance Commission as an

autonomous body has served a splendid purpose. In as complex a polity as India is, it acted as

an agency to bring about co-ordination and co-operation that is so important in the working

of a federal system.

THIRTEENTH FINANCE COMMISSION

The following are some of the key recommendations of the FC-XIII:

1. The share of States in net proceeds of shareable Central taxes shall be 32 per cent

every year for the period of the award.

2. Revenue accruing to a State is to be protected to the levels that would have accrued to

it had service tax been a part of the shareable Central taxes, if the 88 th Amendment to

Constitution is notified and followed up by a legislations enabling States to levy

service tax.

3. Centre is to review the levy of cesses and surcharges with a view to reducing their

share in its gross tax revenue.

4. The indicative ceiling on overall transfers to States on revenue account may be set at

39.5 per cent of gross revenue receipts of the Centre.

5. The Medium Term Fiscal Plan (MTFP) should be a statement of commitment rather

than intent.

6. New disclosures have been specified for the Budget/MTFP including on tax

expenditure, public-private partnership liabilities and the details of variables

underlying receipts and expenditure projections.

7. The Fiscal Responsibility and Budget Management (FRBM) Act needs to specify the

nature of shocks that would require relaxation of the targets there under.

8. States are expected to be able to get back to their fiscal correction path by 2011-12

and amend their FRBM Acts to the effect.

9. State Governments are to be eligible for the general performance and special area

performance grants only if they comply with the prescribed stipulation in terms of

grants to local bodies.

10. The National Calamity Contingency Fund (NCCF) should be merged with the

National Disaster Response Fund (NDRF) and the Calamity Relief Fund (CRF) with

the State Disaster Response Funds (SDRFs) of the respective States.

11. A total non-Plan revenue grant of Rs 51,800 crore is recommended over the award

period for eight States. A performance grant of Rs 1500 crore is recommended for

three special category States that have graduated from a non-Plan revenue deficit

situation.

12. An amount of Rs 19,930 crore has been recommended as grant for maintenance of

roads and bridges for four years (2011-12 to 2014-15).

13. An amount of Rs 24,068 crore has been recommended as grant for elementary

education.

14. An amount of Rs 27,945 crore has been recommended for State-specific needs.

15. Amounts of Rs 5,000 crore each as forest, renewable energy and water sector-

management grants have been recommended.

16. A total sum of Rs 3,18,581 crore has been recommended for the award period as

grants-in-aid to States.

FOURTEENTH FINANCE COMMISSION

Till now, fourteen Finance Commissions have made their recommendations. They focus on

the financial relations between the State government and the Central government. These

recommendations steadily increase share of the state governments in the proceeds of the

income tax. They also increased gradually the amount of grants-in-aids to be given to the

states. As a result the states now enjoy considerable degree of financial autonomy so

necessary for the proper functioning of the federation.

The Chairman of the Fourteenth Finance Commission is Dr. Y.V. Reddy. He previously held

the prestigious position of the Governor of Reserve Bank of India (RBI). The Fourteenth

Commission has given more importance on demographic transition. It has also recommended

that the government of coastal states should get appropriate share of taxes collected from the

production of minerals of territorial waters.

1)The 14th Finance Commission is of the view that tax devolution should be the primary

route for transfer of resources to the States.

2)In understanding the States’ needs, it has ignored the Plan and non-Plan distinctions

3) According to the Commission, the increased devolution of the divisible pool of taxes is a

``compositional shift in transfers’’ – from grants to tax devolution

4)In recommending an horizontal distribution, it has used broad parameters – population

(1971), changes in population since then, income distance, forest cover and area, among

others.

5)It has recommended distribution of grants to States for local bodies using 2011 population

data with weight of 90 per cent and area with weight of 10 per cent

6)Grants to States are divided into two

One, grant to duly constituted gram panchayats

Two, grant to duly constituted municipal bodies

9)And, it has divided grants into two parts

 A basic grant, and a performance one for gram panchayats and municipal bodies

The ration of basic to performance grant is 90:10 for panchayats; and 80:20 for municipalities

12)The total grant recommended is Rs. 2,87,436 crore for a five-year period. Out of which,

the grant to panchayats is Rs.2,00,292 crore. And, the reminder goes to municipalities

13)The Commission has significantly departed from previous commission vis-à-vis

recommendation of the principles governing grants-in-aid to the States by the Centre

14)It has chosen to take the entire revenue expenditure for this purpose. Hence, it has decided

to take into account a state’s entire revenue expenditure needs without making a distinction

between plan and non-plan expenditure

15)The Commission is of the view that sharing pattern in respect to various Centrally-

sponsored schemes need to change. It wants the States to share a greater fiscal responsibility

for the implementation of such schemes.

DEMAND FOR PERMANENT FINANCE COMMISSION

Few states have demanded the setting up permanent finance commission instead of present

one being constituted in five years. A permanent finance commission would reduce the scope

of the central government to make discretionary transfers to the states in ad hoc manner. And

also a permanent finance commission would have to start again from start.

But present system has some benefits too. The system allows the appointment of new

members with a fresh approach and unbiased minds as members.

NATIONAL DEVELOPMENT COUNCIL

It has been set up with three objectives

1. to secure cooperation of the states in the execution of the plan

2. to strengthen and mobilize the effort and resources of the nation in support of the Plan

3. to promote common economic policies in all vital spheres and

4. to ensure the balanced and rapid development of all parts of the country.

Functions

The functions of the Council are

1. to prescribe guidelines for the formulation of the National Plan, including the

assessment of resources for the Plan;

2. to consider the National Plan as formulated by the Planning Commission;

3. to make an assessment of the resources that are required for implementing the Plan

and to suggest measures for augmenting them.

4. to consider important questions of social and economic policy affecting national

development; and

5. to review the working of the Plan from time to time and to recommend such measures

as are necessary for achieving the aims and targets set out in the National Plan.

6. To recommend measures for achievement of the aims and targets set out in the

national Plan.CENTRE- STATE FINANCIAL CONFLICT

The States have been nursing a feeling that the resource transfers to them have not been

commensurate with their growing responsibilities. There have been conflicts in the past

which has been aggravated by political, ideological differences between the ruling parties.

The makers of constitution of India provided in constitution the provisions for grants and

loans for those states that lag behind in development. But the past three decade tells us that

there was the complete domination of centre over the states and also there were some

financial indiscipline and irresponsibility on the part of states.

The J.K. Thavaraj committee and the Rajmannar committee appointed by the governmentts

of Kerala and Tamil Nadu respectively had recommended that there should be political and

financial autonomy of the state and restriction of powers of union.

SOURCES OF CONFLICT LISTED BY THE STATES

Few of the states in India including West Bengal, Jammu And Kashmir, Punjab, Maharashtra

and other southern states were very agitated over the question of states autonomy .The

sources of conflict are as follow-

1. The basic assumption of constitution of strong centre and weak and dependent states

is no longer acceptable and states like West Bengal insists that a strong Centre

requires equally strong and autonomous state.

2. The nature of functions to be performed by states and the necessity to promote

cultural, linguistic and special condition of each states require autonomy.

3. The centre which has to do a little has got too much financial resources whereas the

states which have got many things to do are entrusted with too little financial

resources.

4. The financial resources of centre are highly elastic while those of states are very

inelastic. This means that states have been forced to be dependent on union.

5. The centre has been interfering in the matters of state such as law and order by setting

up Central Reserve Police Force and Industrial Security Forces.

Growing Central Expenditure on Functions in the State List

FINANCE COMMISSION-XII estimated that a fifth of the expenditure incurred by

the Centre was on subjects, which were in the domain of the States. With the

introduction of new Central Plan Schemes and new Centrally Sponsored Scheme, this

proportion would have gone up considerably since the submission of the Report of

FC-XII. A number of developments have resulted in increasing Central expenditure

on State subjects. These are increasing discretionary transfers in the form of

assistance for Centrally Sponsored Scheme, special plan assistance and special

Central assistance. Growing discretionary transfers from the Centre have severely

constrained the States in drawing and implementing schemes according to their

priorities and the felt needs of people. Since our mandate is vast, we cannot look into

the composition of all transfers to States.

Compliance and Enforcement Cost of Central Legislation

There are a number of Central legislations, the compliance and enforcement cost of

which are entirely borne by the States. Central legislations, such as, the Environment

Protection Act, the Wildlife Protection Act, the Forest Conservation Act, the

Biodiversity Conservation Act, the Tribal Conservation Act and many other national

policies require compliance on the part of States. At present, States are not

compensated for the cost of compliance and the revenue loss on account of

compliance.

Impact of Pay Revision by the Central Government on State Finances

The periodic pay revision by the Central Government gives rise to demand on the part

of State government employees for a similar pay hike. For the States, it is a demand

which is difficult to resist. Following the implementation of the recommendations of

the Sixth Central Pay Commission (SCPC), a number of States have revised their pay

scales and others are in the process of doing so. Some States have simply adopted the

pay Issues in Centre-State Fiscal Relations scales recommended by the SCPC. FC-

XIII has estimated that the additional cost of pay revision is likely to be asymmetrical

as between the Centre and the States. FC-XIII has concluded that the additional

liability on account of pay revision will be much higher for States than for the Centre

taking into account the additional income tax revenue that accrues to the Centre

following higher salary payments.

Taxes under Articles 268 and 269

States have been a nursing a grievance that the Centre has not been exploiting the

revenue potential of taxes listed under Articles 268 and 269. The duties mentioned in

Article 268 relate to stamp duties and duties of excise on medicinal and toilet

preparations. Service tax was included in this Article by the 88th Amendment.

Examination of the scope of taxes under Article 268 was referred to FC-VIII. The

Commission expressed the view that there was scope for raising the rates of duties in

respect of bill of lading, letters of credit and the policies of general insurance. As

regards duties of excise on medicinal and toilet preparations, the Commission

indicated that it did not have data to suggest specific increases in the rates. Under

Article 269, duties in respect of succession to property other than agricultural land,

estate duty, terminal taxes on goods or passengers carried by railway, sea or air, taxes

on railway fares and frights, taxes other than stamp duties on transactions in stock

exchanges and futures markets, taxes on the sale and purchase of newspapers and on

advertisements published therein, Central Sales Tax (CST) and consignment tax were

leviable and collectable by the Centre but assigned to States. Of these, only two taxes,

namely, estate duty and CST were being levied. With the 88th Amendment to the

Constitution, the list of taxes leviable under Article 269 has been reduced to CST and

consignment tax, of which the latter is not levied. The rate of CST was reduced from

4 per cent to 2 per cent and is likely to stand abolished once GST is introduced. The

scope for raising more revenue from taxes under Article 269 is now almost non-

existent with the reduction in the number of taxes leviable and the imminent abolition

of CST. The scope for raising more resources from the taxes mentioned in Articles

268 and 269 was last examined by FC-VIII more than 20 years ago. We, therefore,

recommend that the scope for raising more revenue from the taxes mentioned in

Article 268 should be examined afresh. This issue may be either referred to the next

Finance Commission or an expert Committee be appointed to look into the matter.

REGIONAL IMBALANCES

Growing regional imbalances both inter-State and intra-State are matters of serious concern

and are counter to the objective of realising the goal of inclusive growth. The strategy

consisting of area specific programmes and the area specific tax exemptions have so far failed

to address the problem adequately. A number of Committees have gone into the issues

relating to growing imbalances in regional development and made recommendations to

address these issues. The National Committee on Development of Backward Areas (B.

Sivaraman Committee) drew attention to the large variations in climate, rainfall, topography

and soil conditions across the underdeveloped regions and called for a differential approach

to address the problems confronting them. The Committee also observed that special area

development programmes were more in the nature of palliatives that failed to tackle the root

of the problem and that most of the backward regions had potential for growth which could

be tapped of certain special initiatives were taken. The Committee recommended that it

should be the task of planning to identify the special initiatives suited to each backward

region. The Eleventh Plan document observed that redressing regional disparities is not only

a goal in itself but crucial for maintaining the integrated social and economic fabric of the

country without which the country may be faced with a situation of discontent, anarchy and

breakdown of law and order. A large part of the population lives in the less developed regions

in the country resulting in increased migration with its resultant consequences. With public

investment constituting less than 20 per cent of aggregate investment in the country, there

should be a paradigm shift in the role of the States from being undertaking direct investments

to that of facilitating investments in backward regions. This calls for States to improve

infrastructural facilities - both physical and human. As the resources at the command of the

States are limited, we recommend higher central transfers to backward States to enable them

to improve their physical and human infrastructure. It is generally observed that there is an

emphasis on taking up new programmes for the development of the backward regions of the

country to the neglect of the maintenance of assets created under earlier plan schemes. To

realize the benefits of past investments in backward regions of the country, we recommend

that maintenance of assets already created should form an integral part of planning in these

regions. As the problems facing the backward regions are multi-dimensional, there is a need

for a multi-pronged strategy to address the problem of regional imbalances. We recommend

the adoption of a multi-pronged strategy in the backward regions of the country comprising

public investment in infrastructure development, pro-active policies to attract private

investment, higher public expenditure on social sectors, such as health and education and area

specific strategy for the growth of agricultural production. Poor quality of governance and

service delivery characterize most backward States. These act as deterrents to private

investments. Full benefits of public investment will not be realized in the absence of good

governance. We recommend that there should be greater focus on the issues of governance in

the less developed States of the country. 5.4.06 Access to banking services and institutional

finance is crucial for financial inclusion. Regional spread of banking assumes importance in

this context. The average population served by a bank branch at the end of July 2009 was

25,000 in Bihar and 18,000 in Jharkhand as compared with the all-India average of 15,000. In

most north eastern States, the average population served by a bank branch is much higher

than the national average. In most backward States, the Credit-Deposit Ratio (C-D ratio) of

commercial banks is much lower in relation to other States. The C-D ratio as per sanction at

the end of July 2009, was 37.0 in Bihar, 40.2 in Jharkhand and 52.5 in north-eastern States as

compared with the ratio of 96.1 in southern States and the all-India average of 80.28 . This

Commission is concerned about the low C-D ratio in the backward States. Suitable policy

initiatives should be taken to improve the C-D ratio of bank credit in the 8 Reserve Bank of

India. Report on Trend and Progress of Banking in India 2008-09, November 2009. Issues in

Centre-State Fiscal Relations poorer States in a time-bound manner. Efforts should also be

made to spread the habit of banking among the poorer sections of society to achieve the

objective of financial inclusion.

SARKARI COMMISSION

Economic Reforms

There was a paradigm shift in economic policy with the initiation of economic reforms in the

country in the early nineties. The earlier focus on planned economic development, primacy of

the public sector, location of public sector undertaking to address regional imbalances and

regulation of industry and trade through a system of licensing and permits gave way to

market-oriented economic policies. The focus has shifted from public investment to

promoting private investment. The shift in economic policy has been a major contributory

factor in putting the Indian economy on a higher growth trajectory.

The economic reforms and other associated changes had repercussions on the Indian

economy in a number of ways. One such major repercussion is the greater role cast on the

States in economic development. With the major portion of investment envisaged to come

from the private sector in the Five-Year Plans, States are required to put in place the

necessary enabling conditions such as the provision of adequate infrastructure to attract

private investments. States which have taken proactive policy measures and having better

infrastructure facilities have been able to attract private investment. States failing to attract

private investment have lagged behind. This has resulted in increasing inequalities in

economic growth thus accentuating imbalances across States. The poorer States with lower

resource base and lack of infrastructure have been unable to catch up with the rest of the

States. There has been large scale migration from poorer States to richer States and a faster

pace of urban growth stretching the already inadequate civic amenities in urban areas to the

hilt.

Changes in Tax Sharing

One of the long standing grievances of the States was that the divisible pool of Central taxes

was restricted to income tax and Union excise duties. Till the 80th amendment, the

Constitution provided for mandatory sharing of the net proceeds of income tax (Article 270)

and permissible sharing of the net proceeds of Union excise duties (Article 272). The States

were particularly peeved by the exclusion of income tax paid by the companies from the

divisible pool by an amendment of the Income Tax Act in 1959. Following the

recommendations of the Tenth Finance Commission, Article 270 of the Constitution was

amended in 2000 (80th Amendment) to provide for the sharing of net proceeds of all Union

taxes and duties except those referred to in Articles 268 and 269 and cesses and surcharges

referred to in Article 271. This has resulted in a more rational division of net proceeds of

Central taxes between the Union and the States. The new dispensation has enabled the States

to share the overall buoyancy of Central taxes. The States, by and large, have favoured the

sharing of all Union taxes and their grievance is now restricted to the percentage share

devolved to them.

Introduction of Tax on Services

Introduction of service tax initially on three services in 1994 and its gradual extension to

other services was a major development in the area of indirect taxation in the country.

Services now account for over 50 per cent of the Gross Domestic Product(GDP). With the

expansion of the service sector and the extension of service tax to more and more services,

revenue from the tax improved from 0.29 per cent of GDP in 2003-04 to 1.22 per cent of

GDP in the revised estimates of 2008-09. The share of service tax in the total gross tax

revenue of the Centre improved from 3.10 per cent to 10.35 per cent in the same period. The

introduction of service tax resulted in higher buoyancy of Central taxes.

Tax Reforms

The introduction of Value Added Tax (VAT) with commonly agreed rates by States in 2005

was a major landmark in the history of State taxes. It was the culmination of efforts stretching

over a decade towards reforms in sales taxation. It put an end to the cascading effect of sales

taxation and rate wars among States, which was a zero-sum game and heralded a spirit of

cooperation among States. Though the Empowered Committee of State Finance Ministers is

now entrusted with decision making with regard to VAT, it does not amount to any dilution

of the autonomy of States. On the other hand, it is a healthy development towards cooperative

federalism for the common good of all. Another major development is the proposed

introduction of Goods and Services Tax (GST) shortly. This tax to be levied concurrently by

the Centre and the States is likely to subsume a number of Central and State taxes making the

tax administration less cumbersome, more industry friendly and more transparent.

Furthermore, it is expected to do away with most of the tax exemptions involving huge

revenue loss and improve voluntary tax compliance because of the input credit. The

introduction of VAT and the proposed introduction of GST have to be perceived from the

point of view of larger interests of the nation and in making the country an integrated market

rather from the narrow perspective of loss of autonomy of States. Even, if there is a loss of

some autonomy, it is the result of voluntary abdication on the part of States for their common

good.

PRESENT SCENARIO

NITI AAYOG

National Institution for Transforming India Aayog is a Government of India policy think-

tank established by Prime Minister Narendra Modi after his having dissolved the Planning

Commission. Pronounced nithi, meaning "policy" in Hindi, the acronym stands for National

Institution for Transforming India. "Aayog'" is the Hindi word for "commission".The stated

aim of NITI Aayog's creation is to foster involvement and participation in the economic

policy-making process by state governments of India, a "bottom-up" approach in contrast to

the Planning Commission's tradition of "top-down" decision-making.

1. NITI Aayog (National Institution for Transforming India):

(i) a. To evolve a shared vision of national development priorities sectors and

strategies with the active involvement of States in the light of national objectives.

  b. To foster cooperative federalism through structured support initiatives and

mechanisms with the States on a continuous basis, recognizing that strong States

make a strong nation

    c. To develop mechanisms to formulate credible plans at the village level and

aggregate these progressively at higher levels of government 

    d. To ensure, on areas that are specifically referred to it, that the interests of

national security are incorporated in economic strategy and policy

    e. To pay special attention to the sections of our society that may be at risk of not

benefitting adequately from economic progress

    f. To design strategic and long term policy and programme frameworks and

initiatives, and monitor their progress and their efficacy. The lessons learnt through

monitoring and feedback will be used for making innovative improvements,

including necessary mid-course corrections

    g. To provide advice and encourage partnerships between key stakeholders and

national and international like-minded Think tanks, as well as educational and

policy research institutions. 

    h. To create a knowledge, innovation and entrepreneurial support system through

a collaborative community of national and international experts, practitioners and

other partners.

    i. To offer a platform for resolution of inter-sectoral and inter departmental issues

in order to accelerate the implementation of the development agenda.

    j. To maintain a state-of-the-art Resource Centre, be a repository of research on

good governance and best practices in sustainable and equitable development as

well as help their dissemination to stake-holders

    k. To actively monitor and evaluate the implementation of programmes and

initiatives, including the identification of the needed resources so as to strengthen

the probability of success and scope of delivery

    l. To focus on technology up gradation and capacity building for implementation

of programmes and initiatives

    m. To undertake other activities as may be necessary in order to further the

execution of the national development agenda, and the objectives mentioned above

(ii)   Unique Identification Authority of India (UIDAI) now shifted to IT department

(iii)   National Institute of Labour Economics Research and Development (NILERD)

2.   The NITI Aayog is the successor in interest to the Planning Commission

One of the major differences between NITI AAYOG and THE PLANNING COMMISSION

relating to my topic is that NITI Aayog – Includes the Chief Ministers of all States and the

Lieutenant Governors of all Union territories in its Governing Council, devolving more

power to the States of the Union.

Planning Commission – States' role was limited to the National Development Council and

annual interaction during Plan meetings.

CONCLUSION

Centre-State financial relation is a very delicate issue and it needs a complete change not only

in the perceptions, but also at the implementation level. The Finance Commission has the

right credentials (being a constitutional body) to oversee the smooth transfer of funds from

the Centre to the States. It can play a vital role in providing invaluable suggestions to the

Government with regard to the fund transfer and also in suggesting measures to improve the

working of the economy.

I would propose few solutions. First, one main problem is an imbalance between revenue and

expenditure in regional states. The states implement programmes related to health, education

and other public services, but are unable to collect their own revenue for these public

services. One solution would be for the Central government to allocate more revenues to the

states and also allow states to collect more revenue. For example, states cannot collect service

tax. More revenue should be internally generated within states, and the Centre must transfer

more money to the states.

Another solution in developing more productive Centre-state relations is to create linkage

institutions. There are forums where state-level and Central-level officials can talk to each

other and work together by sharing information. Though some institutions like the Inter-State

Council and the National Development Council have become quite active of late, they lack

enforcement power. But their recommendations must be respected.

REFERENCES

BOOKS

INDIAN ECONOMY by RUDDAR DUTT AND KPM SUNDARAM

WEBSITES

1 finmin.nic.in

2 planningcommission.gov.in

3 fincomindia.nic.in

4 www.preservearticles.com/2011092914273/essay-on-financial-relations-between-

center-and-state-according-to-the-report-of-sarkaria-commission.html

ARTICLES

1 D N Sharma : Centre-States Financial Relations Role of Finance Commission

2 COMMISSION ON CENTRE-STATE RELATIONS REPORT VOLUME III CENTRE-STATE FINANCIAL

RELATIONS AND PLANNING headed by JUSTICE (retd.)PUNCHHI