ensuring equity and efficiency - Finance Commission

ENHANCING FISCAL EFFICIENCY--
THROUGH
FEDERAL FISCAL TRANSFERS
SECTION - I REVIEW OF UNION AND STATE FINANCES
PREPARED FOR THE TWELFTH FINANCE COMMISSION BY
V.K.SRINIVASAN JULY 2004
ENHANCING FISCAL EFFICIENCY--
THROUGH
FEDERAL FISCAL TRANSFERS
SECTION - II ISSUES IN FEDERAL FISCAL TRANSFERS PREPARED FOR THE TWELFTH FINANCE COMMISSION BY
V.K.SRINIVASAN
JULY 2004 SECTION - I REVIEW OF UNION AND STATE FINANCES Section- II ISSUES IN FEDERAL FISCAL TRANSFERS Contents
Section- I Preface i-ii Federal Fiscal Transfers in India-A Retrospective View iii-xx FINANCES OF THE UNION Chapter 1
Demands on the Resources of the Centre 1-70
A. Terms of Reference 1-14
Approach of the Finance Commissions
B. Resources of the Centre
Declining Tax Buoyancy
Erosion of Tax GDP Ratio
Recent Trends in Revenue
Tax Advisory Group's Forecast 15-23
C Demands from Expenditure Needs 24-29 Trends in Expenditure
D. Major Items of Expenditure 30-41 General Services, Civil Expenditure
Police Internal & Border Security
Defence
Debt Servicing & Interest Payment
E. Expenditure Reform Commission 42-57
ERC Reports
Food Subsidy
Fertilizer Subsidy
Optimization of Staff
Normative Approach
F. Inter Sectoral Priorities 58-63
G. Assessment of Expenditure Management of GOI 64-70
Assessment
Budget Support for the Tenth Plan
Demands of the States FINANCES OF THE STATE GOVERNMENTS Chapter II A Macro View of State Finances 71-82
Expenditure Management 1951-52 to 1999-2000
Aggregate Budgetary Picture 1980-81 to 2000-2001
Structural Weakness
Eleventh Finance Commission
Fiscal Outlook in Recent Years
Chapter III
Trends in Expenditure Management 83-96 Patterns of Expenditure
Development & Non-Development
Resources for Basic Services
Plan & Non-Plan Expenditure
Sectoral Distribution Chapter -IV Debt Burden and Interest Payment 97-110
Combined Liabilities of Centre & States
Public Debt of State Governments
Indebtedness to Centre
Market Borrowings
Interest Payments Statewise Details
Off Budget Borrowings and Contingent Liabilities Chapter V
Deficit Indicators 111-117
Revenue Deficit
Gross Fiscal Deficit
Current Status
Statewise Details ****
Budgetary Balance 2003-04 and Beyond i- iv
Section- II ISSUES IN FEDERAL FISCAL TRANSFERS
Chapter VI
Changing Profile of Federal India 118-129
Changing Political Map
Fiscal Performance of the States
Growth Performance of the States Chapter VII
Criteria of Devolution 130-150
Vertical Sharing
Horizontal Devolution
Geographical and Demographical Factor
Backwardness
Income Criteria
Choice of Criteria -
A Comparison of X & XI Finance Commission
Recommendations
Tables Chapter VIII
Grants-in-Aid to States 151-166
Constitutional Provisions
Quantum of Grants & Federal Transfers
Grants from Finance Commissions
Selection of States
Effective Targeting of Grants
Suggestion of Standards Chapter IX
Financing Disaster Management 167-175 Views of Previous Finance Commissions
Suggestions Chapter X
Central Plan and Centrally Sponsored Schemes 176-190
Constitutional Position
Origin and Growth of CSS
CSS and Gadgil Formula
Views of Tenth Finance Commision
Views of the Pay Commission
Views of CAG
CSS Transfers
Views of Planning Commission.
Recommendation
Chapter XI Norms For Maintenance Expenditure 191-199
Adoption of Norms
Accounting and Monitoring System
Recommendations Chapter XII
Off Budget Borrowing and Contingent Liabilities 200-206 Chapter XIII
Fiscal Reform Facility 207-220
Deficit Indicators
Tenth Finance Commission Analysis
NDC Discussion
Eleventh Finance Commission Recommendation
State Fiscal Reform Facility - Notified Scheme
Implementation
Assessment Chapter XIV
Ranking of States - Database & Criteria 221-232
Accounting System
Quality of Budgetary Data
Classification of States
Ranking of States Chapter XV
Leveraging Grants for Ensuring Efficiency 233-255
A. Prescription Norms & Parameters
Lessons from Reforms Experience
Reforms in the Nineties
Recommendations
B. Economy & Efficiency
Revisiting Concepts
C. A Macro Level Efficiency Parameters
D. Micro Level Efficiency Parameters
Recommendations Chapter XVI
Monitoring Mechanism 256-262
Monitoring of Projects
Monitoring of Fiscal Reforms
Recommendations
*******************
PREFACE
The Twelfth Finance Commission constituted by a Presidential Order
dated 1st November 2002, issued by the Department of Economic Affairs,
Ministry of Finance and Company Affairs sought a study on Efficiency of
Public Expenditure, setting out specific terms of reference for the study
and time schedule for its completion (15th September 2003 to 31st January
2004). Apart from the Constitutional mandate for making recommendations on
a) the distribution between the Union and the States, of the net proceeds
of taxes and on their allocation between the states, b) the principles
which should govern the grants in aid of the revenues of the state out of
the Consolidated Fund of India and c) the measures needed to augment the
Consolidated Fund of a State, the Twelfth Finance Commission is required to
review the state of the Finances of the Union and the States and suggest a
plan by which the Governments collectively and severely may bring about a
restructuring of the public finances restoring budgetary balances and
achieving macro economic stability, along with debt reduction and equitable
growth. The enlarged terms of reference make the task of the Twelfth
Finance Commission more onerous than its predecessors and at the same time
provide an opportunity and specific mandate to conduct a deep and extensive
probe into several of the inter related issues of revenue augmentation and
expenditure management which the previous Finance Commissions may have
sensed but could not fully settle within the ambits of their relatively
limited frames of reference. The Twelfth Finance Commission, has thus, a complex and challenging
assignment, even as the Indian Economy and Financial systems, already
launched on a reform path, grapple with reorientation of objectives and
institutional changes to enable them meet the challenges of globalisation.
The sweeping changes involve, among other things the redefining of the role
of the state and re ordering of its priorities, with serious implications
for fiscal management and pattern of control over the economy. The
circumstances in which the Twelfth Finance Commission is placed are
somewhat delicate, as the state of public finance need swift and strong
corrective policies and effective implementation, and at the same time the
socio economic and political compulsions demand circumspection and
balancing of diverse forces and imperatives. Keeping this in view draft reports on the finances of the Union and
the State Governments covering budgetary data and analysis, the approach of
the previous Finance Commissions and some view points for the consideration
of the Twelfth Finance commission were presented in February 2004. Offering
comments on the draft reports, Member Secretary of the Commission sought
clarification on some points and coverage of the recommendations of the
Expenditure Reforms Commission by way of supplementation of the report.
While attending to this, it was felt that the data covered in the draft
report could be updated with specific reference to Union Budget for 2004-
05. In the