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Finance Commission Division

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The Finance Commission Division of the Department of Expenditure is concerned with the implementation of the recommendations of the Finance Commission. The Eleventh Finance Commission (EFC) was constituted by the President on 3rd July, 1998. The Commission submitted its main report for 2000-05 covering all aspects of its original mandate on 7th July, 2000. The main report along with the explanatory memorandum as to the action taken on the recommendations made by the EFC in its main report was laid on the table of both Houses of Parliament on 27th July, 2000. The Government accepted the recommendations of the Commission regarding devolution of share in Central taxes and duties, grants-in-aid to cover non-Plan gap on revenue account, grants-in-aid for upgradation of standards of administration and specific grants to States for special problems, grants to States for financing local bodies, financing of calamity relief expenditure and debt relief to States. Subsequently the Commission submitted its report on 30th August, 2000 on the additional term of reference relating to monitorable fiscal reforms programme aimed at reduction of revenue deficit of the States. This report alongwith the explanatory memorandum as to the action taken on the recommendations made by the EFC in its supplementary report on the additional term of reference was laid on the table of both Houses of Parliament on 19.12.2000. The recommendations made in the supplementary report of EFC were accepted by the Government. The 12th Finance Commission has also been constituted under the Chairmanship of Shri. C. Rangaraja vide order dated 31.7.2003. The Finance Commission Division provides the status of the implementation of the accepted recommendations of EFC from time to time and any other data on State Finances when required.

DEVOLUTION OF SHARE IN CENTRAL TAXES AND DUTIES:

Under Article 270 of the Constitution, as amended w.e.f. 01.04.1996 by the Constitution (Eightieth Amendment) Act, 2000, a prescribed percentage of the net proceeds of all Central taxes and duties (except Union surcharge, cess levied for specific purposes under any law made by Parliament and the duties and taxes referred to in Article 268 and 269) is to be assigned to the States within which that tax or duty is leviable in that year and distributed among those States in terms of Orders issued by the President on the recommendations of the Finance Commission. For the period of five years commencing from 01.04.2000, the EFC recommended that 28% of the net proceeds of shareable Central taxes/duties may be distributed amongst all such States where the central tax/duty is leviable. If in any year during 2000-05, a Central tax/duty is not leviable in a State, the share of the State in that tax/duty should be put to zero and the entire proceeds should be distributed among the remaining States, by proportionately adjusting their shares. In addition, 1.5% of the net proceeds of shareable Central taxes/duties in a year may be distributed amongst such States which do not levy sales tax on sugar, tobacco and textiles during that year. Necessary Order of the President to implement the recommendation of the EFC has been issued. Consequent upon reorganization of Bihar, Madhya Pradesh and Uttar Pradesh the share recommended by the EFC has been bifurcated between the new States and remaining States and necessary amendment Order of the President has been issued.

GRANTS-IN-AID TO COVER NON-PLAN GAP ON REVENUE ACCOUNT AND
INCENTIVE FUND:

The EFC has recommended grants-in-aid amounting to Rs.35359.07 crores to 15 States equal to the amount of deficits assessed for each year during the period 2000-05. The EFC in its supplementary report has recommended that 15% of the revenue deficit grant meant for revenue deficit States during 2000-05 and a matching contribution by Central Government may be credited into an Incentive Fund. The first part of the Fund would comprise 15% of the withheld part of the grants recommended to cover deficit of the States on the non-Plan revenue account and depending on the performance of a State in the implementation of the monitorable programme, the withheld amount may be released to it on a proportionate basis. The second part of the Fund may be created by contribution from the Central Government, equivalent to 15% of the recommended revenue deficit grants. The incentive component has been recommended to be provided to all the States. The amount will be available to a State in proportion to the level of performance in the implementation of the monitorable fiscal programme for each year. The revenue deficit grant recommended for 2003-04 Rs 5744 .91 crores and 85% of this amount is being released to the concerned States.

GRANTS-IN-AID FOR UPGRADATION OF STANDARDS OF ADMINISTRATION AND
SPECIAL PROBLEMS:

The EFC has recommended grants for the period 2000-05 amounting to Rs.3843.63 crores to all the States for upgradation of standards of administration for the following sectors:

  1. District administration
  2. Police administration
  3. Prisons administration
  4. Fire services
  5. Judicial administration
  6. Fiscal administration
  7. Health services
  8. Elementary education
  9. Computer training for school children
  10. Public libraries
  11. Heritage protection and
  12. Augmentation of traditional water sources.

In addition, the EFC has also recommended specific grants to States for their special problems amounting to Rs.1129 crores. During 2001-02 grants amounting to Rs.1055.65 crores have been released to States. During 2002-03 grants amounting to Rs.550.30 crores have been released to States .During 2003-04 grants amounting to Rs. 800.58 crores have been released to States.

GRANTS FOR LOCAL BODIES:

The EFC has recommended grants totaling to Rs.10,000 crore for local bodies during 2000-05, to be utilised (except the amount earmarked for maintenance of accounts & audit and for development of database) for maintenance of civic services in rural and urban areas. The annual grant recommended is Rs.1600 crore for rural local bodies and Rs.400 crore for urban local bodies. Of the total grants for local bodies, the EFC has emphasized earmarking of funds - Rs.200 crore for development of database on the finances of the panchayats and municipalities and Rs.493.04 crore for maintenance of accounts of panchayats as the first charge on these grants. Grants amounting to Rs.762.47 crores, Rs. 2530.08 crores and Rs.1583.20 crores have been released during the years 2000-01, 2001-02 and 2002-03 respectively. During the current year 2003-04 grants amounting to Rs.1597.75 crore have been released to States.

FISCAL REFORMS FACILITY OF THE STATES (2000-01 TO 2004-05)

The EFC submitted a supplementary report, under the Additional Term of Reference which, interalia, recommended the drawing-up of a monitorable fiscal reforms programme for the States to generate surplus on revenue account. This monitorable reforms programme was also recommended to be linked to a system of Incentives during its forecast period. EFC also recommended the creation of an Incentive Fund comprising of 15% withheld amount of revenue deficit grants and equal matching contribution by the Center. Creation of a Monitoring Agency was also recommended for drawing up of State specific monitorable fiscal reforms programme for all States. The recommendations of EFC were accepted by the Government of India. The disbursement of the Incentive Fund as well as the utilization of the grants recommended by EFC would be subject to review by the 12th Finance Commission.

Ministry of Finance has drawn up a scheme on “The States’ Fiscal Reforms Facility (2000-01 to 2004-05)”. Given the broad contours of the fiscal objectives as envisage by the Eleventh Finance Commission, the Scheme invited the State Governments to draw up a Medium Term Fiscal Restructuring Programme (MTFRP) for the five year period. The programme needs to dovetail time bound action points such as:

(a) Fiscal Objective and Reforms
(b) Power Sector Reforms
(c) Public Sector Restructuring
(d) Budgetary Reforms

For monitoring of the fiscal reforms of the States, flexibility in designing the MTFRP is broadly left to the States. However, release from the Incentive Fund will be based on a single monitorable fiscal objective i.e. a minimum improvement of 5 percentage point in the ratio of revenue deficit as a proportion to their revenue receipt in each year till 2004-05 for the non-special category States. For the Special category States, the eligibility criteria has been revised recently and is 2 per centage points improvement in this ratio, from Financial year 2002-03 onwards. For those states, which are already in Revenue Surplus, it should be adequate if with improving revenue balance, the State shows a commensurate improvement in their BCR towards the State Plan. The expected improvement is 3 percentage points each year in BCR as percentage of Non- Plan Revenue Receipts. The Base Year is the financial year 1999-2000. Monitoring of the facility would be a joint exercise conducted on the basis of components of the MTFRP and the improvement in revenue balance captured in a proforma devised for the purpose which should form the basis of a Memorandum of Understanding between State and Ministry of Finance as a preliminary exercise.

Fiscal Reforms Programme of the States is essentially the States’ own programme. However, considering the fact that fiscal health of the States is an essential ingredient of overall macro-economic balance of the country, a Monitoring Committee has been constituted in which, among others, Chief Secretary and Finance Secretary of the concerned State are Members. JS(PF-I) will be the Member Secretary.

The Fiscal Reforms Unit (FRU) in Finance Commission Division is the single window Secretariat for the Fiscal Reforms Programme of the States as well as any other supplementary facility that may be extended to the States from time to time, including, inter-alia, facilities from the multilateral lending agencies.

Till date, the Medium Term Fiscal Reforms Programme (MTFRP) have been received from 25 States and discussed in the meeting of the Monitoring Committee viz., Andhra Pradesh, Arunachal Pradesh,Assam, Chhattisgarh, Goa, Himachal Pradesh, Jammu & Kashmir, Karnataka, Kerala, Madhya Pradesh,Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Punjab, Rajasthan, Sikkim, Tamil Nadu,Tripura, West Bengal, Uttar Pradesh Bihar and Uttaranchal. So far,16 MoU have been signed with the Government of Orissa, Nagaland, Karnataka, Kerala, Manipur,Maharashtra, Jammu & Kashmir, Rajasthan, Arunachal Pradesh, Assam, Andhra Pradesh, West Bengal Tripura, Punjab, Tamil Nadu and Meghalaya till 31.03.2004. A sum of Rs.4295.67 crores has been released to the States from the Incentive Fund i.e. Rs.1959.73 crores for the year 2000-01 and Rs.1397.11 crores for the year 2001-02 and Rs. 938.83 crores for the year 2002-03.

Discussions with a two States are in progress for preparation of their respective Medium Term Fiscal Reforms Programme.

Government of India would also provide assistance to States as and when required to overcome its fiscal constraints, subject to the State’s adherence to the fiscal commitments consistent to MTFRP. Additional amounts by way of open market borrowings are being allowed if the State concerned has structural adjustment burden, necessitating ( i) voluntary retirement/severance payments for downsizing Public Sector Enterprises(PSEs) and (ii) for steps linked to fiscal reforms programme. During 2002-03 seven States, namely, Nagaland, Kerala, Mizoram, Andhra Pradesh,Tamil Nadu, Orissa and Sikkim have been allowed additional open market borrowings to the tune of Rs.2363 Crores. Considering the financial position of the State Govts. and that the Govt. of India, it was decided that the reforms costs need to be part-funded by the Govt. of India in a blend of grant and loans for funding the VRS cost of the PSUs to be wound up or Department to be down sized. Assistance of the Govt. of India to the Special Category States in this regard would be in the form of 80% grants and 20% additional open market borrowing as compared to 50% additional market borrowing and 50% grants for non-special category States. For down sizing the PSUs assistance of Govt. of India would be through allocation of open market borrowing. During the current financial year a total amount of Rs. 29.91 crore have been released to three States namely, Jammu & Kashmir and Manipur and Kerala as grant from the Incentive Fund and Rs.205.20 crores allocated as additional open market borrowing for the above purpose:

DEBT RELIEF TO STATES:

Scheme General Debt Relief for all States linked to Fiscal Performance

The Eleventh Finance Commission recommended a general debt relief scheme based on the fiscal performance of each State, which may take the form writing-off of a certain percentage of repayment (subject to a ceiling of 25%) falling due in respect of Central Loans advanced to States. A debt relief of Rs.50.00 crore has been provided to Govt. of Punjab and Tamil Nadu during financial year 2003-04. So far, during the award period of EFC Rs.131.71 crores of debt to five States Governments, namely Andhra Pradesh, Arunachal Pradesh, Manipur, Tamil Nadu and Punjab have been written off under the scheme.

The Finance Commission Division is headed by Joint Secretary (FCD) and it has been entrusted with the following activities:

 
    1. Processing of follow-up action on the various recommendations, suggestions of Finance Commission to be taken by various Central Ministries and States;
    2. Processing of Action Plans submitted by the States, release of grants to States, monitoring and evaluation of the utilisation of the grants and issue of Presidential/ executive orders/ sanctions for upgradation of standards of administration in States and for special problems;
    3. Release of grants, monitoring and evaluation of the utilisation of the grants and issue of Presidential/ executive orders/ sanctions in respect of local bodies’ grants.
    4. Write off of Central loans outstanding against States based on Finance Commission’s recommendations.
    5. Implementation and monitoring of the Fiscal Reforms Programme of the States as recommended by EFC.
    6. Analysis of fiscal data of the States.
    7. To preserve the records of the previous Commissions and take such necessary action to obtain further information as might be of use to the future Commission.
    8. Submission of information to the subsequent Finance Commission.