CHAPTER I
INTRODUCTION
The Constitution of
India clearly specifies the expenditure responsibilities as well as the
resources, which are in the domain of the
1.2 The States have been entrusted a crucial
role in the growth process and most of the developmental functions have been
assigned to them. They have the
responsibility of developing social and economic infrastructure as well as
maintaining the law and order. Most of
these functions have a direct interface with people and require considerable
employee strength to organize them effectively.
1.3 In terms of the powers to raise
resources, Union Government has a predominant position. Taxes on income both
for individuals and corporate entities; excise duties and tax on import and
export of goods; service taxes, etc; are with in the domain of the
1.4 The heterogeneity and disparities that
must be accommodated within the federal fiscal arrangements is considerable.
The richest state (Goa) has a per capita Gross State Domestic Product (GSDP),
which is nearly 5 times as large as that of the poorest state (
1.5 Under article 275 of the Constitution and
as per the award of the Finance Commission there is devolution of a part of the
central tax revenues and grants in aid to the states. The recommendations of
the commission are generally valid for a term of five years. The Finance
Commissions have generally adopted the practice of assessing the non-plan
revenue needs of the states vis-à-vis their own sources of revenue and have
attempted to fill the gap between them. The second channel of transfer of
resources is through Planning Commission in the form of assistance for state
plans and transfers to implement centrally sponsored schemes. The assistance
for plans has a loan and a grant component, which differs for the general
category states (70 per cent loan and
30 per cent grant) and special
category states (10 per cent loan and
90 per cent grant). In case of
non-special category states the share of loan of 70 per cent was arrived at in 1968, which at that time corresponded to
the capital nature of the plan expenditure. These two channels cover both plan
and non-plan resource needs of the states. Besides there are other
discretionary transfers to states and the local bodies, though these are
generally not significant.
Table
1.1: Norms of Assessment of Revenue Receipt[2]
|
|
Ninth
Finance Commission |
Tenth
Finance Commission |
Eleventh
Finance Commission |
Tax Revenue
|
First the taxable capacity estimates were made and
normatively revenue from taxes in the base year were worked out. Revenue was
projected assuming 11.5 per cent annual growth. |
Observed Buoyancy for 1980-90 with floor (F) and
ceilings (C) for major states |
Dividing States into clusters with GSDP growth of 12 to
14 per cent, buoyancy of 1.10 to 1.35. No separate tax wise forecasts |
|
Sales Tax |
1.00 (F) 1.25 (C) |
||
|
Excise Duties |
1.00 (F) 1.35 (C) |
||
|
Stamp Duty |
1.00 (F) 1.30 (C) |
||
|
Motor Vehicles Tax |
1.00 (F) 1.20 (C) |
||
|
Others |
Actual Averages |
||
|
Non Tax Revenue |
|||
Interest
Receipts- other than SEBs and SRTCs
|
To increase gradually from 2 per cent in 1990-91 to 6
per cent in 1994-95 |
4 per cent |
Graduated increase to reach 9 per cent by 2004-2005 |
Dividend-
other than SEB and SRTC
|
Commercial- 5
per cent Financial - 3
per cent Promotional- 0
per cent |
Commercial- 6
per cent Commercial cum Promotional- 4 per cent Promotional- 1 per cent |
Graduated increase to reach 5 per cent by 2004-2005 |
Major and
Medium Irrigation
|
Full O& M Recovery, liberal view for hill states |
Full O& M Recovery 75% recovery in Hill Areas |
Subject to a minimum of Rs 80 per hectare in the base
year and 10 to 25 per cent increase per annum |
Minor
Irrigation
|
Losses to be reduced to one-fourth from 1986-87. |
Full O& M Recovery 75% recovery in Hill Areas |
25 per cent annual step up |
Water Supply
Schemes
|
Losses to be reduced to one-fourth from 1986-87 levels |
50% O& M Recovery |
25 per cent annual step up |
Others
|
Industrial schemes 5 per cent by 1994-95 |
6 per cent return on investment |
25 per cent annual step up |
SEBs
|
Graduated increase from 3 per cent in 1990-91 to 7 per
cent |
Graduated increase to reach 7 per cent in 1999-2000 |
As in case of other PSUS |
SRTC
|
Graduated increase to reach 6.5 per cent in 1994-95 |
Graduated increase to reach 6 per cent in 1999-2000 |
As in case of other PSUS |
Forests and
Mining & Others
|
A 5 per cent increase for forests and 8 per cent for
mining |
Buoyancy of 1.00 |
Forests and Mining 5 per cent increase 25 per cent step up in all other user charges |
1.6 Successive Finance Commissions have
adopted two basic principles, equity and efficiency, for determining the inter
se shares of the states. The principle of horizontal equity has been guided by
the consideration that, as a result of revenue sharing, the resource
deficiencies across the states arising out of exogenous and identifiable
factors are evened out. However, to neutralize adverse disincentive and moral
hazard associated with such an approach, it has been partially complemented by
efficiency. The normative assessment of revenue and expenditure attempted by
Finance Commissions also provide some inbuilt mechanism of fiscal discipline.
The parameters of normative revenue assessment adopted by the last two
commissions are indicated in table 1.1 above.
1.7 Twelfth
Finance Commission considered “equalization” as the guiding principles for
fiscal transfers. “Equalization principle aim at providing citizens of every
state a comparable standard of services provided their revenue effort is also
comparable. In other words, equalization transfers neutralize deficiency in
fiscal capacity but not in revenue effort.”[3]
Equity considerations though on a relatively smaller scale have also guided
transfers from Planning Commission. As per the current Gadgil-Mukherjee Formula,
30 per cent of the total assistance
is earmarked for the special category states. The remaining 70 per cent of assistance is distributed
among non-special category states according to a set of criteria. The transfer
criteria adopted by the finance commissions have consistently been in favour of
the poorer states (Table 1.2).[4]
Fiscal federalism is, therefore, more than simply a constitutional arrangement.
It embodies welfare enhancing outcomes by promoting equity and efficiency.
Table
1.2: Criteria for Horizontal Distribution to States from Divisible Pool[5]
|
|
Ninth Finance Commission |
Tenth Finance Commission |
Eleventh Finance Commission |
Twelfth Finance Commission |
|
|
Income Tax |
Excise Duties |
All Taxes |
All Taxes |
All Taxes |
|
|
Contribution to
collections |
10 |
|
20 |
|
|
|
Distance of Per
Capita Income |
45 |
33.5 |
60 |
62.5 |
50 |
|
Population |
22.5 |
25 |
|
10 |
25 |
|
Index of
Backwardness |
11.25 |
12.5 |
|
|
|
|
Inverse of Per
Capita Income |
11.25 |
|
|
|
|
|
Income Adjusted
Population |
|
12.5 |
|
|
|
|
Deficit States |
|
16.5 |
|
|
|
|
Area |
|
|
5 |
7.5 |
10 |
|
Infrastructure Index |
|
|
5 |
7.5 |
|
|
Tax Effort/Fiscal discipline |
|
|
10 |
12.5 |
15 |
1.8 Prior to the Constitution’s Eightieth
Amendment in 2000, only the proceeds of the income tax were sharable with the
states on mandatory basis. However, successive Finance Commissions had
recommended sharing a part of the proceeds from central excise duties as well.
But with this new amendment, all Union taxes and duties except the surcharge
and cess have become sharable with the states.
States now share in the overall buoyancy of the central taxes. Further, since a little over of seventy per
cent of the net proceeds is still retained by the centre, there is adequate
incentive for it to raise taxes and improve their compliances.
1.9 It has been the endeavour of successive
Finance Commissions and Planning Commission to impart fiscal stability and
sustainability to the state finances. Outcomes in this regard have not exactly
been as envisaged. “The dimensions of imbalances and deficiencies that
characterize our public finances are varied. Critical structural weaknesses are
evinced in chronic and growing revenue deficits, unsustainable fiscal deficits,
low and falling level of public investment as a percentage of GDP,
over-participation of governments in the provision of public goods,
over-subsidisation of non-merit goods, under-provision of public goods and merit
goods in terms of quality and quantity, low efficiency of government
expenditures, persistent revenue erosion exhibited in low and falling tax-GDP
ratio, narrow tax bases, under taxation of services and of agriculture,
distortionary structure of commodity taxes, fiscally debilitating inter-state
tax competition, adverse incentives of the fiscal transfer mechanisms,
dysynchronisation of the Finance and Planning Commission exercises of resource
transfers, regressive impact of fiscal intervention (through taxes, subsidies,
regulation, and administered prices), over-centralisation of revenue resources
relative to expenditure responsibilities, stagnation of non-tax revenues, and
fiscally irresponsible behaviour of economic agents exhibited in tax-evasion, excessive
subsidization, and defaults on debt servicing.”[6]
1.10 Consolidation of fiscal health has been on
agenda of the states for quite some time now. The Eleventh Finance Commission
had recommended the establishment of an incentive fund of over Rs 10,000 crore
to encourage and accelerate the reforms process. States having a revenue
deficit were required to reduce the revenue deficit by 5-percentage point as a
proportion of their total revenue receipt in each year till 2004-05 to be
eligible for assistance from this incentive fund. Twelfth Finance Commission has proposed
enactment of Fiscal Responsibility Legislation by the states. This intends to
provide statutory backing, which was absent in other discretionary efforts
through medium term fiscal reforms programme or Memorandum of Understanding.
FRBM commits the government to a defined debt or deficit reduction path. The
institutional framework of the fiscal legislation facilitates effective
monitoring of fiscal performance of the government and encourages pursuit of
fiscal management policies aimed at transparency[7],
responsibility, efficiency, fairness and stability. It also provides a basis
for political consensus to accomplish economic tasks and thereby enhance
credibility of the government.[8] Basic parameters of the Fiscal
Responsibility Legislation in six states are indicated in Annex 1 A. Other
states had earlier signed an MOU with the
1.11 Eleventh
Finance Commission for the first time indicated an adjustment path for fiscal
consolidation of the states. This path set the expected values for some of the
key fiscal parameters for the states and indicated annual adjustments that may
be needed to get the goal post values. Twelfth Finance Commission also
continued this practice as it provides annual monitorable values. Some key
parameters selected, their base level and expected values and annual adjustment
are summarized in table 1.3 below:
Table
1.3: Fiscal Adjustment Path-
Annual Adjustments[9]
(per cent to GDP)
|
Fiscal Parameters |
Base Values (1999-2000) |
Expected Value (2004-05) |
Annual Adjustment |
Base Values (2004-05) |
Expected Value (2009-10) |
Annual Adjustment |
Shortfall in EFC Expected and TWFC Base
Values |
|
|
Eleventh Finance Commission |
Twelfth Finance Commission |
|||||
|
Own Tax Revenues |
5.29 |
6.44 |
0.23 |
5.9 |
6.8 |
0.17 |
-0.54 |
|
Own Non-Tax Revenues |
1.03 |
1.53 |
0.1 |
1.2 |
1.4 |
0.03 |
-0.33 |
|
Revenue Receipts |
10.38 |
12.96 |
0.52 |
11.6 |
13.2 |
0.32 |
-1.36 |
|
Revenue Expenditure |
13.33 |
12.96 |
-0.08 |
13.6 |
13.2 |
-0.08 |
0.64 |
|
Capital Expenditure |
2.06 |
2.85 |
0.16 |
2.6 |
3.1 |
0.1 |
-0.25 |
|
Interest Payments |
2.3 |
2.55 |
0.05 |
2.9 |
2 |
-0.18 |
0.35 |
|
Revenue Deficit |
2.96 |
0 |
-0.59 |
2 |
0 |
-0.4 |
2 |
|
Fiscal deficit |
4.71 |
2.5 |
-0.44 |
4.5 |
3 |
-0.3 |
2 |
1.12 This
adjustment path proposed the resource augmentation and expenditure
prioritisation. However, as is revealed from the table above, actual outcome may
significantly fall short of the expectations of the Eleventh Finance
Commission. Base values of the all the parameters taken by the Twelfth Finance
Commission indicate that the consolidation path proposed may not be adhered to
by the states.
1.13 Assessment of fiscal health of the states
is through the accounts. Accounting as a system is defined as “a set or
assemblage of things connected, associated, or interdependent, so as to form a
complex unity; a whole composed of parts in orderly arrangement according to
some scheme or plan[10]”.
Government accounting over the years has developed from a simple housekeeping
to a policy instrument sub-serving the needs of economic management. Accounting
is charged with identification, selection and analysis, measurement,
estimation, processing and communication of information on receipts,
expenditures, assets, liabilities, costs and benefits, and all other aspects
that legitimately form part of the fiscal management of a state[11].
Accounting systems essentially follow the parameters of budget and provide the
required information at various stages of budget formulation and
implementation. As such, the coverage, the basis and the classification of
budgets and accounts are closely linked.
1.14 The presentation of accounts is usually
driven by user needs, but users and their purposes in seeking financial
information may differ from time, from place to place and according to context.
Even when these needs are known or explicitly indicated, it may at times be
difficult to arrange information customized according to these needs, as these
may vary from too much of selected details to a desired aggregation. In a
survey conducted by the audit agencies in
1.15 Much of the information that the users need
comes from the basic budgetary accounts maintained at different layers of
government and associated economic and statistical data. However, the first
step in delineating the analytical framework of financial reporting is to
determine the basic level of information to be collected and then aggregated so
as to assess the overall performance of governance at different layers which
would also meet the user’s information needs and expectations. There is always
a trade off between giving details (as that may make the compiled accounts
bulky and unmanageable) and possible simplification (as reducing the number of
account codes could result in potential loss of detail in accounting
information) and that prevents full customisation. Broad architecture[12]
of government’s financial information could be summarized as under.
Architecture
of Governments Financial Information Flow
|
|||||||
|
Citizens |
|||||||
|
Legislatures |
|||||||
|
Donors |
International
Agencies |
Domestic Investors |
Media |
Special Interest Groups |
|||
|
Executive Departments |
Planning, Allocating and
Raising of Resources |
Audit |
|||||
|
Receipts |
Disbursements |
Surplus/Deficit |
Fresh Liabilities |
Assets |
Debt Stock |
Performance Indicators |
Economic and Social Well
being |
|
Flow |
Stock |
Use of resources |
Surrogate Performance
Measure |
||||
1.16 The
Reporting
Parameters
·
Fiscal aggregates like
tax and non-tax revenues, revenue and capital expenditures, fiscal liabilities
and revenue and fiscal deficits have been presented as percentage to the Gross
State Domestic Product (GSDP) at current market prices. This is based on new series of GSDP with
1993-94 as base and as released (updated up to February 2005) by Central
Statistical Organisation (CSO).
·
In case of the States
where the recent figures of GSDP were not available, these have been worked out
on the basis of growth of GDP at factor cost as released by CSO.
·
For the revenue
receipts, own taxes, various components of expenditure and fiscal liabilities,
buoyancy estimates have given. Other than for the revenue receipts and its
components, such buoyancy estimates are indicated both with regard to GSDP and
revenue receipts and in some cases also with own resources. The buoyancy indicates the responsiveness of
these parameters to one percentage change in GSDP or the revenue receipts.
Buoyancy estimates are indicated for 1990-2004 and three sub periods, viz,
1990-95, 1995-2000 and 2000-04. These correspond to the award periods of the
Ninth, Tenth and first four years Eleventh Finance Commission.
·
For most series a
trend growth during 1990-2004 and growth in the three sub-periods has been
indicated. The first year is the base
year, which insulates the series/sub period growth rates from being
contaminated by an exogenous of a finance commission award. In certain
categories of expenditure, per capita expenditure has also been given. The per capita estimates have been worked out
on the basis of the annual mean population.
·
In respect of all
parameters, States have been divided into two clusters, general category and
special category. However,
·
Detailed methodology
with regard to the computation of various indices of Fiscal Health has been
indicated in chapter VI of the Report.
·
All figures of
revenue, expenditure and fiscal liabilities are as per the audited accounts,
unless otherwise indicated.
·
In November 2000, three new states-
Chhattisgarh, Jharkhand and Uttaranchal were carved out Madhya Pradesh,
1.17 The
Comptroller and Auditor General of India while reviewing the state accounts
regularly comments on the finances and fiscal sustainability of the States and
provides the actual audited/certified values of various fiscal parameters.
These are often indicated along with the expectations/budgeted figures to
facilitate an assessment of fiscal marksmanship and a comparative picture of
intentions and outcomes. However, there
has been an absence of a comprehensive review of the state finances based on
finance accounts covering both time series and a cross section analysis –
ensuring a comparative picture in its totality and covering the broad
parameters of resource mobilization, expenditure management and prioritization,
management of fiscal imbalances and fiscal liabilities. Further, there has not been a composite index
of fiscal health of the states comparable over time and across the states. In
January 2003, for the first time a composite index of fiscal health of States
was compiled for inter-state comparison of fiscal parameters. This publication
had a reference period of 1996-2001. This report is the forth edition of the
study and is fully updated and revised. It has a longer time frame covering the
awards of three Finance Commissions. It uses 1990-95(the Ninth Finance
Commission period) as the reference and provides comparable picture over the
Tenth and Eleventh Finance Commission’s periods and across the states.
Annex I A
Fiscal Responsibility
Legislation of States- Salient Features
|
Item/ |
Karnataka (Act) |
Kerala (Act) |
Tamil
Nadu (Act) |
|
Uttar
Pradesh (Act) |
(Bill) |
|
Gross Fiscal Deficit |
Not more than 3% of GSDP by 2006. |
2% of GSDP by 2007 |
Not more than 3% of GSDP by 2008 |
Contain rate of growth of GFD to 2% per annum in
nominal terms, till GFD is below 3% of GSDP. |
Not more than 3% of GSDP by 2009. |
Limiting the annual incremental borrowings to not
more than half the trend growth rate of revenue receipts |
|
Revenue Deficit |
Nil by 2006 |
Nil by 2000-07 |
Ratio of RD to revenue receipt not to exceed 5% by
2008 |
Reduce RD to revenue receipts by at least 5
percentage points until revenue balance is achieved. |
Nil by 2009 |
Ensuring that after a period of 5 years from the
appointed day, revenue expenditure shall not exceed RR. |
|
Limiting Guarantees |
Limit the guarantees within prescribed ceiling. |
|
Cap outstanding guarantees to 100% of RR in the
proceeding year or at 10 % of GSDP. Cap risk weighted guarantees to 75 % of RR or 7.5%
of GSDP |
Cap outstanding guarantees on long-term debt to
80% of RR of the previous year. Guarantees on short term debt given only for
working capital or food credit |
Not to give guarantee for any amount exceeding the
limit prescribed by the government |
Amount of risk-weighted guarantees issued in a
year shall not exceed 1.5 per cent of the expected revenue receipts and to
classify guarantees according the risk of devolvement. |
|
Total liabilities |
Not to exceed 25% of GSDP by 2015. |
|
|
Ratio of debt to GSDP to 40% by 2007. |
Total liabilities not to exceed 25% of GSDP by
2018. |
Restriction on borrowing. |
|
Expenditure |
|
|
|
|
|
Non-salary development expenditure to be not less
than 60 per cent of the total. |
|
Medium-Term Fiscal Plan (MTFP) |
i) Four year rolling target, ii) Assessment of sustainability; iii) evaluation
of performance of fiscal indictors. |
To review progress of public expenditure with
reference to fiscal target, evaluation of trends to budgetary allocations. |
i) Objectives, ii) Evaluation of fiscal indicators, iii) Strategic priorities for ensuing year, and iv) Economic trends and future prospects. |
i) Three-year rolling target, ii) Assessment of the sustainability, and iii)
recent economic trends and future prospects. |
i) Five-year rolling targets, ii) medium term
fiscal objectives, iii) strategic priorities, iv) evaluation of performance
of prescribed fiscal indicators. |
Multi-year framework and presenting three years
forward estimates of revenue and expenditure.
|
|
Compliance |
Half yearly review of receipts and expenditure.
GFD/RD targets may exceed due to national security or natural calamity. |
Public Expenditure Review Committee to submit
review reports on deviations of targets during the previous year. |
Independent external body to carry out periodic
review. Target GFD/RD may exceed the limits due to national security or
natural calamity. |
Quarterly review of receipts and expenditure.
GFD/RD may exceed the limits on unforeseen grounds due to national security
or natural calamity. |
Half-yearly review of receipts and expenditure.
The review report to reflect clearly deviation and remedial measures. b) GFD/RD may exceed the due to national security
or natural calamity. |
Constitution of Fiscal Advisory Board to advise Government on matters
relating to implementation of Fiscal responsibility legislation. |
|
Pension |
|
|
|
|
|
Present to the legislature pension liabilities
worked out on actuarial basis for the next ten years. |
|
Fiscal transparency |
Certain fiscal management principles and measures
for fiscal transparency. |
Measures to ensure greater transparency in fiscal
operations. |
Measures to ensure greater transparency in fiscal
operations. |
Measures to ensure greater transparency in fiscal
operations. |
Budget to be made more transparent by better
disclosure statements to be included in the budget documents. |
Bringing budget transparency by identifying all
liabilities, constitution of a Doubtful Loans and Equity Fund. |
Chapter-II
RESOURCES OF THE STATES- REVENUE RECEIPTS
Revenue and
capital are the two streams of receipts that constitute resources of the state
governments. The capital receipts have two components, one the debt receipts,
which create future repayment obligations and the other comprising
miscellaneous capital receipts, proceeds from disinvestments and recovery of
loans and advances, which lead to a reduction in states’ assets base. No future
obligations (or depletion of assets) are created in accessing the revenue
receipts.
2.2 Revenue receipts of a state are composed
of the following components:
a.
Receipts from states’ own taxes, which are levied and
collected by the state, such as sales or trade tax, excise duties, stamp duty
and registration fees, motor vehicles tax, etc.;
b.
Receipts from states’ sovereign functions, financial
intermediation and user charges for the economic and social services provided
by them;
c.
Devolution of taxes collected by the Union Government and
transferred to the states’ in terms of the award of the Finance Commission; and
d.
Grants in aid from the Union Government
Growth of Revenue Receipts
2.3 Overall revenue receipts of the states
increased from an average of Rs 93,188 crore during 1990-1995 to an average of
Rs 270,769 crore during 2000-2004. Revenue receipts were placed at Rs 313,370
crore in 2003-04. Seventeen general category states (including
Table 2.1: Consolidated Revenue of
the States (Rs Crore)
|
|
Revenue
Receipts
|
Average Annual Rate of Growth |
||||
|
General Category States |
Special Category States |
All States |
General Category States |
Special Category States |
All States |
|
|
1990-2004 |
157995 |
12835 |
170830 |
12.06 |
13.22 |
12.15 |
|
1990-1995 |
86735 |
6453 |
93188 |
16.05 |
16.25 |
16.07 |
|
1995-2000 |
155231 |
13291 |
168522 |
9.82 |
12.42 |
10.02 |
|
2000-2004 |
250526 |
20243 |
270769 |
9.23 |
12.80 |
9.49 |
|
2003-2004 |
285541 |
23829 |
313370 |
12.91 |
12.07 |
12.85 |
2.4 Average annual rate of
growth of revenue receipts during 1990-2004 for all the states was 12.15 per
cent. Special category states had a slight edge in the relative growth rate.
Growth rates over the three recent Finance Commissions’ award periods generally
decelerated and were significantly higher during 1990-1995 (IX Finance
Commission[15]).
There, however, were significant inter year and inter state variations in the
growth rates in both the clusters of states. Long-term trend growth rates were
generally range bound and varied from 11 to 13 per cent for 13 of the 17
general category states. Goa and
2.5 Revenue receipts are linked to economic
activity and domestic product of a state is its natural base. Apart from the quantum
and rate of growth of revenue receipts, it is equally important to look at
these receipts relative to this base and its expansion over time. The ratio of
revenue receipt- GSDP being scale neutral also allows for its meaningful
comparison across the states. In case of the general category states, revenue
receipts relative to their Gross State Domestic Product[16]
(GSDP) did not exhibit any buoyancy. Buoyancy coefficients both for the trend
period 1990-2004 and for the three sub periods remained below unity. During
1995-2000, buoyancy coefficient declined to 0.79, indicating that for each one
per cent increase in GSDP, revenue receipts increased by only 0.79 per cent. In
case of special category states, while trend buoyancy was less than unity,
during 1990-95 and 2000-04, it exceeded one.
Table 2.2:
Revenue Buoyancy and Revenue GSDP Ratio
|
|
Revenue Receipts/GSDP Ratio |
Buoyancy of Revenue Receipts[17] |
||||
|
General Category States |
Special Category States |
All States |
General Category States |
Special Category States |
All States |
|
|
1990-2004 |
13.03 |
37.93 |
13.71 |
0.95 |
0.96 |
0.95 |
|
1990-1995 |
13.82 |
38.59 |
14.46 |
0.94 |
1.10 |
0.95 |
|
1995-2000 |
12.28 |
39.86 |
12.98 |
0.79 |
0.86 |
0.80 |
|
2000-2004 |
13.34 |
36.25 |
14.00 |
0.98 |
1.32 |
1.01 |
|
2003-2004 |
13.39 |
37.10 |
14.07 |
1.02 |
1.04 |
1.02 |
2.6 The ratio of revenue receipt to GSDP
differed significantly in two clusters. While in case of general category states,
average revenue receipt- GSDP ratio was 13 per cent during 1990-2004; in case
of special category states, it was nearly three times of that level.
Notwithstanding the inter year variations in revenue receipt-GSDP ratios in the
two clusters, long-term ratios had a decelerating trend. Average annual rate of
shift in the ratio of revenue receipt to GSDP was (-) 0.60 per cent for general
category states and (-) 0.49 per cent for special category states. The ratio of
revenue receipt to GSDP declined from an average of 13.82 for general category
states during 1990-95 to an average of 12.28 during 1995-2000 before reaching
an average level of 13.34 per cent during 2000-04[18].
In case of special category states, ratio of revenue receipt to GSDP peaked at
41.49 per cent in 1995-96. It declined to an all time low of 33.96 per cent in
2000-01. Pick up was again noticeable in last three years.
2.7 It is often argued that GSDP is not an
ideal normalizing factor for revenue receipt. “Equalization in a federation is
done primarily by equalizing the revenue capacity of the states. States whose
per capita revenue capacity as determined normatively with reference to its tax
base is deficient, that is, below the average or the standard stipulated, are
given grants to make up for their deficiencies[19].
The successive Finance Commissions had infact sought to bring about some
equality in the revenue capacity across the states so that they can provide
basic public services to their people at reasonably comparable levels. The Twelfth
Finance Commission has also provided specific grants in aid (direct resource
transfer) for education and health sectors to those states, which were unable
to spend adequately in these sectors because of deficiencies in fiscal capacity[20].
Population may be a better normaliser of receipt and expenditure parameters as
it directly focuses on need, which may often be inversely related to per capita
income or Gross State Domestic Product. Lower receipt and lower GSDP may
actually neutralize the adversity and give a false sense of revenue adequacy in
case of poor states. While the amount that may be needed to have full
equalization may be quite large, Finance Commission, both through earmarked
sectoral transfers and by adopting weighting criteria favouring the poorer
states have attempted the same.
Table 2.3: Percapita Revenue
Receipts (in Rupees)
|
|
General Category States |
Special Category States |
All States |
|
|
Current Prices |
1993-94 Prices |
|||
|
1990-2004 |
1709 |
4897 |
1795 |
1310 |
|
1990-1995 |
1029 |
2758 |
1076 |
1160 |
|
1995-2000 |
1659 |
5010 |
1752 |
1274 |
|
2000-2004 |
2471 |
6900 |
2595 |
1542 |
|
2003-2004 |
2785 |
7834 |
2929 |
1656 |
|
Average Annual Growth (1990-2004) |
9.87 |
10.52 |
9.94 |
2.91 |
2.8 Per capita availability of receipts for
the states increased from an average of Rs 1076 during 1990-95 to an average of
Rs 2595 during 2000-04. For the special category states, per capita receipts
continued to be around 2.8 times of the receipts for the states in other
cluster. Trend rate of growth of per capita receipt for these states was also
relatively higher (10.52 per cent per annum during 1990-2004 against 9.87 per
cent). Inflation adjusted[21]
increase in per capita receipts was, however, only 2.91 per cent as nearly 70
per cent of the increase was because of price rise and the associated growth in
receipts. (Table 2.3)
Table 2.4:
Parameters of Internally Generated Resources (General Category States)
|
|
1990-2004 |
1990-1995 |
1995-2000 |
2000-2004 |
2003-04 |
|
Own Resources (Rs crore) |
104258 |
54952 |
103564 |
166756 |
192551 |
|
Tax Transfers and Grants (Rs crore) |
53738 |
31784 |
51666 |
83770 |
96990 |
|
Own Resources/GSDP (per cent) |
8.60 |
8.76 |
8.19 |
8.88 |
8.90 |
|
Growth of Own Resources (per cent) |
12.73 |
17.21 |
10.36 |
9.58 |
11.48 |
|
Buoyancy of Own Resources |
0.999 |
1.011 |
0.832 |
1.021 |
0.909 |
|
Own Resources/ Receipts (per cent) |
65.99 |
63.36 |
66.72 |
66.56 |
66.50 |
|
Dependency Ratio |
0.52 |
0.58 |
0.50 |
0.50 |
0.50 |
|
Shift Rate |
0.60 |
1.00 |
0.50 |
0.32 |
-1.26 |
·
Shift rate is the average annual increase in the proportion
of revenue receipts from own sources (own tax and own non-tax) in total revenue
receipts.
·
Dependency ratio is the ratio of revenue
receipts from tax transfers and grants to the receipts from own tax and
non-taxes sources. A higher ratio indicates greater dependence.
2.9 In terms of control and maneuverability,
revenue receipts can be considered as being composed of internally generated
resources and transfers. In case of the general category states, internally
generated resources constituted around two thirds of their total revenue
receipts. The relative share of the internally generated resources was
moderately upward moving and average annual rate of shift during 1990-2004 was
a modest 0.6 per cent. Own resources comprising the tax and non-tax receipts
had a higher relative growth rate and moderately higher buoyancy compared to
the total receipts. Since bulk of the
resources for these states were internally generated, the dependency ratio (the
ratio of their own resources to resource transfers) was 0.50 and generally
stable during this period. (Table 2.4)
Table 2.5:
Parameters of Internal Resources (Special Category States)
|
|
1990-2004 |
1990-1995 |
1995-2000 |
2000-2004 |
2003-04 |
|
Own Resources (Rs crore) |
2709 |
1085 |
2928 |
4467 |
4924 |
|
Tax Transfers and Grants (Rs crore) |
10126 |
5368 |
10363 |
15776 |
18904 |
|
Own Resources/GSDP (per cent) |
8.01 |
6.49 |
8.78 |
8.00 |
7.67 |
|
Growth of Own Resources (per cent) |
16.70 |
16.80 |
19.93 |
16.02 |
-7.55 |
|
Buoyancy of Own Resources |
1.21 |
1.14 |
1.38 |
1.65 |
|
|
Own Resources/ Receipts (per cent) |
21.11 |
16.81 |
22.03 |
22.07 |
20.67 |
|
Dependency Ratio |
3.74 |
4.95 |
3.54 |
3.53 |
3.84 |
|
Shift Rate |
3.08 |
0.47 |
6.68 |
2.85 |
-17.51 |
2.10 In case of special category states, less than
a quarter of their receipts were generated internally and more than three
fourths of these came by way of grants and devolution of the taxes collected by
the Union Government. Overall dependency ratio of these states at 3.74 was more
than six times of the general category states.
The rate of growth of receipts from their internally generated resources
was, however, significantly higher than total revenue receipts. The buoyancy of
receipts from their own resources during 1990-2004 at 1.21 was significantly
higher than the buoyancy of 0.96 for total receipts. (Table 2.5)
2.11 With in the overall transfers of resources,
relative importance of tax devolutions and grants in aid varied significantly across
the two clusters. In case of special category states, grants in aid contributed
to over 60 per cent of total receipts. The relative share of grants in total
receipt had an annual shift rate of 1.08 per cent. As against this, the
relative share of grants in aid for general category states was generally
decelerating. (Table 2.6) For special category states, there was a sharp
increase in the relative share of grants during 2000-04. This was indeed
compensatory to off set the decline in share of tax transfers.
Table
2.6: Relative Share of Tax Transfers and Grants in Aid (per cent)
|
|
1990-2004 |
1990-1995 |
1995-2000 |
2000-2004 |
2003-04 |
Shift Rate |
|
General Category States |
||||||
|
Share of Tax Devolution |
21.62 |
20.92 |
21.96 |
21.66 |
22.20 |
0.26 |
|
Share
of Grants in aid |
12.39 |
15.72 |
11.33 |
11.78 |
11.33 |
-3.14 |
|
Special Category States |
||||||
|
Share of Tax Devolution |
18.69 |
25.49 |
25.65 |
10.28 |
11.39 |
-7.57 |
|
Share
of Grants in aid |
60.20 |
57.70 |
52.32 |
67.65 |
67.94 |
1.08 |
2.12 Notwithstanding the relative share of the
tax transfers or their absolute values, devolution of taxes from Union
Government continued to fall short of the projections and expectations of the Finance
Commissions. In 2000-2004, shortfall in actual devolution of tax proceeds to
states increased to 18.43 per cent partly because of a moderate growth in GDP
and partly due less than expected buoyancy in tax receipts of the Union
Government. Though this shortfall was compensated by an increase in allocation
of grants, particularly to the special category states, it was to that extent a
shift from entitlement to endowment. (Table 2.6)
Table 2.6 Devolution of the Tax Proceeds to the States (Rs in crore)
|
|
1990-2004 |
1990-1995[22] |
1995-2000 |
2000-2004 |
|
General Category states |
34157 |
18145 |
34083 |
54263 |
|
Special Category States |
2399 |
1645 |
3409 |
2081 |
|
Total Devolution of Taxes |
36556 |
19790 |
37492 |
56344 |
|
Devolution
Expected by the Finance Commissions |
40649 |
17290 |
41269 |
69076 |
|
Shortfall
in Actual Devolution to Expectations (per cent) |
-10.07 |
14.46 |
-9.15 |
-18.43 |
Tax Receipts
2.13 Receipts from
their own taxes remained the predominant source of revenue for the states. Most
of the initiatives of the states for augmenting their revenue receipts during
this period also aimed at enhancement of receipts by broadening the tax base,
revision of tax rates and improved tax compliances. Tax receipts of the states
increased from an average of Rs 41,625 crore during 1990-95 to an average of Rs
136,519 crore during 2000-04. The trend
rate of growth of tax receipts was 13.55 per cent (it was 13.51 per cent for
general category states and 16.30 per cent for special category states). This
rate was much higher than the rate of growth of receipts of Union taxes, which
averaged 11.80 per cent during this period. Tax receipts were particularly
buoyant for special category states. Though this may have partly been due to
the lower base of tax receipts for these states, relatively higher growth in
the tax receipts of special category states narrowed the gap in their tax-GSDP
ratio compared to states in other cluster. The tax- GSDP ratio of special
category states as proportion to the ratio of general category states increased
from 51 per cent in 1990-95 to 63 per cent in 2003-04. (Table 2.7)
|
|
1990-2004 |
1990-1995 |
1995-2000 |
2000-2004 |
2003-04 |
|
Tax Receipts (Rs in crore) |
|||||
|
General Category States |
81668 |
41063 |
80312 |
134120 |
|