Are you aware Centre is hell bent upon converting the progressive state of Punjab to Bihar? Are you aware Centre returns only 0.65% of the revenue collected from Punjab? Are you aware at times even the Punjab Govt is not in a position to pay salaries to its employees? Are you aware Centre has not so far in 65 years devised any formula for allocation of revenue among the states and Union? Discrimination is the basic principle of ancient Chanakiya Neeti and do you know the Govt of India takes pride in following Chanakiya? Here you find an article by Prof. Om Parkash  and a commentary in Punjabi by B.S.Goraya. So can we say Indian is a dubious democracy?

Union -State Financial Relations in lndia

 lndia has a complex system of inter- governmental tax transfers between the Union and state governments. lt also reflects the need to cater to vast differences among states such as population, national resources, economic and social performance, administrative capacity and ethnic composition. There are three basic components of inter-governmental transfers in lndia, Viz., devolution of a fraction of the Centre's divisible taxes and grants-in-aid of revenues of states in need of assistance through the Finance Commission [FC], transfers through the Planning Commission [PC], in the form of assistance for state plans, transfers to implement centrally sponsored schemes under the central sector plan, and other discretionary transfers.

The resources transferred from the Central Govt to states show that about 65% of the total transfers were on the recommendations of the FC during the fourth five year plan. The transfers through the [PC] accounted for about 24% and 'Other' transfers were of the order of about 11%. There was an increase in the share of transfer through the FC and the PC and there was a considerable decline in the share of 'Other' transfers-during the Fifth Five Year Plan. After the Fifth Five Year Plan there has been a declining trend in the transfer through the FC. The transfers through the PC and 'Other' transfers has received a higher share in the total resource transfers from the Central Government. ln 1998-99, the transfer from the central Govt to states through the FC accounted for about 43% , where the transfers through the PC constituted about 35% . The 'Other' transfers during this year were of the order of 22o/o .

Thus, the transfers through the PC and 'Other' transfers have increased in their share as compared to transfers through FC which is a statutory body. By giving a large percentage share through non-statutory body at the discretion of the central Govt leads inevitably to the establishment of a donor-recipient relationship between the Centre and States. 

A perusal of the latest FC (Eleventh) reveals that out of the total devolution of  funds, the share of taxes and duties is 86.5% and that of grants is 13.5% . The Tenth FC recommended 91% as a share of taxes and duties in the total devolution and only 9% was given for grants-in-aid. The non-plan revenue grants have increased considerably from 3.3% in the tenth FC award to 8.1% in the eleventh FCs awards. The increasing share of grants-in-aid in the divisible pool has been a source of invitation to the states especially the progressive states. These states generally prefer devolution of taxes rather than grants under Article 275. This is because whereas taxes are buoyant, grants-in-aid are fixed sums, whose value is eroded in real terms over the years.

A glance at the criteria adopted by Tenth and Eleventh FC regarding tax sharing among states show that Tenth FC gave 20% weight to population (1971); 60% weight to distance of per capita income of state from that of state having highest per capita income; 5% weight each to area, and index of infrastructure; and a weight of 10% was given to tax effort. The eleventh FC has reduced the weight of population factor from 20 to 10%. lt has raised the weightage from 5% to 10% to area and index of infrastructure each. The Eleventh FC has used two criteria, namely, tax effort and fiscal discipline while the weight of tax effort has been reduced from 10% to 5%, an additional factor has been used to judge the performance of the state with a weight of 7.5%. ThuS, Tax effort and fiscal discipline, which indicate fiscal efficiency of the state to achieve a better fiscal balance receive a combined weight. of 12.5%. The states showing better fiscal balance would be rewarded more than the states  showing poor fiscal balance. 
The most important determinant of the share of the states is the distance of per capita income from the state having the highest per capita income. The weightage to this measure, which was 60% as fixed by the Tenth FC, has been raised to 62.5% by the eleventh FC. The intention of the eleventh FC here seems to be tilting the balance in favour of equity. The criteria and for determining the relative shares of states by FC has resulted to provide 51.3% share of shareable taxes and duties to four states, viz., Uttar Pradesh, Bihar, Madhya Pradesh and West Bengal. These states comprise 43% of total population of the country. Obviously, relative low per capita income has contributed to enhance their share. This factor has resulted in lowering the share of progressive state like Punjab whose share was 1.5% in the Tenth FC Award and now it is 1.1% given by eleventh FC. The southern states along with Punjab state has complained that FC is not the forum to address the intractable problem of regional imbalance. There is structural problem about the ills of these states and diverting of funds from the so-called developed states would not cure their ills. 
The second and quickly growing source of financial transfers is through the PC. Since 1969, The Plan assistance for state plans has been distributed to the states as  per the Gadgil formula. Some marginal changes have been made in this formula from time to time, but the emphasis has always been on channelising larger assistance to states. As per the latest (existing) formula, The criteria and weightage for non-specialised category states is : (l) Population (1971) 60%;  ll) Per capita income 25%, lDerivation method 20% and distance method 5%); Performance (Tax Effort, Fiscal Management; Progress ln respect of national objectives)7 .5% and iv) Special problems 7.5%.

 It may be mentioned here that both PC and FC have assigned definite weight to population on the basis of 1971 census this has been done to ensure that states which have taken effective steps to contain population growth are not penalised. However, the use of 1971 census figures for assigning weight to population criterion has been considered inappropriate by some economists because it favours static states and penalises those states which experience inflow of population. Secondly, per capita income is a deceptive indicator to determine backwardness. For example Punjab occupies the predominant situation among states on the basis of per capita income. However, the structure of the economy shows that maximum share of the state is coming from agriculture. The share of industry is small as compared to other industrialised states. The degree of backwardness should be determined keeping in mind the structure of the economy. 
Thirdly, the formula assigns 7.5% weightage to performance. Assigning 7 .5% weight to fiscal performance is not sufficient when one finds that most of the states are under fiscal distress. The states would have to undertake hard and painstaking measures for mobilisation of additional resources through taxation. 
Lastly, the allocation of central assistance on the basis of special problems of states is highly subjective and discretionary is nature which depends upon the wishes of the Central Government. 
The PC seems to be more concerned forgiving more weightage to backwardness criterion.This is evident from the fact that the original Gadgil formula had 10% weightage to backwardness (per capita income below average), the modified formula which become operative from 1980 assigned 20% weightage to backwardness (per capita income below the national average) and now the present formula has increased the weightage to backwardness to the extent of 25%. lt may be noted here that if the distribution of resources rely more on redistributive criterion, the more enterprising and financially disciplined states will be penalised and the over all growh of the economy would be unduly constrained so that, in the end, no state will gain this arrangement. Thus, a judicious balance between equity and efficiency is imperative.
 Another issue which has been cropping up from time to time in the relation between Centre and states pertains to centrally  sponsored schemes (CSS). The CSS are being implemented right from the beginning of the First plan. At that time, they were welcome as they intended to serve specific national goals-like introduction of HYV seeds which ushered in the green revolution in the country. But the number of CSS has grown over the years and they made deep inroads into spheres falling within the domain of the states. There have been efforts from time to time for transferring these schemes to the states along with corresponding funds, but not to much avail. lt has been reported that the number of such schemes has gone up to 210. The budget allocation to these schemes amounted to Rs. 34,257 crore in 1999-2000. The yearly expenditure has been stated to exceed Rs. 40,000 crore, if peripheral expenditure by states is included on these schemes. This level of central funding in believed to be more than the normal plan assistance funding for states plans. lt is a well-known fact that the concerned central ministries have developed a strong vested interest in continuing and enlarging these schemes at the Centre. Finally, it may be suggested that the promotion of Co-operative federalism demands the proper blending of the criteria of autonomy, fiscal discipline and inter-Sea equity. This would help in creating an atmosphere of mutual trust and confidence between Centre and states and also amongst states themselves. Moreover the overlapping in the functions of FC and PC should be avoided as for as practicable….Z 
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