«Volume I CONTENTS Pages Chapter 1: Introduction 1 Terms of Reference Administrative Arrangements Major Activities Studies Other Features ...»
Chapter 1: Introduction 1
Terms of Reference
Chapter 2: Issues and Approach 11 Features of Terms of Reference
Continuity and Change
Chapter 3: Review of Union Finances 21 Fiscal Balance
Trends of Union Debt and Liabilities
Non Debt Capital Receipts
Trends of Expenditure
Overview of Union Finances
Chapter 4: Review of State Finances 38 Studies on State Finances
Chapter 18: Summary of Recommendations
Note of Dissent of Prof. Abhijit Sen, Member (Part-time)
Reply to Note of Dissent
MGNREGA Mahatma Gandhi National Rural Employment Guarantee Act MIS Management Information Systems MPLADS Member of Parliament Local Area Development Scheme MSP Minimum Support Price MSS Market Stabilisation Scheme MTFP Medium-Term Fiscal Policy MYTs Multi-Year Tariffs NBS Nutrient-Based Subsidy NCCD National Calamity Contingency Duty NCCF National Calamity Contingency Fund NDC National Development Council NDMA National Disaster Management Authority NDMF National Disaster Mitigation Fund NDRF National Disaster Response Fund NEDC National Economic and Development Council NFCR National Fund for Calamity Relief NFSA National Food Security Act NHM National Health Mission NIF National Investment Fund NPDM National Policy on Disaster Management NPS New Pension Scheme NRDWP National Rural Drinking Water Programme NSDP Net State Domestic Product NSSF National Small Savings Fund OECD Organisation for Economic Cooperation and Development OPEC Organisation of Petroleum Exporting Countries PAT Profit After Tax PBIT Profit Before Interest And Tax PDS Public Distribution System PEFM Public Expenditure and Financial Management PEL Production Exploration and License PEM Public Expenditure Management PFMS Public Fund Management System PMES Performance Monitoring and Evaluation Systems PPP Public Private Partnership PSE Public Sector Enterprise RBI Reserve Bank of India RNR Revenue Neutral Rate RTA Rail Tariff Authority SDMA State Disaster Management Authority SDMF State Disaster Mitigation Fund SDRF State Disaster Response Fund SEBs State Electricity Boards SERCs State Electricity Regulatory Commissions SFC State Finance Commission
1.1 The Fourteenth Finance Commission (FC-XIV) was constituted by the President under Article 280 of the Constitution on 2 January 2013 to make recommendations for the period 2015Dr. Y. V. Reddy was appointed the Chairman of the Commission. Ms. Sushama Nath, Dr. M.
Govinda Rao and Dr. Sudipto Mundle were appointed full time Members. Prof. Abhijit Sen was appointed as a part-time Member. Shri Ajay Narayan Jha was appointed as Secretary to the Commission (Annex 1.1).
Terms of Reference
1.2 The Terms of Reference (ToR) of the Commission mandated the following:
“4. The Commission shall make recommendations as to the following matters:
(i) the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between the States of the respective shares of such proceeds;
(ii) the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States which are in need of assistance by way of grants-in-aid of their revenues under article 275 of the Constitution for purposes other than those specified in the provisos to clause (1) of that article; and (iii) the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayat and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
5. The Commission shall review the state of the finances, deficit and debt levels of the Union and the States, keeping in view, in particular, the fiscal consolidation roadmap recommended by the Thirteenth Finance Commission, and suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth including suggestions to amend the Fiscal Responsibility and Budget Management Acts currently in force and while doing so, the Commission may consider the effect of the receipts and expenditure in the form of grants for creation of capital assets on the deficits;
and the Commission shall also consider and recommend incentives and disincentives for States for observing the obligations laid down in the Fiscal Responsibility and Budget Management Acts.
7. In making its recommendations on various matters, the Commission shall generally take the base of population figures as of 1971 in all cases where population is a factor for determination of devolution of taxes and duties and grants-in-aid; however, the Commission may also take into account the demographic changes that have taken place subsequent to 1971.
8. The Commission may review the present Public Expenditure Management systems in place including the budgeting and accounting standards and practices; the existing system of classification of receipts and expenditure; linking outlays to outputs and outcomes;
best practices within the country and internationally, and make appropriate recommendations thereon.
9. The Commission may review the present arrangements as regards financing of Disaster Management with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.
10. The Commission shall indicate the basis on which it has arrived at its findings and make available the State-wise estimates of receipts and expenditure.”
1.3 The following additional item was added to the ToR of the Commission vide President’s
Order published under S.O. No. 1424(E) dated 2 June 2014 (Annex 1.2):
“Para 5 A. The Commission shall also take into account the resources available to the successor or reorganised States on reorganisation of the State of Andhra Pradesh in accordance with the Andhra Pradesh Reorganisation Act, 2014 (6 of 2014) and the Ministry of Home Affairs notification number S.O. 655 (E) dated 4 March, 2014 and make recommendations, for successor or reorganised States, on the matters under reference in this notification”.
1.4 The Commission was originally asked to make its report, covering a period of five years commencing on 1 April 2015, available by 31 October 2014. The Commission had completed all its State visits and consultations with all stakeholders, including most of Departments/Ministries of the Government of India by June 2014 and the process of finalisation of its recommendations had reached an advanced stage. The bifurcation of Andhra Pradesh and the additional ToR required the Commission to examine again various comparable estimates for financial projections.
Subsequently, in view of the additional ToR notified, the President through his order, published under S.O. No. 2806(E) dated 31 October 2014, extended the tenure of the Commission to 31 December 2014 (Annex 1.3).
1.5 This Commission was confronted with several administrative difficulties in its initial stages, as had previous Commissions. Through the efforts of a small nucleus office, two temporary office spaces were arranged at Hotel Janpath and Jawahar Vyapar Bhavan, New Delhi, to enable the Commission to initiate its preliminary tasks from 1 February 2013 when the Chairman and Members assumed office. The regular office at Chatrapati Shivaji Bhavan, Qutab Institutional Area, New Delhi was made operational within 100 days due to the diligence and hard work put in by the small number of staff available in the early period.
3Fourteenth Finance Commission
1.6 The process of appointing suitable staff was a time-consuming process. The entire system of recruitment through deputation required several levels of clearances. Most of the officers and staff joined by May 2013, when we moved out of temporary premises. In some instances, even after requisite permissions by the Ministry of Finance and other relevant agencies, officials were not released by the lending departments and ministries. The Government of India, however, allowed us to take qualified and suitable persons on contract to meet our requirements. We also got approval to restructure the composition of the staff by inducting more officers at the level of Director through a matching surrender of lower posts. We could, in the process, obtain the services of some very competent, qualified and industrious staff. The list of sanctioned posts and the officers and staff are in Annex 1.4 and 1.5 respectively.
1.7 In regard to the administrative arrangements, it was the experience of several previous Commissions that considerable time is lost in getting suitable office space and obtaining the services of willing and suitable staff. Our experience also was similar. The ToR of Finance Commissions in recent times have been very expansive. In particular, some of the ToR of this Commission were new, requiring considerable fresh thinking and original work. Further, the mandate gives a Finance Commission about twenty-four months, on an average, to submit its report. In our case, the time available was initially only twenty-two months. Though our Commission could initiate its work early enough, it would be an advantage for everybody in the future if the few initial months are not lost in putting together an office and requisite staff. As the due date for constituting a new Finance Commission, as prescribed in the Constitution, is generally known well in advance, we would urge the Union Government to effectively resolve the location of office space and recruitment of staff well before the notification constituting the next Finance Commission. In our view, this could be achieved by suitably delegating and empowering the advance cell with the requisite mandate and relaxing the deputation rules for willing and suitable staff to join. Since the advance cell is usually headed by a very senior officer, the actions taken by it may be reviewed on an ex-post basis by the Finance Commission when appointed, rather than on ex-ante basis, as is being done at present. In this regard, Article 280 (4) of the Constitution, read with the Finance Commission (Miscellaneous Provisions) Act 1951 (Act No 33 of 1951), provides, in our view, adequate scope for the Union Government to reform the arrangements.
1.8 The Commission was delegated the powers of a Department of the Union Government (Annex 1.6). It held its first meeting on 1 February 2013, after the Chairman and three Members had assumed charge. The fourth Member assumed office on 2 February 2013. The Rules of Procedure of the Commission (Annex 1.7) were approved in the first meeting so that it could commence its work. During the remaining part of its tenure, the Commission held 117 meetings on the dates indicated in Annex 1.8. The list of meetings excludes the meetings held with the State Government representatives at state capitals during the visits by the Commission and with the Accountants General of the States at New Delhi. A committee comprising of Members, Secretary and senior officers was set in place to guide work on the key issues before the Commission. It met regularly and initiated action on subjects requiring special study, identified
4 Chapter 1 : Introduction
outside experts to carry out the research and regularly reviewed the progress of studies commissioned and in-house research work done by the staff. The inputs of the Committee were further reviewed at the level of the full Commission.
Collection of Information
1.9 The recommendations of Finance Commissions are based on economic and financial data collected from the Union and State Governments. The data gathered is supplemented by consultations with various stakeholders, experts, research studies commissioned and inputs from the public. Accordingly, on 1 February 2013, a public notice (Annex 1.9) was issued in all leading newspapers of India and on the website of the Commission, inviting views and comments from all interested individuals, knowledgeable persons, organisations and other sources on various issues related to the ToR of the Commission. The Chairman wrote to Union Ministers, Chief Ministers of States, the Deputy Chairman of the Planning Commission, Presidents of recognised national and state political parties, Governor of the Reserve Bank of India (RBI) and the Comptroller and Auditor General of India (C&AG), seeking their views on the ToR. The Secretary similarly wrote to all Chief Secretaries of the States and Secretaries in the Union Government.
1.10 The Finance Commission, being a temporary body, has to start afresh the task of collecting and compiling voluminous data on public finances from the Union and State Government every time it is constituted. The legacy data and files of the previous Commission do get transferred from the Finance Commission Cell in the Ministry of Finance. However, the data which the previous Commission used is of a period at least five years earlier and requires complete updating. All the State Governments and the concerned Ministries and Departments of the Union Government were, accordingly, requested to submit their memoranda, data on several items covering all items of revenues and expenditures, and topical notes on issues impacting the finances.