Chapter Chapter 1 INTRODUCTION
“No union or federation can survive if it has no financial resources of its own and is entirely dependent on contribution from the constituent units”
To define the Relationship between Planning Commission and Finance Commission in the Indian context is very difficult as both Planning Commission and Finance Commission play a vital role in their respective field, the only difference being that planning commission does not enjoy constitutional status. But still 70 percent of tax allocation is done by planning commission. From the very beginning a question always arises that if we have a constitutional body called finance commission then what is the need of planning commission. It is again a debatable topic and many opposition parties were totally against the planning commission because it violates the principle of strict federalism. Because of the planning commission the union government does not give much importance to finance commission. In planning commission there is monarchy of prime minister and its council. Even though the t he Planning Commission is an extra-constitutional body it enjoys almost parallel authority to the Cabinet. India‟s federal system is distinguished by tax and expenditure assignments that result in large Vertical fiscal imbalances, and consequent transfers from the central government to the state governments. Several channels are used for these transfers: the Finance Commission, the Planning Commission, and central government ministries. This project uses panel data on Centre-state transfers to examine how the economic and political importance of states influences the level and composition of per capita transfers, as well as differences in temporal patterns of Planning Commission and Finance Commission transfers. We find evidence that states with indications of greater bargaining power seem to receive larger per capita transfers, and that there is greater temporal variation in Planning Commission transfers. The Government of India established the t he Planning Commission in March1950 with the Prime Minster as its Chairman. The Commission was established by virtue of a Resolution 1 of Parliament. The Commission also employs a Deputy Chairman, a number of Central Ministers and a varying number of full time members who represent various socio – economic fields.
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Resolution No. 1-P(C)/50 dated 15.3.1950.
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This executive body was charged with the responsibility of making an assessment of all resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilisation of resources and determining priorities. Since 1951 the Commission has been formulating Fiver Year Plans on a (nearly) 2 regular basis and is currently put forth the 11thFive Year Plan which is to be operative between 2007 and 2012.The Commission functions through 31 divisions such as the Agriculture, Labour and Employment, International Finance and Financial Resources division. 3 Each division is headed by a Senior Officer and the subjects assigned to the various divisions cut across state and central subjects as enumerated in Seventh Schedule of the Constitution of India, 1950. The functions of the Commission have evolved since its inception and are still evolving with the changing nature of Indian polity. The expansion of its functions over the past six decades has only enhanced the status of this “superbody over the cabinet” 4 which is an executive body without Constitutional or statutory basis. The powers of the Commission have always overlapped and often been a duplication of the powers and functions assigned to the Finance Commission, which is a Constitutional body established by virtue of Article 280 of the Constitution. This co – extensive scope of powers invested in a constitutional and extra – constitutional body and the conflict therein is the subject of study in this paper. The paper further studies the Commission as a tool used by successive central governments to create a strong Union at the expense of the states and federal polity.
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[4] The first Five-year Plan was launched in 1951 and two subsequent five-year plans were formulated till 1965, when there was a break because of the Indo-Pakistan Conflict. Two successive years of drought, devaluation of the currency, a general rise in prices and erosion of resources disrupted the planning process and after three Annual Plans between 1966 and 1969, the fourth Five-year plan was started in 1969. The Eighth Plan could not take off in 1990 due to the fast changing political situation at the Centre and the years 1990-91 and 1991-92 were treated as Annual Plans. The Eighth Plan was finally launched in 1992 after the initiation of structural adjustment policies. 3
[5] Planning Commission, “Functions”. history/org.htm (Last Visited: 15-10-2013)
Available
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at
http://planningcommission.nic.i n/aboutus/
Sardar Patel, Hare Krushna Mahtab Oral History Transcript, p. 218, NMML as cited in G. Austin, Working of a Democratic Constitution, (New Delhi: Oxford University Press: 1999) p.618. Other commentators / critiques view the Commission Commission as “A Super Cabinet”, K.V. Rao, Parliamentary Democracy in India, (Calcutta: The World Press Pvt. Limited: 1965) p. 326; “A Quasi – Political – Political Body”, PV Rajamannar, Government of Tamil Nadu, “Report on the Commi ssion ssion on the Centre – Centre – State State Relations Inquiry Committee”, Committee”, 1971, p 206.
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STATEMEN T OF PROBLEM
The Constitution of India was made with a view of a systematic government, so that the government and the country functioned in strict adherence with the prescribed methods mentioned in the Constitution. However, the existence of an extra-constitutional body like the Planning Commission despite the presence of a constitutional body like the Finance Commission violates the principle of strict federalism. The Planning Commission enjoys more power than the Finance Commission with regard to the grants allocation, under article 275 of the Indian Constitution. There is less coordination between the Finance Commission and the Planning Commission. Consequently, it is the states who are the sufferers.
SCOPE AND LI M I TATION
The project compacts the planning and finance commission and extra constitutional work done by planning commission. For example seventy percent grants allocation was done by planning commission and prepare five year plan which was approved by National Development Council of India. The project has a wider scope as it also includes the principle of federalism and also talks about allocation of fund and why planning Commission does not enjoy the constitutional status. This project also includes the role of finance commission under article 280 of Indian constitution and enjoy constitutional status but still not enjoy the real power as compared to planning commission. There is also certain limitation in this project that only discusses planning commission in the context of India because of lack of resources and limits this project up to the planning commission and finance commission not go beyond this. So in Toto it mainly concentrates on the work of planning commission and finance commission in context of centre-state relationship.
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Chapter 2 H I STORY OF PLANNI NG COM M I SSI ON
The Planning Commission was set up by a Resolution of the Government of India in March 1950 in pursuance of declared objectives of the Government to encourage a rapid rise in the standard of living of the people by well-organized utilization of the resources of the country, increasing production and offering opportunities to all for employment in the service of the community. The Planning Commission was charged with the task of making assessment of all resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilization of resources and determining priorities.
Rudimentary economic planning, deriving the sovereign authority of the state, first began in India in 1930s under the British Raj, and the colonial government of India formally established a planning board that functioned from 1944 to 1946. Private industrialists and economist formulated at least three development plans in 1944. After India gained independence, a formal model of planning was adopted, and the planning commission, reporting directly to the Prime Minister of India was established. Accordingly, the Planning Commission was set up on 15 March 1950, with Prime Minister Jawaharlal Nehru as the chairman The first Five-year Plan was launched in 1951 and two subsequent five-year plans were formulated till 1965, when there was a break because of the IndoPakistan Conflict. Two successive years of drought, devaluation of the currency, a general rise in prices and erosion of resources disrupted the planning process and after three Annual Plans between 1966 and 1969, the fourth Five-year plan was started in 1969. The Eighth Plan could not take off in 1990 due to the fast changing political situation at the Centre and the years 1990-91 and 1991-92 were treated as Annual Plans. The Eighth Plan was finally launched in 1992 after the initiation of structural adjustment policies.For the first eight Plans the emphasis was on a growing public sector with massive investments in basic and heavy industries, but since the launch of the Ninth Plan in 1997, the emphasis on the public sector has become less pronounced and the current thinking on planning in the country, in general, is that it should increasingly be of an indicative nature. 5
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History Planning commission - http://planningcommission.nic.in/aboutus/index.html
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NEED OF PLANNI NG COMM I SSI ON
Finance commission is constituted periodically and works for a short period. Planning is a dynamic process and as such continuous appraisal and adjustments are essential. A five fiveyear would not meet the requirements of planning. The planning commission reviews annually the resources and plan needs of the states and recommends plan assistance. In a dynamic situation, net revenues available for transfer from the union to the states towards plan assistance will also be known only on a yearly basis. The necessary expertise, support and competence for dealing with such a situation have been developed by the planning commission. For obvious reasons, it would not be possible for the finance commission to perform such a role. Therefore, practical difficulties would arise If plan transfers are also entrusted to the finance commission. The present division of labour which has developed over the years is that the finance commission advises on the non-plan revenue requirements and non-plan capital gap. In certain sectors, where the problem is clear and the numbers are reasonably sure, the finance commission has recommended capital resource devolution also only to a limited extent. ROLE , OBJECTIVES AND F UNCTI ONS OF TH E PL ANNI NG COMM I SSI ON
The Planning Commission in India was set up on March 1950 to promote a rapid rise in the standard of living of the people by utilizing the resources of the country, increasing production and offering employment opportunities to all. The Planning Commission has the responsibility for formulating plans as to how the resources can be used in the most effective way. The Planning Commission has to make periodic assessment of all resources in the country, boost up insufficient resources and formulate plans for the most efficient and judicious utilization of resources.
F oll owing are the fu nctions of the Planni ng Commission of I ndia:
• To make an assessment of the material, capital and human resources of the country, including technical personnel, and to see which resources are deficient in relation to the nation‟s requirement, and try and augmenting them thus.
• To formulate plans for the most effective and balanced utilization of country's resources.
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• To indicate the factors which are hampering economic development, and to determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan.
• To determine the machinery, that would be necessary for the successful implementation of each stage of Plan in all its aspects.
• Periodical assessment of the progress of the Plan, i.e., appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisal may show to be necessary. 6 Evolving Fu nctions –
• With the changing times, the Planning commission is preparing itself for long term vision for the future. The commission is seeing to maximize the output using our limited resources optimally. Instead of looking for mere increase in the plan outlays, the effort is to look for increases in the efficiency of utilisation of the allocations being made. • From being a centralized planning system, the Indian economy is slowly progressing towards indicative planning wherein the Planning Commission has set the goal of constructing a long term strategic vision for the future and decide on priorities of the nation. • It sets sectoral targets and provides stimulus to the economy to grow in the desired direction. • The Planning Commission plays an integrative role in the development of a holistic approach to the formulation of policies in critical areas of human and economic development. In the social sector, schemes which require coordination and synthesis like rural health, drinking water, rural energy needs, literacy and environment protection have yet to be subjected to coordinated policy formulation. It has led to multiplicity of agencies. An integrated approach can lead to better results at much lower costs.
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http://planningcommission.nic.in/
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• With the emergence of severe constraints on available budgetary resources, the resource allocation system between the States and Ministries of the Central Government is under strain. This requires the Planning Commission to play a mediatory and facilitating role, keeping in view the best interest of all concerned. It has to ensure smooth management of the change and help in creating a culture of high productivity and efficienc y in the Government. • The key to efficient utilisation of resources lies in the creation of appropriate self-managed organisations at all levels. In this area, Planning Commission attempts to play a systems change role and provide consultancy within the Government for developing better systems. In order to spread the gains of experience more widely, Planning Commission also plays an information dissemination role.7
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http://www.indianetzone.com/45/planning_commission_india.htm
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Chapter 3 FU NCTIONS OF PLANNI NG COMM M I SSI ON AND FI NANCE COM M I SSI ON
A. Functions & Supervision of the Planning Commission
Principal task of the Planning Commission is to formulate the Five Year and Annual Plans for the most effective and balanced utilisation of the country's material, capital and human resources, appraise from time to time the progress in their implementation and recommend adjustments of policy and measures that are considered to be necessary in the light of such appraisal. Since the Commission was a purely central body the state governments were of the opinion that they were not involved in the planning process of the country and vehemently opposed the activities of the Commission as being infringement of the autonomy of states. Nehru, in an attempt to bring the state government into the planning process established the National Development Council in 1952 on the recommendation of the Planning Commission. The NDC is composed of the Prime Minister, central cabinet ministers, members of the Planning Commission and the Chief Ministers of all the States. At its twice – yearly meeting the NDC was to prescribe guidelines for the formation of national plans; consider the Commission‟s plan and review its functioning; and consider important questions of “soci al and economic policy affecting national development”. Though the NDC is technically the supervisor and approver of the Commissions plans, the Council had lost all power and authority by the Third Plan and had become nothing more than a rubber stamp ensuring a façade of state participation in national planning. In the earlier period the Commission gave plan assistance to fill the gap in a State‟s assessed financial resources and estimated plan outlay. Towards the end of the Third Plan this system was found faulty and many states felt that they were being discriminated against. Currently the Commission makes recommendations of to the Central Government and the NDC with respect to Plan Revenue expenditure at the national and state levels, i.e., the Commission allocated resources for the implementation of the plans put forward by it in the Five Year and Annual Plans. A majority of the funds transferred by the Commission are granted by virtue of Article 282 which provides for grants with respect to “any public purpose” even if the public purpose is one for which the Parliament and State Legislatures may not be able to make laws. A small
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portion of these funds are transferred as loans to states by virtue of Article 293 of the Constitution. The problems arises since “planning” pertains to any and every subject on the central, state and concurrent lists and hence affords a purely executive body a great degree of autonomy in a sphere which has been assigned by the Constitution to a body mentioned therein.
B. Functions of the Finance Commission
The powers and functions of the Finance Commission merits a separate paper and this section of this paper will merely outline those functions of the Finance Commission which are overlapping in conflict with the Planning Commission. The Finance Commission is an ad hoc8 body established by virtue of Article 280 of the Constitution coupled with The Finance Commission (Miscellaneous Provisions) Act, 1951. The President of India selects the commissioner and the four other members of the Finance Commission India. Further, the President of India assigns the term of their office and their responsibilities. The commissioner and the four members of the Finance Commission India are answerable for their act of commission and omission, directly to the President of India. The duties of the Finance Commission in general are enshrined in Article 280 Clause (3) of the Constitution and include the duty to make recommendations with respect to “the distribution between the Union and the States of the net proceeds of taxes” 9 and “measures needed to augment… and supplement the resources of the States” 10 . In accordance with Article 280 (3) (d) 11 each Finance Commission is provided with Terms of Reference which enumerates specific matters with respect to which the Central Government requires assistance.12
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Article 280 provides for constituting a Finance Commission at the expiration of every fifth year or at such earlier time, as the President of India considers necessary. Even after accepting the necessary principles of interpretation of the statute, it cannot mean that a particular Commission would be given a short tenure of 1½ or 2 years for delineating certain fixed principles for 5 years in advance. A look at the articles 109, 110 and 112 and similar articles in respect to the State Assemblies may be necessary to have a complete grasp of the matter. The practice of Finance Commissions being given tenure of 1½ years or 2 years may be a historical fact but has nowhere been forwarded in the Constitution nor does it fulfill the aspirations as conveyed by the letter and spirit of that sacred law. It should be treated a s a continuing body and its personnel may change every fifth year. 9 Art. 280 (3) (a) of the Constitution. 10 Art. 280 (3) (bb) of the Constitution. 11 The sub – clause makes it the duty of the Finance Commission to make recommendations with respect to any matter that the President may refer to it. 12 D.D. Basu, Shorter Constitution of India, (Napur: Wadhwa and Company: 13th ed: 2004) p. 1225.
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The mechanism employed by the Finance Commission for distributing funds between the Union and State governments is provided in Articles 268, 269, 270, 271, 274, 275, 280, 281 and 282 of the Constitution. 13 It is submitted that the Planning Commission and Finance Commission disburse funds by virtue of the same Constitutional provisions and are assigned the same functions and hence there occurs an overlap between the functions of the two Commissions.
COM PARI SON - PLANNI NG COM M I SSI ON AND F I NANCE COM M I SSI ON
The proper approach to the task of the Finance Commission at the present crucial juncture in union-state relations is to expect it to use the best norms and judgments it can devise to work out what the union and the states can raise and what they genuinely need to spend in relation to their appropriate functions as laid down in the Constitution. The commission should suggest expenditure norms which the union government should adhere to and recommend the distribution of a large part of the amount that is to devolve on the states under section 280, reserving section 282 grants for disasters and other such unexpected events. Very useful fallout of such an arrangement will be that the Planning Commission will then have to become a genuinely expert advisory body. It will not have the clout of „plan -grants‟ to enforce the patterns of development which it and the various union ministries think appropriate for all the states. Only through the basis of its genuine expertise will it be able to influence state governments, not through its financial clout. When thinking about the relationship between the Finance Commission and the Planning Commission in the Indian context, certain historical and constitutional facts need to be emphasized. The Indian constitution does not use the word „federal‟, and the relat ionship under the present provisions has been dubbed as quasi-federal and sometimes even as almost as unitary. But the nature of the Indian polity itself compels the Indian Union to be a federation of states, however powerful the centre has been made under the Constitution. One of the essential requirements of a federal relationship must be assumed to be that the federal government as well as the constituent units should have a status of basic equality. This implies that the constitutional scheme must be so understood and operated, that for their 13
The mentioned articles allow for different types of grants and loans to the states by the centre and also provide centre – state revenue sharing mechanism. See, Finance Commission of India, “Constitutional Provisions”. Available athttp://fincomindia.nic.in/ShowContent.aspx?uid1= 2&uid2=2&uid3=0&uid4=0 (Last Visited: 15 – 10 – 2013).
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normal functioning, neither the federal government nor the state government should have to depend on the other‟s goodwill. In the scheme of federal finance, this implies that the financial resources must be so distributed between the federal and the state governments that each will have the potential of enjoying adequate resources for the expenditures involved in carrying out the functions allotted to them. Because it is impractical to make a clear-cut allotment of financial resources, the device of the Financial Commission has been used in the Indian Constitution for periodically deciding how the finances raised by the union government are to be distributed among the states. The Constitution of India which we say is a federal constitution actually in essence is almost a unitary Constitution. Leading scholars on federal government also have not regarded India‟s system as true federalism but as “unitary constitution,” and various foreign scholars have called it a quasi-federation, an administrative federation, organic federalism, and a territorial federation. The recommendations of the Finance Commission appointed under Article 280 are not binding on the Union government, which did not accept some recommendations of the third and the seventh Finance Commissions and did not implement final recommendations of the eighth. On the other hand, the National Planning Commission, which is not a constitutional body, has become very powerful under the ex-officio chairmanship of the Prime Minister. It is the Planning Commission which disburses discretionary grants under Article 282, which has been used extensively for making “plan grants” to the states without reference to the Finance Commission. Plan assistance to states by the center consists of grants and loans in the ratio of 30:70. Non-plan grants under Article 275 can be made only by the Finance Commission, but the Planning Commission controls the determination and allocation of three-fourths of the total grants under this Article. In the process, it has not only become an “economic cabinet” of India but also an “aid-giver” to the states. Thus, the working of a non-constitutional body like the Planning Commission despite the existence of a constitutional body like the Finance Commission is a classical example of quasi-federalism and a violation of the principle of strict federalism.14
14
M.Govinda Rao, Changing contours in fiscal federalism in india. www.econ.hit-u.ac.jp/~kokyo/APPPsympo04/PDF.../RaoFinal2.pdf
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Chapter 4 F I NANCE COM M I SSI ON Vs. PLANN I NG COM M I SSI ON F EDERAL I SM
Vs. UNI TARY STATE
A. A Historical Perspective
The confusion with respect to the exact powers of the two Commissions is as old as the Commissions themselves and has been raised by a number of Finance Commissions. The Second Finance Commission expressed the view that “some anomalies inevitably arise where the functions of the two Commissions overlap”15. The Second Finance Commission, through its terms of reference, was specifically asked to take into account both the requirements of the Second Five Year Plan and the efforts made by states to raise additional revenue. The terms of reference for the Third Finance Commission were similar to those of the Second Commission with respect to five year plans. The Majority Report of the Third Finance Commission in their recommendations, and as per their terms of reference, included recommendations regarding fiscal assistance to the plan component of revenue expenditure but, inexplicably, the Majority Report was rejected in favour of the Minority Report which was appended as a dissenting note. The terms of reference of the Fourth Finance Commission did not expressly ask for recommendations with respect to plan revenue and expenditure and the Commission (perhaps keeping in mind the experience with the Majority Report of the Third Commission) confined itself to non – plan revenue expenditure and did not recommend any plan grants. The Commission, in its report, clearly mentioned that it was limiting itself to non – plan expenditure as it would be “inappropriate” for it to interfere in the tasks of the Planning Commission.16 It is submitted that the Constitutional body essentially forfeited its powers in favour of a politically dominant extra Constitutional body. 17
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Report of the Second Finance Commission, 1957, p. 8, para. 3. The Commission was chaired by K. Santhanam who subsequently has raised a number of issues regarding the overlap of functions between the Planning and Finance Commissions. 16 Report of the Fourth Finance Commission, 1965, p.9, para. 16. 17 G. Thimmaiah, “The Ninth Finance Commission: Issues and Recommendations”, Journal of the National Institute of Public Finance and Policy, 1993, p. 231. The author endorses the above view and goes on the say that the functions of the Finance Commission (in deference to the powers of the Planning Commission) are reduced to a mere arithmetic exercise and can therefore be carried out by the lowest rung of the bureaucracy.
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Subsequently, the Central Government expressly limited the terms of reference of the Fifth Finance Commission by asking it to make recommendations about the grants – in – aid for purposes other that the requirements of the Five Year Plan. 18 The Sixth, Seventh and Eight Finance Commissions were asked to adhere to the “existing practice” in regard of Central – State revenue distribution. Hence, since the Fifth Commission, the Finance Commissions are precluded, by their terms of reference, from taking into account the requirements of state plans in recommending fiscal transfers or grants in aid to state plans. On a scrutiny of the terms of reference of all Finance Commission post the Fifth Commission, one may conclude that the role of the Finance Commission is confined to grants under Article 275 only. It is submitted that this is an incorrect interpretation of the Constitution and is merely an extra – Constitutional practice which has served to enhance the powers of an executive body at the expense of the Finance Commission.
B. Current Position
With the emergence of the Planning Commission, the role of the Finance Commission has been considerably diminished in the sphere of federal finance. The bulk of the resources transferred to States from the Union are transferred through the Planning Commission. 19 Nearly 75% of all funds transferred from the Union to the State are transferred from on the recommendation of the Planning Commission 20 and for the implementation of the Five Year Plans and this is carried out through grants and loans under Article 282 and 293 respectively. Due to this practice Article 282, which was originally a residuary provision, 21 has assumed centre stage for making financial adjustments between the Union and the States. This has consequently enhanced the status of the Planning Commission as well. The present day position is that the Finance Commission does not take into account Centre – State fiscal relationship under the plan. After the Finance Commission makes its recommendations regarding tax – sharing and grants, the Planning Commission takes over, assesses the needs and resources of the States and the Centre and plan programmes and then
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Report of the Fifth Finance Commission, 1969, p.2, Item 4 (b). As much of 75% of total transfers are made on the recommendation of the Planning Commission. M.P. Jain, Indian Constitutional Law, Vol. I, (Nagpur: Wadhwa and Company: 5th ed: 2003) p.845. 20 R. Singh and A. Lakshminath, Fiscal Federalism – Constitutional Conspectus, (Nagpur: Wadhwa and Company: 2005) p. 154. 21 K. Santhanam, Union – State Relations in India, (Bombay: Asia Publishing House: 1960) p. 56 19
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decides how much money should be given to each State by way of loan and grants under Article 282.22 Furthermore, since the Planning Commission is a continuous body which deals with grants and loans of all kinds while the Finance Commission is an ad hoc body dealing with tax – sharing and fiscal need grants only, the Planning Commission has come to exert a much more profound impact on Indian Federalism that the Finance Commission. An analysis of Annexure IV and Annexure V clearly illustrates that between 1980 and 2001, barring two year, the transfer by the Planning Commission has always been above fifty percent of the total transfers to the States. A similar comparison can be drawn from the grants – in – aid awarded by the two Commissions. For example, in 1980 – 81 the grants – in – aid awarded by the Finance Commission was Rs. 250 crores while the same year the grants – in – aid by the Planning Commission was Rs. 2060.2 crores. For many years the grants – in – aid by the Planning Commission is ten times the amount allotted by the Finance Commission. It is quite clear from the statistics that the Planning Commission could, in all respects, sidestep the Finance Commission which has been recognized by the Constitution as the balance wheel of Indian fiscal Federalism. Thus, as it stands today, the two Commissions have certain fields within which their functions overlap and in these fields the Planning Commission, though an extra – Constitutional body, clearly overrules the Finance Commission, which is a Constitutional body. The only sphere within which the Finance Commission exercises unfettered power is that of tax distribution since this sphere is expressly assigned to it as per the Constitution. The subsequent section of the paper analyses the need for co – ordination within those spheres which are common between the two Commissions.
C. Overlapping Powers of the Commissions
In achieving the objectives of intergovernmental transfers, the dichotomous functioning of the two Commissions has been a great hindrance. 23 Likewise, the overlapping and duplication on account of the functioning of the two agencies has resulted in i nefficiency.24
22
M.P. Jain, Indian Constitutional Law, Vol. I, 5th ed., (Nagpur: Wadhwa and Company: 5th ed: 2003) p.846. Also D. D. Basu, Constitutional Law of India, (Nagpur: Wadhwa and Company: 7th ed: 2003). 23 M. G. Rao and V. Aggarwal, “Intergovernmental Fiscal Transfers in India: Some Issues of Design and Measurement”, National Institute of Public Finance and Policy, 1990. 24 M. G. Rao and R. J. Chelliah, “Fiscal Federalism in India”, Indian Council of Social Science Research, 1996, p. 36 – 37.
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As a result of this overlap in powers a number of anomalies occur in the transfer of funds to the States. Both the Finance Commission and Planning Commission carry out independent revenue exercises in order to estimate each State‟s position on non – loan account. Similarly, both bodies compile independent reports regarding the revenue expenditure of the States and methods of augmenting their revenue. Adding further to this confusion is the distinction between Plan and non – plan expenditure. Since plan expenditure has an extremely broad purview it is very difficult to distinguish the exclusive territory of the Finance Commission. Furthermore, the Finance Commission has no power to look into the plan requirements of the States and the Planning Commission does not consider the fiscal problems of the States in detail. It is extremely restrictive to ask the Finance Commission to recommend fund transfers to the States without actually being aware of the Plans in which those funds will be utilized. The lack of coordination between the two commissions creates a soft budget constraint for the states. Because the Finance Commission tends to provide funds to make up shortfalls, states have an incentive to commit to expenditures regardless of funds. This behavior by states emerged soon after independence. In the 1960s, for example, an astute observer remarked that “states indulge in competitive importuning, putting up scheme after scheme to attract funds, and then happily run up big deficits by failing to collect their own share”. Because of the division of responsibilities between the Financial and Planning Commissions, a few states, primarily those with higher per capita income, have regularly been left with substantial revenue surpluses.25 Thus, such issues of overlapping functions lead to a number of problems in Centre – State fiscal relations such as inefficiency in allocation and utilization of funds and duplication of research by two central bodies. The suggestions put forward by numerous scholars in order to remedy this situation of overlapping powers will be discussed in a subsequent section of the paper.
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For example, in the 1980s, Bihar's (one of the poorer states) non-Plan surplus was only ten percent of that of Punjab’s (a rich state). These surpluses are important because they can they be plowed back into further development schemes, creating even wider disparities in the future. K.S. Krishnaswamy, I.S. Gulati and A. Vaidyanathan, “Economic Aspects of Federalism in India”, in N. Mukerji and B. Arora (eds.) Federalism in India: Origins and Development, (New Delhi: Vikas Publishers: 1992) p. 180, 188.
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COORDI NATI ON - PLANNI NG COM M I SSION AND FI NANCE COM M I SSI ON
Need for greater coordination between the Finance Commission and the Planning Commission has been emphasised by many State Governments and experts. The Administrative Reforms Commission had recommended that in order to ensure greater coordination between the two bodies, one Member of the Planning Commission should also be nominated as Member of the Finance Commission. Since the Sixth Finance Commission, one Member is common to both the Commissions. It is however, a matter of concern that only two of the four common Members so far appointed were in charge of the Financial Resources Division in the Planning Commission. As this defeats the very purpose of having a common Member, we would suggest that the Member in-charge of financial resources in the Planning Commission should automatically be the common Member and remain in this charge even after the report of the Finance Commission is submitted. This arrangement would enable the adoption of an integrated approach in the assessment of financial resources and needs of the States by the two Commissions. A precondition for smooth coordination between the two bodies is the synchronisation of Five-Year Plan period with the reference period of the Finance Commission. There is an impression that once the Finance Commission's report is submitted, it is not of much consequence beyond determining major parameters like tax shares, grants-in-aid, etc. A planned economy presupposes utmost financial discipline. The entire system of resource transfer built up on the basis of the recommendations of a semi-judicial body of experts would crumble in case there is scant regard for the norms evolved by it. We have already noted that Finance Commissions reassess the receipts and expenditure of the States on a normative basis. A perusal of the reports of the various Finance Commissions shows that practically all the Finance Commissions have had occasion to note that on the receipts side the norms determined by the preceding Finance Commission were seldom reached, particularly in regard to returns from irrigation and power projects and from State road Transport Corporations. On the other hand, on the expenditure side, the norms have been invariably exceeded. In many cases, large expenditure on new non-Plan items has been incurred. Sometimes schemes which could not be accommodated in the Plan have been included as non-Plan items and large sums spent on them.
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Chapter 5 WH Y PL ANNI NG COM M I SSI ON DO NOT ENJOY STATUS OF A CONSTI TUTI ONAL BODY
To give constitutional status to the planning commission is a part of the overall need to redefine centre-state relation. The question whether the planning commission should be merely a body created by an executive order of the government of India, or it should be established under a statue making use of the relevant constitutional provision in the concurrent list, was debated even before the initial appointment of the commission. The decision in favour of the former alternative was apparently taken mainly on the ground that it was a new experiment which was undertaken, and therefore such a course would provide the necessary flexibility to facilitate changes and adjustments suggested by experience. As it turns out, though 40 years have passed, much experienced gained and considerable discussion on the matter conduct, there has been no change in the legal position of the commission. It continues to be a body created under an executive order as originall y passed in 1950. John Mathai, the finance minister resigned on the issue of his criticism that the commission would be a kind of parallel authority to the cabinet but extra constitutional and therefore not subject to the usual discipline of the democratic system. A link between planning commission and finance commission came to be provided through the convention that the member of planning commission would always be appointed as a member of finance commission. Now the question arises that if we have finance commission then what is the need of an extra constitutional body called planning commission of India. As we already discussed that India follows the principle of quasi federalism and the prime minister and his council enjoy the real power and prime minister is the head of planning commission. If we provide constitutional status to the planning commission of India then there is a chance that prime minister and its council will lose control over planning commission because after becoming the constitutional body the prime minister and it s council will have to work according to the constitution of India. This will restrain the power of the
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prime minister and his council. This is one of the major reasons why the planning commission does not enjoy the constitutional status. 26 THE PLANNI NG COMM I SSI ON: A POLI TICAL AND F EDERAL PERSPECTIVE
One of the major criticisms of the Commission has been that it is an executive body which is chaired by a politician (the Prime Minister) and consists of members who are nominated by the dominant political body. It has increasingly been claimed over the years that the Planning Commission has just become an appendage of the Central Government and to introduce objectivity in planning, it should be made an autonomous body. It must further be noted that at the time when the Commission was established India was essentially functioning under a single party system, i.e., the Congress Party formed the Central Government as well as most of the State Governments and hence it was much more feasible to nurture a centralized planning system. 27 It should be noted that the political scenario in India has changed over the past three decades and there have emerged a number of different national and regional parties which enjoy power in the states. Hence a centralized planning system is no longer feasible. It is submitted that this centralized planning structure in tandem with a decentralized political structure provides a great amount of political leverage to the party in power at the Union and also provides potential for exploitation of states through fiscal considerations. Another criticism is that fact that the Commission has no statutory or Constitutional basis and hence does not have any limitations or expressly provided guidelines within which it has to function. This being the case, the Commission can make recommendations with respect to any subject on the State, Concurrent or Central lists. Hence, the Commission can be used by the Union government to take executive actions with respect to any State subject. The main problem in this regard is that, in the absence of concrete guideline, the element of discretion is very strong in the functioning of the Commission. Furthermore, it can be misused by the Union government in order to allocate a greater proportion of funds to those states where the 26
H.K. Paranjape - Planning commission as a constitutional body. http://www.jstor.org/pss/4396962 27 This is a submission made by the researchers though it was refuted then and is still refuted. At the time of formation of the Commission, the extent of powers given to the Commission was disputed many eminent parliamentarians and economists such as John M athai (India’s first Railway Minster and second Finance Minister) who, in his budget speech for the year 1950 – 51 was the person who introduced the Commission to the Indian Parliament but later resigned from the Government over a disagreement related to the scope of the Commission’s power. Similarly, Sardar Vallabhai Patel opposed the establishment of the Commission as he felt it would become a “super cabinet”. An exchange of letters between G.B. Pant and C. Rajagopalachari (the Chief Ministers of UP and Madras respectively) in 1952 showed that they nurtured similar apprehensions about the Commission, G. Austin, Working of a Democratic Constitution, (New Delhi: Oxford University Press: 1999) p.615. K. Santhanam and P.V. Rajamannar also opposed the expansion of the Commission’s powers amongst others.
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same party / coalition partners are in power and smaller proportions to those states where the opposition parties are in power. It should also be noted that an analysis of fund allocations over the years clearly indicates that states with greater bargaining power 28 receive larger per capita transfers, and that there is greater temporal variation in Planning Commission transfers. A final criticism is leveled at the centralized nature of the Commission and claims have been made that it is a mere tool used by theUnion to strengthen itself are the expense of State autonomy. The Finance Commission was meant to be “a quasi – arbitral body whose function is to do justice between the Centre and the States” 29 and it has been suggested by numerous scholars and political bodies that the Planning Commission, by overshadowing the Finance Commission essentially seeks to create a purely centralized planning and fiscal system thus destroying the federal structure prescribed by the Constitution. 30 It has been seen as a brazen and direct encroachment upon State autonomy.31 Constitutional considerations not withstanding, the Centre has no difficulty in persuading or pressuring States into following centrally determined patterns of economic policy affecting large segments of the area which falls, constitutionally, under State jurisdiction. Due to the financial inadequacy of States and with the help of financial inducements, the Centre has often been able to persuade the State governments to act according to central policies even if the same is not necessarily desired by the States.32 Other commentators, thinking along the same lines, feel that the Planning Commission while ignoring the nation‟s diversity has started working on the presumption that nationally “there should be practical uniformity”. 33 Santhanam further noted that 75% a large number of the Plans were related to subject which were assigned exclusively to the States and hence concluded that planning for economic development had “practically superseded the federal Constitution” with the result that it was “functioning almost like a unitary system in many respects”. Similarly, Ashok Chandra was of the opinion that the undefined position of the 28
G. Vasistha and N. Singh, “Some Patterns in Center -State Fiscal Transfers in India: An Illustrative Analysis”, National Institute for Public Finance and Policy, New Delhi, 1998. Available at:http://129.3.20.41/eps/pe/papers/0412/0412005.pdf 29 B.R.Ambedkar in the Constituent Assembly as cited in G. Austin, Working of a Democratic Constitution, (New Delhi: Oxford University Press: 1999) p.615 . 30 Federalism has been declared one of the basic features of the Constitution as per the ruling in Keshavananda Bharti v. Union of India, AIR 1973 SC 1461. 31 P. Diwan, Union States Fiscal Relations: An Overview, (New Delhi: Light and Life: 1981) p. 126. 32 K.R. Bombwall, Foundations of Indian Federalism, (New York: Asia Publishing House: 1967) p. 304. 33 K. Santhanam, Union – State Financial Relations in India, (Bombay: Asia Publishing House: 1960) pp. 45, 47. He supported the First and Second Five Year Plans but felt that the subsequent plans had strayed from the objective of the Commission.
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Planning Commission and its wide terms of reference had led to it becoming “the Economist Cabinet, not merely for the Union but also for the Stat es”.34 The strongest suggestions regarding the ambiguous position of the Commission have come from the Administrative Reforms Commission[42] which noted that the Center has a “vital role” in planning but that the states were not “subordinate offices” of the Central Government.35 The ARC‟s final report went much further and suggested that most of the central planning organs be dismantled in favour of decentralized planning and that the Planning Commission should become an “expert advisory” body which was to formulate objective, outlays, targets etc. but would not be involved in the implementation of the same. The implementation of the schemes, as per the ARC‟s recommendations should be carried out only by the States (in case of state based schemes) and the Centre in co – ordinations with the States (in case of inter – state schemes).36 Austin attacks the Planning Commission on two counts – firstly, he is of the opinion that the Central Government, if raised to the “commanding heights of the economy” will create an impediment to economic development in particular and the functioning of federalism as a whole. Secondly, he views the Planning Commission as an attempt at intellectual centralization and points out that in a diverse country such as India, it is a fallacy to assume that such centralization will be capable of solving the plethora of problems faced at the state level. Panikar sums up the issues faced by federalism in the context of planning when he says, “(due to centralized planning) every state has become a petitioner at the doorstep of the Central Government”.37 This section clearly outlines the problems of a centralized planning system in a diverse federation such as India; it further outlines how such a system can and has been used by the Union government to control the States. The subsequent section of the paper considers numerous recommendations, made by scholars and commissions, in order to remedy this situation.
34
A. Chandra, Federalism in India, (London: George Allen & Unwin Ltd: 1965) p.279. ARC, Report of the Study Team, 1967, p. 93. 36 G. Austin, Working of a Democratic Constitution, (New Delhi: Oxford University Press: 1999) p.620. 37 K.M. Panikar, The Foundation of New India, (New Delhi: Foundation Books: 1963) p.236. 35
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Chapter 6 SUGGESTI ONS AND RECOMM ENDATI ONS LOOKI NG F OR A REM EDY
Recommendations operate on the basis of two assumptions – firstly, it is assumed that the curbing of the powers of the Planning Commission is a desirable objective and secondly, it is assumed that India is a federation and its federal structure, as envisaged by the framers of the Constitution, should be maintained.
A. Recommendations of the Third Finance Commission, 1961
The Third Finance Commission put forward two suggestions aimed at solving the conflict powers between the two Commissions. Firstly, it was suggested that the powers of the Finance Commission be enhanced to “embrace total financial assistance to be afforded to the states”. This will be in harmony with the mandate of the Constitution. Secondly, it was recommended that the Planning Commission be transformed into a permanent Finance Commission at an appropriate time. These recommendations were rejected because it was felt that the Constitutional/ statutory basis for the Finance Commission was the difference between the two Commissions and if such a basis was provided for the Planning Commission then it would lose the dynamism and flexibility which it enjoyed and hence would be less e ffective.
B. Recommendations of the Administrative Reforms Commission (1966 – 1970)
The ARC Study Team on Planning was of the view that the Planning Commission should be responsible for formulating the objectives and laying down priorities while indicating broad sectoral outlays. It was of the opinion that the Planning Commission should not be involved in the implementation of its plans. 38 The ARC also recommended that the appointment of the Finance Commission be timed to coincide with the plan periods. The ARC Study Team on Financial Administration recommended that a single central body should handle all devolution of finances. It further suggested that there should be a common member between the two Commissions and hence the Vice – Chairman of this body should be a member of the Planning Commission.
38
ARC, Report of the Study Team, 1967, pp. 106 – 107.
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The ARC also recommended that the planning capabilities of the States should be enhanced and all basic questions of planning policy should be “squarely” placed before the NDC and its decision with such matters would be final and binding. Prime Minister Gandhi sought to act upon the latter recommendations of the ARC but no significant changes were brought about in the planning process. The planning power continues to vest with the centre and the NDC is still a mere rubber stamp for the actions of the Planning Commission.
C. Recommendations of Shri N.C. Jain
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Mr. Jain put forward these recommendations as part of his note on restructuring the Indian fiscal system. Amongst other recommendations he recommended that: -----The Planning Commission should be given Constitutional status by merging the Planning and Finance Commission. The membership envisaged under Article 280 can be increased if required for the purposes of a composite body. The
Finance
Commission
should
be
competent
to
entitled
to
make
recommendations with respect to both plan and non - plan issues and there may exist two cells of the Commission in order to carry out these functions. Finally, it was suggested that the Finance Commission be made a permanent body which can be reconstituted every fifth year or prior to it is circumstances so require. It is submitted that Jain’s suggestions, which are similar to those of t he Third Finance Commission, would fetter the flexibility of the Commission and hence are not desirable . D. West Bengal Government Memorandum on Centre – State Relations (1977)
The Left Front Government headed by Jyoti Basu held a meeting in December 1, 1977 and adopted a memorandum on Center – State Relations suggesting a review of the existing scheme so as to restructure the same. The basic premise underlying this document was that the Constitution, thought federal in spirit was essentially unitary in practice. The suggestions regarding the Finance and Planning Commissions were few in number but were significant. It was suggested that the Planning Commission as well as the National Development Council be given Constitutional status. Furthermore, it was suggested that the NDC‟s decisions be made binding on the Central Government with respect to plan policies and other plan related matters. 39
N.C. Jain was a member of the Eleventh Finance Commission which put forth recommendations for the period 2000 – 2005.
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It was also suggested that the Finance Commission be given the final say in all matters related to allocation of resources to the States. These suggestions are significant in light of the fact that they are suggestions which come from the States as compared to the earlier recommendations which were made by Commissions appointed by the Central Government. It is clear from the recommendations that the West Bengal Government is in favour of granting a greater degree of power to a constitutionally established body as opposed to a body established by an executive action of the Central Government. It should also be noted that the memorandum does not dismiss a centre – based planning system but merely seeks more autonomy for state planning and a more structured use of planning power at the Centre.
E. Recommendations of the Rajamannar Committee (1971)
The Tamil Nadu government appointed a Committee, under the Chairmanship of Dr. Rajamannar, in September, 1969 to submit a report on Centre – State relations. The Committee made four recommendations regarding the Commissions. Firstly, it was suggested that the Finance Commission be made a permanent body with its own Secretariat.40 Secondly, it has been recommended that by virtue of a constitutional amendment the recommendations of the Finance Commission be binding on the Center as well as Sta tes. Thirdly, it has been recommended that the Planning Commission as presently constituted should be disbanded and should be replaced by a statutory body consisting of scientific, technical, agricultural and economic experts. Finally, it has been suggested that the States establish planning commissions similar to those mentioned in the prior recommendation. The recommendations of the Rajamannar Committee seem to be feasible since they maintain the flexibility of the Planning Commission and also solve the issue of extra – constitutionalism. As opposed to the current scenario, the Committee seeks to mediate the recommendations of a non – statutory body through a Constitutional body which is capable of curbing the excesses of the Central Government. The Central Government did not accept the recommendations of the Rajamannar Committee as it was appointed by a State Government.
40
Report of the Rajamannar Committee, p. 95.
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F. Recommendations of the Sarkaria Commission, 1988
This central commission on Centre – State Relations firstly accepted and approved the existing
division/duplication
of
powers
between
the
Planning
and
Finance
Commission.41 Keeping this approval in view, the Commission went ahead to make a number of minor and cosmetic recommendations. It was recommended that the Member in charge of financial resources in the Planning Commission should also be a member of the Finance Commission. It has been suggested that the NDC be renamed the National Economic and Development Council in order to ensure that along with developmental issues, it has to consider and advice on relevant economic issues. No changes in its character have been recommended.42 The Commission also encouraged decentralization of planning and more State participation in the same. A logical corollary of this recommendation is more centre – state co – ordination with respect to planning. In a related recommendation, the Commission has suggested that the number of centrally sponsored schemes should be kept to a minimum. Synchronization of the Plan period with the reference period of the Finance Commission has also been recommended by the Commission. The Commission has also recommended that the Planning Commission act as a watch dog over the State‟s finances in order to ensure that the regimen prescribed by the Finance Commission is followed. The Planning Commission is to report to the NEDC any deviations from the regimen and the reasons for the same. The Commission has rejected the call for a permanent Finance Commission but has recommended an expert, non – political agency under the common member of the two Commissions in order to ensure co – ordination between the two Commissions. It has recommended that the report of the Finance Commission be made biding on the State and Central governments. While rejecting the suggestion of a statutory basis for the Planning Commission, the Sarkaria Commission was of the view that, “… a statutory status for the Planning Commission will make it lose its mobility and momentum”.
It is submitted that the recommendations made by the Sarkaria Commission are merely cosmetic in nature and do not have the ability to resolve the issues outlined above. Further, it 41
Sarkaria Commission Report, para. 10.11, reco no. 10 . Sarkaria Commission Report, para. 10.7, reco no. 31.
42
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seems that the Sarkaria Commission has only rejected the recommendations put forward by various other Commissions and Committees and, in the process, has provided the Planning Commission with certain immunity from challenge. The Report seems to be one which is extremely convenient for the Central Government since it gives the Government the license to carry on with the Commission in spite of the aforementioned issues.
Only one of the aforementioned recommendations have been accepted and acted upon by the Central Government. The recommendation made by the ARC and the Sarkaria Commission with respect to a common member between the two Commissions has been put into play from the Twelfth Finance Commission onwards. All Finance Commissions now have an “ex officio” nominee who is a member of the Planning Commission. 43 It is submitted that this is one of the few recommendations which should have been rejected by the Central Government as such an arrangement would ensure further centralization of planning. The inclusion of a member of the Planning Commission in the Finance Commission essentially allows the Planning Commission access to statutory transfers without suffering any of the statutory limits. 44 The researchers are of the view that the powers of the Planning Commission need to be curbed in order to preserve the federal structure of the country. At the same time it must be taken into consideration that the degree of flexibility enjoyed by the Planning Commission is essential for efficient and expedient planning.
The aforementioned recommendations seek to ensure two things – that the federal str uctu r e, as prescri bed by the Constitu ti on, i s main tain ed and that th e plan ni ng system i n I ndi a is evolves to meet n ew chal lenges but onl y in a mann er that is per mi tted by the Constitution.
43
It is ironic to note that this action was taken on the recommendation of Deputy Chairman of the Planning Commission, K.C. Pant. See The Hindu, “Front Page”, Jul 21 2002, Online Edition. Available athttp://www.hinduonnet.com/2002/07/21/stories/2002072103190100.htm (Last Visited: 04 - 04 – 2009). 44 C. P. Chandrasekhar, “Twelfth Finance Commission: Ominous Mandate”, People’s Democracy, Vol. 26 No. 47, Dec 1 2002. Available at: http://pd.cpim.org/2002/dec01/12012002_eco.htm
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CONCLUSION At the end of our project, we concluded that both the Planning Commission and the Finance Commission play a very important role for the efficient working of the government, especially relating to allocation of funds. Conclusion is that we cannot compel that the Planning Commission should enjoy constitutional status like the Finance Commission. However, we want to give certain suggestions for the proper coordination between the Planning Commission and Finance Commission: Hence it is suggested that: •
The Planning Commission should not be given statutory recognition.
•
The functions of the Planning Commission should be restricted to formulation of plans
and objectives and should not extend to their implementation. •
The National Development Council (alternately the National Economic and Development
Council) should be given Constitutional recognition under Article 263 which provides for the establishment of an inter – state council. •
The NEDC should be endowed with an administrative wing consisting of civil servants
and experts from various fields. The members of this wing should be nominated by the Central and the State Governments. •
The NEDC should perform the function of mid – plan assessment and should also be
entitled to recommend any measures which are required to remedy any deviations in the working of the plans. •
The recommendations of the Planning Commission should be binding on the State and
Central Governments after they have been approved and amended by the NEDC and the Finance Commission. •
The recommendations of the Finance Commission should be binding on the State and
Central Governments and the Constitution should be amended to allow for the State Governments to have a say in the constitution of the Finance Commiss ion. •
The Finance Commission should be made a permanent body will be reconstituted after
every five years. •
The State Governments should establish, by legislation under Entr y 20 of List III, a State
Planning Board which will make recommendations to the central Planning Commission.
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•
Concrete criteria should be formulated for membership to the Planning Commission. The
Commission should consist of a mix of experts in various fields as well as bureaucrats who will be aware of the implementation process. •
Both the Planning Commission and the Finance Commission should enjoy equal status,
which is not the current scenario. •
The recommendation given by the Finance Commission under article 281 of the
•
Indian Constitution should be made binding on the Union Government.
•
The power of the Planning Commission relating to allocation of grants should be
restrained up to a certain limit. •
Since the Planning Commission is not a constitutional body, it should work under the
guidance of the Finance Commission.
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BIBLIOGRAPHY
BOOKS V.N.shuk la Constituti on of I ndia by M ahendr a P. Sin gh . I ndian Constitutional L aw by M .P gain Constituti onal l aw of I ndi a by Dr . subh ash c. kashyap Constituti onal l aw of I ndia by H.M .seervai
INTERNET SOURCES http://planningcommission.nic.in/aboutus/index.html http://planningcommission.nic.in/ http://www.indianetzone.com/45/planning_commission_india.htm http://www.jstor.org/pss/44128 www.econ.hit-u.ac.jp/~kokyo/APPPsympo04/PDF.../Rao-Final2.pdf http://www.jstor.org/pss/4396962 http://planningcommission.nic.in/reports/genrep/50NDCs/vol1_1tol4.pdf http://lawmin.nic.in/ncrwc/finalreport/v1ch8.htm
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