1. Taxation Internal Assignment
Role, Responsibility & Significance of NITI Aayog
and Finance Commission of India
Sagar Patel
MMM-2/Sem-1
Roll No – 14 M 508
The role of the government in achieving 'national objectives' may change with time, but will
always remain significant. Government will continue to set policies that anticipate and
reflect the country's requirements and execute them in a just manner for the benefit of the
citizens. The continuing integration with the world - politically and economically - has to be
incorporated into policy making as well as functioning of the government.
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INDEX
Sr No. Topics Page No.
1 Why NITI AAYOG has been Formed 3
2 Challenges faced by country 5
3 Significance of NITI AAYOG 6
4 Demise of The Planning Commission 7
5 Objectives of NITI AAYOG 9
6 The comprises of NITI AAYOG 10
7 Difference between NITI AAYOG & PLANNING COMMISSION 11
8 Role and Responsibility of NITI AAYOG 14
9 Finance Commission of India 18
10 Concept and Definition 18
11 Role of Finance Commission of India 20
12 Significance of Finance Commission of India 21
13 Composition of Finance Commission of India 22
14 Power, Function & Responsibility of Finance Commission 22
15
Impact of Planning Commission/NITI Aayog on Finance
Commission of India
23
16 Finance Commission Appointed so far 24
17 Proposal to 14th Finance Commission of India 25
18 Major Recommendation of 14th Finance Commission of India 26
19 Advisory Role of Finance Commission 27
20 References 28
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Why NITI AAYOG has been Formed
Mahatma Gandhi had said: "Constant development is the law of life, and a man who always
tries to maintain his dogmas in order to appear consistent drives himself into a false
position". Reflecting this spirit and the changed dynamics of the new India, the institutions
of governance and policy have to adapt to new challenges and must be built on the
founding principles of the Constitution of India, the wealth of knowledge from our
civilizational history and the present day socio-cultural context.
The Planning Commission was set up on the 15th of March, 1950 through a Cabinet
Resolution. Nearly 65 years later, the country has metamorphosed from an under-
developed economy to an emergent global nation with one of the world's largest
economies.
From being preoccupied with survival, our aspirations have soared and today we seek
elimination, rather than alleviation, of poverty. The people of India have great expectations
for progress and improvement in governance, through their participation. They require
institutional reforms in governance and dynamic policy shifts that can seed and nurture
large-scale change. Indeed, the 'destiny' of our country, from the time we achieved
Independence, is now on a higher trajectory.
The past few decades have also witnessed a strengthening of Indian nationhood. India is a
diverse country with distinct languages, faiths and cultural ecosystems. This diversity has
enriched the totality of the Indian experience. Politically too, India has embraced a greater
measure of pluralism which has reshaped the federal consensus. The States of the Union do
not want to be mere appendages of the Centre. They seek a decisive say in determining the
architecture of economic growth and development. The one-size-fits-all approach, often
inherent in central planning, has the potential of creating needless tensions and
undermining the harmony needed for national effort. Dr. Ambedkar had said with foresight
that it is "unreasonable to centralise powers where central control and uniformity is not
clearly essential or is impracticable".
At the heart of the dynamics of transforming India lies a technology revolution and
increased access to and sharing of information. In the course of this transformation, while
some changes are anticipated and planned, many are a consequence of market forces and
larger global shifts. The evolution and maturing of our institutions and polity also entail a
diminished role for centralised planning, which itself needs to be redefined.
The forces transforming India are many and include:
A. The industry and service sectors have developed and are operating on a global scale
now. To build on this foundation, new India needs an administration paradigm in
which the government is an "enabler" rather than a "provider of first and last
resort". The role of the government as a "player" in the industrial and service
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sectors has to be reduced. Instead, government has to focus on enabling legislation,
policy making and regulation.
B. India's traditional strength in agriculture has increased manifold on account of the
efforts of our farmers and improvements in technology. We need to continue to
improve, and move from pure food security to a focus on a mix of agricultural
production as well as the actual returns that farmers get from their produce.
C. Today, we reside in a 'global village', connected by modern transport,
communications and media, and networked international markets and institutions.
As India 'contributes' to global Endeavour’s, it is also influenced by happenings far
removed from our borders. Global economics and geo-politics are getting
increasingly integrated, and the private sector is growing in importance as a
constituent within that. India needs to be an active player in the debates and
deliberations on the global commons, especially in relatively uncharted areas.
D. India's middle class is unique in terms of its size and purchasing power. This
formidable group is increasing with the entry of the neo-middle class. It has been an
important driver of growth and has enormous potential on account of its high
education levels, mobility and willingness to push for change in the country. Our
continuing challenge is to ensure that this economically vibrant group remains
engaged and its potential is fully realised.
E. India's pool of entrepreneurial, scientific and intellectual human capital is a source
of strength waiting to be unleashed to help us attain unprecedented heights of
success. In fact, the 'social capital' that is present in our people has been a major
contributor to the development of the country thus far and, therefore, it needs to be
leveraged through appropriate policy initiatives.
F. The Non-Resident Indian community, which is spread across more than 200
countries, is larger in number than the population of many countries of the world.
This is a significant geo-economic and geo-political strength. Future national
policies must incorporate this strength in order to broaden their participation in the
new India beyond just their financial support. Technology and management
expertise are self-evident areas where this community can contribute significantly.
G. Urbanizations are an irreversible trend. Rather than viewing it as an evil, we have to
make it an integral part of our policy for development. Urbanization has to be
viewed as an opportunity to use modern technology to create a wholesome and
secure habitat while reaping the economic benefits that it offers.
H. Transparency is now a sine qua non for good governance. We are in a digital age
where the tools and modes of communication, like social media, are powerful
instruments to share and explain the thoughts and actions of the government. This
trend will only increase with time. Government and governance have to be
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conducted in an environment of total transparency - using technology to reduce
opacity and thereby, the potential for misadventures in governing.
Technology and information access have accentuated the unity in diversity that defines us.
They have helped integrate different capabilities of our regions, states and eco-systems
towards an interlinked national economy. Indeed, Indian nationhood has been greatly
strengthened on their account. To reap the benefits of the creative energy that emerges
from the Indian kaleidoscope, our development model has to become more consensual and
co-operative. It must embrace the specific demands of states, regions and localities. A
shared vision of national development has to be worked out based on human dignity,
national self-respect and an inclusive and sustainable development path.
The challenges we face as a country
A. India's demographic dividend has to be leveraged fruitfully over the next few
decades. The potential of our youth, men and women, has to be realized through
education, skill development, elimination of gender bias, and employment. We have
to strive to provide our youth productive opportunities to work on the frontiers of
science, technology and knowledge economy.
B. Poverty elimination remains one of the most important metrics by which alone we
should measure our success as a nation. Every Indian must be given an opportunity
to live a life of dignity and self respect. The words of Tiruvalluvar, the sage-poet,
when he wrote that "nothing is more dreadfully painful than poverty", and "gripping
poverty robs a man of the lofty nobility of his descent", are as true today as they
were when written more than two thousand years ago.
C. Economic development is incomplete if it does not provide every individual the
right to enjoy the fruits of development. Pt. Deen Dayal Upadhyaya had enunciated
this in his concept of Antyodaya, or uplift of the downtrodden, where the goal is to
ensure that the poorest of the poor get the benefits of development. Inequalities
based on gender biases as well as economic disparities have to be redressed. We
need to create an environment and support system that encourages women to play
their rightful role in nation-building. Equality of opportunity goes hand in hand with
an inclusiveness agenda. Rather than pushing everyone on to a pre-determined
path, we have to give every element of society - especially weaker segments like the
Scheduled Castes and Scheduled Tribes - the ability to influence the choices the
country and government make in setting the national agenda. In fact, inclusion has
to be predicated on a belief in the ability of each member of society to contribute. As
Sankar Dev wrote centuries ago in the Kirtan Ghosh: 'To see every being as
equivalent to one's own soul is the supreme means (of attaining deliverance)".
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D. Villages (Gram) continue to be the bedrock of our ethos, culture and sustenance.
They need to be fully integrated institutionally into the development process so that
we draw on their vitality and energy.
E. India has more than 50 million small businesses, which are a major source of
employment creation. These businesses are particularly important in creating
opportunities for the backward and disadvantaged sections of the society. Policy
making must focus on providing necessary support to this sector in terms of skill
and knowledge upgrades and access to financial capital and relevant technology.
F. Responsible development implies environmentally sound development. India is one
of the mega-diverse countries. Our environmental and ecological assets are eternal,
and must be preserved and safeguarded. The country's legacy of respect for
environment is reflected in our reverence for trees and animals. Our legacy to future
generations must be sustainable progress. Each element of our environment
(paryavaran) and resources, namely water, land and forest(Jal, Jameen evam Jungle)
must be protected; and this must be done in a manner that takes into account their
interlinkages with climate (jal vayu) and people (jan). Our development agenda has
to ensure that development does not sully the quality of life of the present and
future generations.
Significance of NITI AAYOG
The role of the government in achieving 'national objectives' may change with time, but
will always remain significant. Government will continue to set policies that anticipate and
reflect the country's requirements and execute them in a just manner for the benefit of the
citizens. The continuing integration with the world - politically and economically - has to be
incorporated into policy making as well as functioning of the government. In essence,
effective governance in India will rest on the following pillars.
A. Pro-people agenda that fulfils the aspirations of the society as well as individual,
B. Pro-active in anticipating and responding to their needs, Participative, by
involvement of citizens.
C. Empowering women in all aspects.
D. Inclusion of all groups, with special attention to the economically weak (garib), the
SC, ST and OBC communities, the rural sector and farmers (gaon and kisan), youth
and all categories of minorities.
E. Equality of opportunity to our country's youth.
F. Transparency through the use of technology to make government visible and
responsive.
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Governance, across the public and private domains, is the concern of society as a whole.
Everyone has a stake in ensuring good governance and effective delivery of services.
Creating Jan Chetna, therefore, becomes crucial for people's initiative. In the past,
governance may have been rather narrowly construed as public governance. In today's
changed dynamics - with 'public' services often being delivered by 'private' entities, and the
greater scope for 'participative citizenry', governance encompasses and involves everyone.
The institutional framework of government has developed and matured over the years.
This has allowed the development of domain expertise which allows us the chance to
increase the specificity of functions given to institutions. Specific to the planning process,
there is a need to separate as well as energize the distinct 'process' of governance from the
'strategy' of governance. In the context of governance structures, the changed
requirements of our country, point to the need for setting up an institution that serves as a
Think Tank of the government - a directional and policy dynamo. The proposed institution
has to provide governments at the central and state levels with relevant strategic and
technical advice across the spectrum of key elements of policy. This includes matters of
national and international import on the economic front, dissemination of best practices
from within the country as well as from other nations, the infusion of new policy ideas and
specific issue-based support. The institution has to be able to respond to the changing and
more integrated world that India is part of.
An important evolutionary change from the past will be replacing a centre-to-state one-
way flow of policy by a genuine and continuing partnership with the states. The institution
must have the necessary resources, knowledge, skills and, ability to act with speed to
provide the strategic policy vision for the government as well as deal with contingent
issues. Perhaps most importantly, the institution must adhere to the tenet that while
incorporating positive influences from the world, no single model can be transplanted from
outside into the Indian scenario. We need to find our own strategy for growth. The new
institution has to zero in on what will work in and for India. It will be a Bharatiya approach
to development.
The institution to give life to these aspirations is the NITI Aayog (National Institution for
Transforming India). This is being proposed after extensive consultation across the
spectrum of stakeholders including inter alia state governments, domain experts and
relevant institutions.
Demise of the Planning Commission
Here have been wide-ranging discussions on the role and remit of the new institution to
replace the Planning Commission ever since the prime minister in his 2014 Independence
Day address declared that the Planning Commission would be replaced by a new
institution. In the cabinet resolution passed on 7 January, the government has come out
with the broad contours of the new institution, National Institution for Transforming India
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(NITI). The remit and functioning of NITI Aayog will become clearer as it evolves over time.
This note analyses the possible role it can take and the challenges it is likely to face in
carrying out remit assigned to it.
Not many will shed tears on the abolition of the Planning Commission. In fact, the previous
prime minister himself had called for redefining its role to suit changing realities. The
planning exercise that was followed had hardly any relevance for the market economy. It
did very little to plan and implement even public sector investments for infrastructure and
its role in promoting public private partnership was mostly seen as obstructive. The whole
exercise of giving approvals to state plans smacked of dispensing patronage. The
proliferation of various centrally-sponsored schemes (CSS) with “one size if it’s all” design
and conditionality contributed to severe distortions in public spending. Often, the Planning
Commission came up with discretionary transfers to states to meet non-plan revenue
deficits negating the norms set by the Finance Commissions. The presence of a member of
the Planning Commission as a part-time member of the Finance Commission did very little
to correct this anomaly.
There were two contradictions between the Indian development strategy and the
institutional framework cons training economic environment over the years. The first is the
contradiction between the planning framework and the role of the market. The initial years
after Independence required a planning frame to allocate the low levels of savings to invest
in much needed infrastructure and priority sectors to overcome severe infrastructure
deficits and the lack of competitiveness of the economy. However, the framework failed to
adapt to the transition after the liberalising reforms were initiated. With fiscal constraints
becoming more and more binding and political economy factors crowding out
infrastructure spending with subsidies and transfers, the planning exercise lost much of its
relevance.
The second contradiction was between the centralised command over resource allocation
and the developmental role of the states in a federal polity. The end of single party rule and
the emergence of coalition governments and regional parties as members of the central
coalition brought to the fore the contradiction between centralised planning in a federal
framework. The response of the central government was to further centralise even by
intruding into the legislative domains of the states by various means including the
proliferation of CSS. The consequence of the above was that the two important sources of
economic dynamism, the private sector and the states, had to function in a constrained
environment.
The architecture, engineering and management aspects of the new institution, NITI Aayog,
will have to be crafted carefully, if it has to serve as an institution to impart dynamism to
the developmental process in a harmonious manner. First, economic liberalisation has
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created a vibrant private sector and the new institution should assist in policymaking to
enable private entrepreneurs to unleash their animal spirits and not to constrain them.
Second, horizontal and vertical competition in a multilevel fiscal system can be an
important source of economic dynamism so long as a certain measure of “competitive
equality” and “cost-benefit appropriability” are ensured and predatory competition is
prevented. “Laboratory federalism” can be a source of innovations, imitations and learning
and facilitating this is important. Third, coordination costs are higher when there are
coalition governments and the parties in power in the states are different from that of the
centre. There is an urgent need for an institution to promote healthy intergovernmental
competition while preventing the “race to the bottom”. All these underline the need for an
institution to promote “Coasean bargains” in the spirit of cooperative federalism and
ensure resolution of issues when such bargains fail.
The NITI Aayog will work towards the following objectives
1. To evolve a shared vision of national development priorities, sectors and strategies
with the active involvement of States in the light of national objectives. The vision of
the NITI Aayog will then provide a framework 'national agenda' for the Prime
Minister and the Chief Ministers to provide impetus too.
2. To foster cooperative federalism through structured support initiatives and
mechanisms with the States on a continuous basis, recognizing that strong States
make a strong nation.
3. To develop mechanisms to formulate credible plans at the village level and
aggregate these progressively at higher levels of government.
4. To ensure, on areas that are specifically referred to it, that the interests of national
security are incorporated in economic strategy and policy.
5. To pay special attention to the sections of our society that may be at risk of not
benefitting adequately from economic progress.
6. To design strategic and long term policy and programme frameworks and
initiatives, and monitor their progress and their efficacy. The lessons learnt through
monitoring and feedback will be used for making innovative improvements,
including necessary mid-course corrections.
7. To provide advice and encourage partnerships between key stakeholders and
national and international likeminded Think Tanks, as well as educational and
policy research institutions.
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8. To create a knowledge, innovation and entrepreneurial support system through a
collaborative community of national and international experts, practitioners and
other partners.
9. To offer a platform for resolution of inter-sectoral and inter-departmental issues in
order to accelerate the implementation of the development agenda.
10. To maintain a state-of-the-art Resource Centre, be a repository of research on good
governance and best practices in sustainable and equitable development as well as
help their dissemination to stake-holders.
11. To actively monitor and evaluate the implementation of programmes and initiatives,
including the identification of the needed resources so as to strengthen the
probability of success and scope of delivery.
12. To focus on technology upgradation and capacity building for implementation of
programmes and initiatives.
13. To undertake other activities as may be necessary in order to further the execution
of the national development agenda, and the objectives mentioned above.
The NITI Aayog will comprise the following
1. Prime Minister of India as the Chairperson.
2. Governing Council comprising the Chief Ministers of all the States and Lt. Governors
of Union Territories.
3. Regional Councils will be formed to address specific issues and contingencies
impacting more than one state or a region. These will be formed for a specified
tenure. The Regional Councils will be convened by the Prime Minister and will
comprise of the Chief Ministers of States and Lt. Governors of Union Territories in
the region. These will be chaired by the Chairperson of the NOT Aayog or his
nominee.
4. Experts, specialists and practitioners with relevant domain knowledge as special
invitees nominated by the Prime Minister.
5. The full-time organizational framework will comprise of, in addition to the Prime
Minister as the Chairperson:
A. Vice-Chairperson: To be appointed by the Prime Minister.
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B. Members: Full-time.
C. Part-time members: Maximum of 2 from leading universities research organizations
and other relevant institutions in an ex-officio capacity. Part time members will be
on a rotational basis.
D. Ex Officio members: Maximum of 4 members of the Union Council of Ministers to be
nominated by the Prime Minister.
E. Chief Executive Officer: To be appointed by the Prime Minister for a fixed tenure, in
the rank of Secretary to the Government of India.
F. Secretariat as deemed necessary.
Swami Vivekananda said 'Take up one idea. Make that one idea your life - think it, dream of
it, live on that idea. Let the brain, muscles, nerves, every part of your body, be full of that
idea and just leave every other idea alone. This is the way to success." Through its
commitment to a cooperative federalism, promotion of citizen engagement, egalitarian
access to opportunity, participative and adaptive governance and increasing use of
technology, the NITI Aayog will seek to provide a critical directional and strategic input
into the development process. This, along with being the incubator of ideas for
development, will be the core mission of NITI Aayog.
This Resolution shall come into force and shall be deemed to have come into force with
effect from the 1st day of January, 2015 and Resolution No. l-P(C)/50 dated the 15th March
1950, shall stand superseded with effect from the date of coming into force of this
Resolution.
NITI Aayog – How it is different from Planning Commission
According to the official press release, “The centre-to-state one-way flow of policy, that was
the hallmark of the Planning Commission era, is now sought to be replaced by a genuine
and continuing partnership of states.”
“The institution will serve as a ‘think tank’ of the government – a directional and policy
dynamo. NITI Aayog will provide governments at the Central and State levels with relevant
strategic and technical advice across the spectrum of key elements of policy,” the release
further said.
According to the various statements coming out of the government, the Aayog, instead of
being in the controlling seat, is going to provide a direction. It is going to be an ‘enabler’
instead of a ‘provider of first and last resort’.
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In the Planning Commission, there was just one central figure that practically controlled
every aspect of the commission: the Deputy Chairman. It’s another matter whether it was
the Deputy Chairman or the actual-powers-that-be (the ominous National Advisory Council
in the ruinous UPA days, headed by Sonia Gandhi) who used the Deputy Chairman merely
as a puppet to perpetuate their own policies. For instance in the UPA days it was never
clear whether the Commission was working to boost the country’s economy or was trying
to keep it as backward as possible.
To do away with the central authority and to make the Aayog more useful in terms of
policy, direction and implementation, the Deputy Chairman has been replaced by a CEO
and a Vice Chairperson (with a caveat that they’ll be appointed by the PM). Asian
Development Bank’s Former Chief Economist Arvind Panagariya is being tipped to be the
first Vice Chairperson.
Instead of control, the focus will be on being a catalyst and providing a platform for the
States and the Centre to come together and discuss matters of economic policies and
development plans. The planning will be orchestrated at the village level and an
aggregation of these inputs shall be used to formulate national-level plans and policies.
Even during the formation of the Aayog, Chief Ministers from all the States were invited to
participate.
Aside from the CEO and the Vice-Chairman Niti Aayog will have a governing council
comprising of Chief Ministers and Lieutenant Governors. They will also be for Union
Ministers serving as ex-officio members. There will be full time members and part-time
members. People will also be drawn from regional councils and experts and specialists
from varied fields will also be a part of Niti Aayog, mostly as special invitees nominated by
the Prime Minister. The Aayog will also have 2 part-time members from leading
universities and research organizations.
While the government feels that it is a totally new approach, different from the Planning
Commission that has overseen 12 five-year plans and sundry other plans involving more
than Rs. 200 lakh crores in its 65-year-old history, the detractors are saying that nothing
much has been changed. For instance, the structure is almost the same with a few changes
here and there. Even in the old Planning Commission experts were invited based on various
needs. Earlier the Commission was reporting to the National Development Council
consisting of State Chief Ministers and Lieutenant Governors and this has been replaced by
a governing council which, again, comprises of State Chief Ministers and Lieutenant
Governors. Even the regional councils are the same, according to Kriti Parikh, a former
member of the Planning Commission.
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The big difference is, as mentioned above, the States will now have a greater say.
Previously it was the Planning Commission that formulated plans and then asked the States
to implement them (provided they agreed), this time the States themselves will be able to
actively participate in the planning so that there is no communication gap and the plans can
be implemented effectively. Prime Minister Narendra Modi, being a big advocate of
federalism, believes that decentralization can play a big role in facilitating a balanced
growth and making every individual State an important stakeholder, instead of the Centre
acting like a big brother handing over goodies. Regional councils will be formed to address
specific issues particular to those areas impacting the local populations. Issues of national
security that were ignored so far will be incorporated at various levels of economic
strategy and policy. All the necessary technological upgrades will be implemented and the
functioning of the Aayog will be brought at par with any world-class organisation involved
in nation building.
Special stress will be put on the benefit of those marginalized sections of the society that
have been ignored due to the template-nature of the Planning Commission so far.
Whatever the detractors may say – considering that their interests don’t lie in the big and
small changes happening in the way the economy and the government function – there is a
paradigm shift in the way the policy formulation and implementation are being worked
out. Instead of being the last resort, as rightly put by the official statement, the government
should act as an enabler.
Right now there is too much control. This control isn’t going to go away immediately – after
all it has been there for the past 65 years and immediately yanking it out may collapse the
administrative infrastructure – but it will go away gradually and Niti Aayog could be the
first, albeit, small change.
When the central authority is minimized, the Aayog will be allowed to function in a more
flexible manner, involving 2 types of changes – planned changes and changes influenced by
the indigenous as well as global markets. Since the policy decisions will be made from the
bottom of the pyramid and then move upwards, they will be more realistic and human-
centered rather than something being prepared from an ivory tower.
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Role and Responsibility of NITI AAYOG
The cabinet resolution lists 13 different tasks to it which may be grouped under four major
heads, namely: (1) fostering cooperative federalism by providing structured support to
states on a continuous basis; (2) formulation of a strategic vision and long-term policies
and programme framework both for the macroeconomy and for different sectors; (3)
acting as a knowledge and innovation hub and providing research inputs by undertaking
and accessing globally available research; and (4) providing a platform for
interdepartmental coordination. Each of these functions is discussed here in some detail.
Cooperative Federalism:
The most important responsibility of NITI Aayog relates to promoting “…cooperative
federalism through structured support initiatives and mechanisms with the States on a
continuous basis”. The Seventh Schedule to the Constitution demarcates the legislative
domains and functional responsibilities of the union and states in terms of union, state and
concurrent subjects. However, there is considerable overlap in the functions requiring
coordination between the union and the states and among the states inter se. carrying out
stable and sustainable developmental agenda requires fostering the spirit of cooperation
and cementing the federal structure.
The areas of coordination needed are many and some of them may be listed here. First,
there is considerable overlap in carrying out legislative and executive functions in
concurrent subjects. Recent years have shown the need for cooperation in areas such as
energy and environment, education and poverty alleviation where the need for coordinated
action and speedy decisions are critical for pursuing the developmental agenda. Second the
union government may have to intervene in the national interest even if they are in the
State List or Concurrent List. There may be some public services in the State List, which, for
reasons of nationwide externalities or for redistribution require coordinated action to
ensure minimum standards throughout the country. The examples include healthcare,
urban development and poverty alleviation. In these cases, the state governments are the
partners in achieving a common goal. Third, In the case of union subjects too, the states
may be involved in implementation as agencies due to their proximity to the people. In
addition, NITI can facilitate exchange of information and experiences and promote healthy
intergovernmental competition through monitoring and regulation.
The most important issue which the NITI Aayog will have to deal with is the rationalisation of
CSS as there is considerable resentment by the states on them. In 2011, there were over
147 schemes which have since been consolidated into 66, but a close examination shows
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that these have been retained as sub-schemes even in the new arrangement. The “one size
fits all” design of the schemes do not take account of varying local conditions and
institutions, The large counterpart/matching fund requirements distort priorities of the
states, conditionalities in availing the grants make them restrictive and the final
distribution of transfers is very different from the original design. Finally, when the
schemes are discontinued, they leave large committed liabilities on the states.
There is certainly a case for having specific purpose transfers for ensuring minimum
standards of services which are considered to be of national importance. Given the
collaborative nature of such schemes, they should be designed and implemented in the
spirit of cooperative federalism. The schemes should be holistic with scope for flexibility in
implementation depending on the varying local conditions and they should be limited in
number (not more than 10). They should have considerable scope for flexibility in
implementation. The new institution could provide a platform for designing the schemes,
implementation systems, monitoring and evaluating them in a collaborative framework.
In order to enable NITI Aayog to play a constructive role in fostering cooperation, it is
necessary to place the Inter- State Council, properly empowered under Article 263 of the
Constitution, in the Aayog. This institution should be the nodal agency for negotiation,
discussion, bargaining and resolution of all major issues. It should have the required
expertise on intergovernmental relations, fiscal federalism and constitutional law.
Strategic Planning:
One of the major tasks assigned to NITI Aayog is strategic planning at both macro and
sectoral levels. Perspective planning helps to make projections on the macro variables and
keep the policy perspective in view. The strategy and policies required to improve the
standard of living of the projected population and improve human development to
empower the people to productively engage them in economic activities over a long-term
horizon are important. These should be constantly revisited to ensure their relevance.
The cabinet resolution also speaks about planning at the grass-roots level which implies
that the exercise of medium- term planning could be continued, but in a different manner.
It could be indicative planning to provide satisfactory levels of social and physical
infrastructure for meeting the growing needs of the economy, with the roles of public and
private sectors clearly defined. Grass-roots planning entails building up of the plan right
from the village level based on the resource envelop, with each higher level aggregating the
plans and adding the investment requirements for the category. In other words, the
planning should be built right from the village, block and district levels and these should be
harmonised with planning at the state level. Similarly, national planning should be the
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consolidation of state-level plans along with the planning infrastructure and service
requirements for the country as a whole worked out at the union level. NITI can provide a
framework for preparing the plans to the states and the latter, in turn, to the lower levels of
government. It should also have a unit to advice and guide if any state is in need of such
assistance.
Innovation and Knowledge Hub:
Closely aligned to strategic planning is the role of NITI Aayog as a think tank facilitating
partnerships between the stake holders. Formulation of strategic vision and policies and
programmes aligned to it as well as initiating and monitoring them requires state of the art
research, technology upgradation and capacity building. As a major think tank of the
government working on various developmental policies, it should not only have basic
research capabilities but also should access and outsource research on relevant subjects
globally. It should have a strong data bank consolidating data and information on economic,
demographic, geographic and social variables relevant for research and policy. Among
other functions, the institution should also provide a platform for experience sharing
among the states.
Coordination:
The fourth important task of the Aayog is to ensure intergovernmental and
interdepartmental coordination. The disastrous consequences of lack of coordination
between the infrastructures, including environmental, ministries on economic growth were
clearly evident in the last years of the previous government.
Conclusions
The cabinet resolution lays down only the broad framework for the Aayog. The
effectiveness of the NITI Aayog in transforming India will depend upon the clarity in the
functions assigned, the status and power given and the quality of the people who will steer
the institution. In fact, the first Aayog will have a tremendous responsibility of carving out a
niche for itself, setting the pace and steering the transformation.
Thus, the effectiveness of NITI will depend on how it charts out a course for itself. Despite
the claims of a marked departure from the past, the institution has to function in the
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prevailing milieu and deal with the burden of legacy. The important question is whether
the Aayog will have influence when it does not have the power to give grants and when it
does not have the powers to make plan allocations to different ministries and departments.
The abolition of the Planning Commission paves the way for restoring the role of the
Finance Commission to assess the total requirements of the states in the revenue account
without making a distinction between plan and non plan spending. However, the Finance
Commission does not have a comparative advantage in recommending specific purpose
transfers unless it is made a permanent body. Of course, the constitutional provision does
not require it to be a temporary body – Article 280 simply states that the commission
should be appointed every five years or earlier; the appointed commission can continue
until the new commission is appointed. However, so long as the Finance Commission
continues to be a temporary body, the NITI Aayog will have a role in designing and
implementing these programmes.
The legacy issues do not end merely with the abolition of the Planning Commission. There
are parallel institutions in the states and it is important to transform them to meet the new
requirements. Similarly, the Constitution requires the establishment of district planning
committees and metropolitan planning committees. Their role in the new environment
needs to be specified. Although the cabinet resolution states that NITI Aayog will facilitate
grassroots planning, how exactly this will be carried forward needs to be seen.
The success of the institution in achieving inter ministerial, interdepartmental coordination
will depend on the trust and cooperation it receives from them and the harmony with
which the Aayog and various ministries work. There could be tensions between the
technocrats in the Aayog and various ministers on the one hand, and between the
technocrats and bureaucrats on the other. There is also the danger of bureaucratisation of
the Aayog. Similarly, success in fostering cooperative federalism will depend on the trust of
and cooperation from the states. In particular, the first Aayog will have a tremendous task
of shaping the character and charting a course to make it an important institution in Indian
federal polity to transform India.
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FinanceCommissionofIndia
India to be a “Union of States”. In effect, India is a federation consisting of one National or
Union Government and a number of Governments of the federating units such as the states
and the Union Territories.
In such a composite polity, it is essential that the financial resources should be divided
between the Union Government and the government of the federating units.
The Finance Commission of India was formed on 22nd November, 1951. The Finance
Commission has been provided for by the Indian constitution as part of the scheme of
division of financial resources between the two different sets of governments.
It was established under Article 280 of the Indian Constitution by the President of India. It
was formed to define the financial relations between the centre and the state. The Finance
Commission Act of 1951 states the terms of qualification, appointment and disqualification,
the term, eligibility and powers of the Finance Commission. As per the Constitution, the
commission is appointed every five years and consists of a chairman and four other
members. Since the institution of the first finance commission, stark changes have occurred
in the Indian economy causing changes in the macroeconomic scenario. This has led to
major changes in the Finance Commission's recommendations over the years. Till date,
Fourteen Finance Commissions have submitted their reports.
Finance Commission - Concepts and definitions
Tax Devolution
One of the core tasks of a Finance Commission as stipulated in Article 280 (3) (a) of the
Constitution is to make recommendations regarding the distribution between the Union
and the states of the net proceeds of taxes. This is the most important task of any Finance
Commission, as the share of states in the net proceeds of Union taxes is the predominant
channel of resource transfer from the Centre to states.
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Divisible Pool
The divisible pool is that portion of gross tax revenue which is distributed between the
Centre and the States. The divisible pool consists of all taxes, except surcharges and cess
levied for specific purpose, net of collection charges. Prior to the enactment of the
Constitution (Eightieth Amendment) Act, 2000, the sharing of the Union tax revenues with
the states was in accordance with the provisions of articles 270 and 272, as they stood
then. The eightieth amendment of the Constitution altered the pattern of sharing of Union
taxes in a fundamental way. Under this amendment, article 272 was dropped and article
270 was substantially changed. The new article 270 provides for sharing of all the taxes
and duties referred to in the Union list, except the taxes and duties referred to in articles
268 and 269, respectively, and surcharges on taxes and duties referred to in article 271 and
any cess levied for specific purposes.
Grants-in-aid
Horizontal imbalances are addressed by the Finance Commission through the system of
tax devolution and grants in-aid, the former instrument used more predominantly. Under
Article 275 of the Constitution, Finance Commissions are mandated to recommend the
principles as well as the quantum of grants to those States which are in need of assistance
and that different sums may be fixed for different States. Thus one of the pre-requisites for
grants is the assessment of the needs of the States. The First Commission had laid down
five broad principles for determining the eligibility of a State for grants. The first was that
the Budget of a State was the starting point for examination of a need. The second was the
efforts made by States to realize the potential and the third was that the grants should help
in equalizing the standards of basic services across States. Fourthly, any special burden or
obligations of national concern, though within the State's sphere, should also be taken into
account. Fifthly, grants might be given to further any beneficent service of national interest
to less advanced States. Grants recommended by the Finance Commissions are
predominantly in the nature of general purpose grants meeting the difference between the
assessed expenditure on the non-plan revenue account of each State and the projected
revenue including the share of a State in Central taxes. These are often referred to as 'gap
filling grants'. Over the years, the scope of grants to States was extended further to cover
special problems. Following the seventy-third and seventy-fourth amendments to the
Constitution, Finance Commissions were charged with the additional responsibility of
recommending measures to augment the Consolidated Fund of a State to supplement the
resources of local bodies. This has resulted in further expansion in the scope of Finance
Commission grants. The Tenth Commission was the first Commission to have
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recommended grants for rural and urban local bodies. Thus, over the years, there has been
considerable extension in the scope of grants-in-aid.
Fiscal capacity/Income distance
The income distance criterion was first used by Twelfth FC, measured by per capita GSDP
as a proxy for the distance between states in tax capacity. When so proxied, the procedure
implicitly applies a single average tax-to GSDP ratio to determine fiscal capacity distance
between states. The Thirteenth FC changed the formula slightly and recommended the use
of separate averages for measuring tax capacity, one for general category states (GCS) and
another for special category states (SCS).
Fiscal discipline
Fiscal discipline as a criterion for tax devolution was used by Eleventh and Twelfth FC to
provide an incentive to states managing their finances prudently. The criterion was
continued in the Thirteenth FC as well without any change. The index of fiscal discipline is
arrived at by comparing improvements in the ratio of own revenue receipts of a state to its
total revenue expenditure relative to the corresponding average across all states.
Role of Finance Commission of India
1. The role Finance Commission in India is to act as an instrument to divide proceeds
of divisible taxes between the states and the Union government or in cases of taxes
that are collected by the centre but the proceeds of which are allocated between the
states, to determine the principles of such allocation.
2. The Finance commission of India also determines the principles of governing the
grants-in-aids of the revenues of states out of the consolidated fund of India. It is an
important function of the Indian Finance Commission.
3. Thirdly the commission has the duty of considering any matter referred to the
commission by the President in the interest of sound finance.
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Significance of Finance Commission of India
The President under Article 280 lays the recommendations of the finance commission
before each House of the Parliament with an explanatory note as to the action to be taken
on the recommendations.
It should be noted that chapter XII, Article 280 of the Indian constitution do not exhaust the
entire gamut of financial relations between the Union and the States. The Finance
Commission distributes of proceeds of Income tax between the union and the states.
But, taxes on the emoluments of the central government are attributable only to the union
territories.
Under Article 280 (C), the President may refer any matter to the Finance commission in the
interest of “sound finance.” Till now the President of India has asked the commission to
make recommendations on the principles governing distribution of the net proceeds of
estate duty in respect of property Tax on Railway fare and excise duties on sugar and
tobacco etc. The President also sought recommendations on the rates of interest, and terms
of repayment of loans to the various states by the government of India.
Till now, fourteen Finance Commissions have made their recommendations. They focus on
the financial relations between the State government and the Central government. These
recommendations steadily increase share of the state governments in the proceeds of the
income tax. They also increased gradually the amount of grants-in-aids to be given to the
states. As a result the states now enjoy considerable degree of financial autonomy so
necessary for the proper functioning of the federation.
The Chairman of the Fourteenth Finance Commission is Dr. Y.V. Reddy. He previously held
the prestigious position of the Governor of Reserve Bank of India (RBI). The Fourteenth
Commission has given more importance on demographic transition. It has also
recommended that the government of coastal states should get appropriate share of taxes
collected from the production of minerals of territorial waters.
The Finance Commission as an autonomous body has served a splendid purpose. In as
complex a polity as India is, it acted as an agency to bring about co-ordination and co-
operation that is so important in the working of a federal system.
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Composition of Finance Commission of India
The Finance Commission of India has a Chairman along with four other members and a
Secretary. The Chairman is the person who heads the Commission and presides over its
activities. The Indian Parliament is authorised to determine by law the qualifications of the
members of the Commission and method of their selection. The Chairman of the Finance
Commission is selected among persons who have had the experience of public affairs, and
four other members are selected among persons who- are, or have been, or are qualified as
judges of High Courts of India, or have knowledge of finance, or have vast experience in
financial matters and are in administration, or have knowledge of economics. All the
appointments are made by the Indian President. A member can be disqualified on the
following grounds- when a member is found to be of unsound mind, is involved in a vile act
or if his interests are likely to affect the functioning of the Commission.
The tenure of the office of the Member of the Finance Commission is specified by the
President of India and in some cases the members are also re-appointed. The members
shall give part time or whole time service to the Commission as scheduled by the President.
The salary of the members of the Finance Commission is according to the provisions led
down by the Constitution of India.
Powers, Functions and Responsibilities
Under the Constitution, the basis for sharing of divisible taxes by the Centre and the States
and the principles governing grants-in-aid to the states have to be decided by the
Commission every five years. The President can refer to the Commission any other matter
in the interest of sound finance. The recommendations of the Commission together with an
explanatory memorandum as to the action taken by the Government on them are laid
before each house of Parliament. The Commission has to evaluate the increase in the
Consolidated Fund of a state to affix the resources of the Panchayat in the state. It also has
to evaluate the increase in the Consolidated Fund of a state to affix the resources of the
Municipalities in the state.
The Commission has been given adequate powers in the exercise of its function and within
its area of activity. It has all the powers of the Civil Court as per the Code of Civil Procedure,
1908. It can call any witness, or can ask for the production of any public record or
document from any court or office. It can ask any person to give information or document
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on matters as it may feel to be useful or relevant. It can function as a civil court in
discharging its duties.
Functions
The Finance Commission is required to make recommendations to the president of India on
the following matters:
1. The distribution of the net proceeds of taxes to be shared between the Centre and
the states, and the allocation between the states of the respective shares of such
proceeds.
2. The principles that should govern the grants-in-aid to the states by the Centre (i.e.,
out of the consolidated fund of India).
3. The measures needed to augment the consolidated fund of a state to supplement the
resources of the panchayats and the municipalities in the state on the basis of the
recommendations made by the state finance commission.
4. Any other matter referred to it by the president in the interests of sound finance.
Till 1960, the commission also suggested the grants given to the States of Assam Bihar
Orissa and West Bengal in lieu of assignment of any share of the net proceeds in each year
of export duty on jute and jute products. These grants were to be given for a temporary
period of ten years from the commencement of the Constitution.
The commission submits its report to the president. He lays it before both the Houses of
Parliament along with an explanatory memorandum as to the action taken on its
recommendations.
Impact of the Planning Commission
The Constitution of India envisages the Finance commission as the balancing wheel of fiscal
federalism in India. However, its role in the Centre-state fiscal relations has been
undermined by the emergence of the Planning Commission, a non-constitutional and a non-
statutory body. Dr P V Rajamannar, the Chairman of the Fourth Finance commission,
highlighted the overlapping of functions and responsibilities between the Finance
Commission and the Planning Commission in federal fiscal transfers in the following way.
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The reference in Article 275 to grants in aid to the revenues of states is not confined to
revenue expenditure only. There is no legal warrant for excluding from the scope of the
Finance Commission all capital grants; even the capital requirements of a state may be
properly met by grants-in-aid under Article 275, made on the recommendations of the
Finance Commission.
The legal position, therefore, is that there is nothing in the Constitution to prevent the
finance commission from taking into consideration both capital and revenue requirements
of the states in formulating a scheme of devolution and in recommending grants under
Article 275 of the Constitution. But the setting up of Planning Commission inevitably has
led to a duplication and overlapping of functions, to avoid which a practice has grown
which has resulted in the curtailment of the functions of the finance commission.
As the entire plan, with regard to both policy and programme, comes within the purview of
the Planning Commission and as the assistance to be given by the Centre for plan projects
either by way of grants or loans is practically dependent on the recommendations of the
Planning Commission, it is obvious that a body like the Finance Commission cannot operate
in the same field. The main functions of the Finance Commission now consist in
determining the revenue gap of each state and providing for filling up the gap by a scheme
of devolution, partly by a distribution of taxes and duties and partly by grants-in-aid.
Finance Commission Appointed so Far
Finance Commission Year of Establishment Chairman Operational Duration
First 1951 K. C. Neogy 1952–57
Second 1956 K. Santhanam 1957–62
Third 1960 A. K. Chanda 1962–66
Fourth 1964 P. V. Rajamannar 1966–69
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Fifth 1968 Mahaveer Tyagi 1969–74
Sixth 1972 K. Brahmananda Reddy 1974–79
Seventh 1977 J. M. Shelat 1979–84
Eighth 1983 Y. B. Chavan 1984–89
Ninth 1987 N. K. P. Salve 1989–95
Tenth 1992 K. C. Pant 1995–2000
Eleventh 1998 A. M. Khusro 2000–2005
Twelfth 2002 C. Rangarajan 2005–2010
Thirteenth 2007 Dr. Vijay L. Kelkar 2010–2015
Fourteenth[3] 2013 Dr. Y. V Reddy 2015–2020
Proposal to 14th Finance Commission
1. As the states are subjected to more and more interstate migrant workers and illegal
migrants from the neighboring countries, the finance commission shall give appropriate
weight-age in distribution of the total taxes to the states based on these criteria. The states
which are giving more employment to interstate workers are ahead in demographic
transition. Demographic transition of a state is a real index & status of all round human and
economical development.
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2. The states with coast line shall be given appropriate share from the royalty / taxes
collected by the central government from the minerals produced (including oil & natural
gas) from the area of territorial water sand exclusive economic zone similar to land based
minerals production. Articles 1 & 3 of the constitution define India as union of two entities
only which are either states or union territories. There is no third entity such as territorial
waters or exclusive economic zone. These are parts of states / union territories under
Indian union.
3. Article 282 accords financial autonomy in spending the resources available with the
states for public purpose. Finance commission should desist from specific expenditure
related grant in aids to the states out of the Consolidated Fund of India.
4. Under article 360 of the constitution, President can proclaim financial emergency when
the financial stability or credit of the nation or of any part of its territory is threatened.
Finance commission should bring out the guidelines which may warrant the imposition of
financial emergency in the entire country or a state or a union territory or a panchayat or a
municipality or a corporation to take up precautions for improving their financial
soundness.
5. Finance commission should deliberate and recommend whether government
advertisements other than educational advertisements are serving public purpose for
deserving government expenditure under article 282 of the constitution.
6. The finance commissions shall deliberate and recommend on all issues related to
government spending which are taken up by various law commissions earlier and of public
topics with wide public attention.
Major Recommendations of 14th Finance Commission headed
by Prof. Y V Reddy
1. The share of states in the net proceeds of the shareable Central taxes should be 42%.This
is 10% higher than the recommendation of 13th Finance Commission.
2. Revenue deficit to be progressively reduced and eliminated.
3. Fiscal deficit to be reduced to 3% of the GDP by 2017–18.
4. A target of 62% of GDP for the combined debt of centre and states.
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5 .The Medium Term Fiscal Plan (MTFP) should be reformed and made the statement of
commitment rather than a statement of intent.
6. FRBM Act need to be amended to mention the nature of shocks which shall require
targets relaxation.
7. Both centre and states should conclude 'Grand Bargain' to implement the model Goods
and Services Act (GST).
8. Initiatives to reduce the number of Central Sponsored Schemes (CSS) and to restore the
predominance of formula based plan grants.
9. States need to address the problem of losses in the power sector in time bound manner.
Advisory Role
It must be clarified here that the recommendations made by the Finance Commission are
only of advisory nature and hence, not binding on the government. It is up to the Union
government to implement its recommendations on granting money to the states. To put it
in other words, ‘It is nowhere laid down in the Constitution that the recommendations of
the commission shall be binding upon the Government of India or that it would give rise to
a legal right in favour of the beneficiary states to receive the money recommended to be
offered to them by the Commission. As rightly observed by Dr. P.V. Rajamannar, the
Chairman of the Fourth Finance Commission, “Since the Finance Commission is a
constitutional body expected to be quasi-judicial, its recommendations should not be
turned down by the Government of India unless there are very compelling reasons.
