Mobilization of Resources: National Development Council; Finance Commission; States Finance Commission

National Development Council

The National Development Council or the Rashtriya Vikas Parishad was set up on 6th August 1952 to strengthen and mobilise the effort and resources of the nation in support of the plan, to promote common economic policy in all vital spheres, and to ensure the balanced and rapid development of all parts of the country.

The Council which was re-constituted on October 7, 1967 is the highest decision-making authority in the country in the area of development matters.

It is a constitutional body with representation from both the Centre and States. The Council is headed by the Prime Minister and all Union Cabinet Ministers, State Chief Ministers, representatives of Union Territories; Members of Planning Commission are its members.The Secretary/ Member-Secretary of Planning Commission functions as the Secretary of the Council and all administrative assistance is rendered by Planning Commission.

The Secretary/ Member-Secretary of Planning Commission functions as the Secretary of the Council and all administrative assistance is rendered by Planning Commission.

The functions of NDC are

  1. to prescribe guidelines for formulation of the National Plan, including assessment of resources for the Plan
  2. to consider the National Plan as formulated by the Planning Commission
  3. to consider important questions of social and economic policy affecting national development and
  4. to review the working of the Plan from time to time and to recommend such measures as are necessary for achieving the aims and targets set out in the National Plan.
  5. The prime function of the Council is to act as a bridge between the Union government, Planning Commission and the State Governments.

It is a forum not only for discussion of plans and programmes but also social and economic matters of national importance are discussed in this forum before policy formulation. It is a very democratic forum where the States openly express their views. No resolution is passed by the Council.

The practice is to have a complete record of the discussion and gather out of its general trends pinpointing particular conclusions. Sub-Committees under the Chairmanship of Union Cabinet Minister/State Chief Minister are also formed under the NDC to deliberate on policy areas requiring wide-range of consultations.

The NDC ordinarily meets twice a year. So far 58 meetings of the NDC have been held.

Finance Commission.

Article 280 of Indian Constitution

Finance Commission:

  1. The president shall, within two years of the commencement of the constitution and thereafter at the expiration of every five years or as such earlier time as the President considers necessary, by order constitute a finance commission which shall consist of a chairman and four other members to be appointed by the President.
  2. Parliament may by law determine the qualifications which shall ne requisite for appointment as members of the commission and the manner in which they shall be selected.
  3. It shall be the duty of the commission to make recommendations to the president as to:
  4. The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under this chapter and the allocation between the states of the respective share of such proceeds.
  5. The principles which should govern the grants-in-aid of the revenue of the states out of the consolidated fund of India.
  6. Any other matter referred to the commission by the President in the interest of sound finances.

Finance Commission Working

Vertical and horizontal imbalances are common features of most federations and India is no exception to this. The Constitution assigned taxes with a nation-wide base to the Union to make the country one common economic space unhindered by internal barriers to the extent possible.

States being closer to people and more sensitive to the local needs have been assigned functional responsibilities involving expenditure disproportionate to their assigned sources of revenue resulting in vertical imbalances.

Horizontal imbalances across States are on account of factors, which include historical backgrounds, differential endowment of resources, and capacity to raise resources. Unlike in most other federations, differences in the developmental levels in Indian States are very sharp. In an explicit recognition of vertical and horizontal imbalances,

The Indian Constitution embodies the following enabling and mandatory provisions to address them through the transfer of resources from the Centre to the States.

1. Levy of duties by the Centre but collected and retained by the States (Article 268)
2. Taxes and duties levied and collected by the Centre but assigned in whole to the States (Article 269).
3. Sharing of the proceeds of all Union taxes between the Centre and the States under Article 270. (Effective from April 1, 1996, following the eightieth amendment to the Constitution replacing the earlier provisions relating to mandatory sharing of income tax under Article 270 and permissive sharing of
Union   excise duties under Article 272).
4. Statutory grants-in-aid of the revenues of States (Article 275)
5. Grants for any public purpose (Article 282).
6. Loans for any public purpose (Article 293).

In addition to provisions enabling transfer of resources from the Centre to the States, a distinguishing feature of the Indian Constitution is that it provides for an institutional mechanism to facilitate such transfers.The institution assigned with such a task under Article 280 of the Constitution is the Finance Commission, which is to be appointed at the expiration of every five years or earlier. Under the Constitution, the main responsibilities of a Finance Commission are the following.

The institution assigned with such a task under Article 280 of the Constitution is the Finance Commission, which is to be appointed at the expiration of every five years or earlier. Under the Constitution, the main responsibilities of a Finance Commission are the following.

1. The distribution between the Union and the States of the net proceeds of taxes which are to be divided between them and the allocation between the
States of the respective shares of such proceeds.
2. Determination of principles and quantum of grants-in-aid to States which are in need of such assistance.
3. Measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of
the recommendations made by the Finance Commission of the State.

The last function was added following the 73rd and 74th amendments to the Constitution in 1992 conferring statutory status to the Panchayats and Municipalities. These Constitutionally mandated functions are the same for all the Finance Commissions and mentioned as such in the terms of reference (ToR) of different Finance Commissions.

To enable the Finance Commission to discharge its responsibilities in an effective manner, the Constitution vests the Finance Commission with the power to determine its procedures.

Under the Constitution, the President shall cause every recommendation made by the Finance Commission together with an explanatory memorandum as to the action taken thereon to be laid before each House of Parliament.

So far, thirteen Finance Commissions have given their reports. The Union government has always been accepting the recommendations of the Finance Commissions, exception being the recommendations of the Third Commission relating to Plan grants.

There have been major changes in the public finances of the Union and the States during the period of over 55 years covered by the Finance Commissions. A number of new matters have been referred to the Commissions in consonance with these developments.

How the different Finance Commissions have discharged their responsibilities in the ever-changing fiscal situation is covered in the following sections under different heads.

State Finance Commission

In India, decentralization reforms, aimed at empowering local people through local governments, assumed significance in early 1990s. Though the Panchayats and the municipalities (rural local bodies and the urban local bodies) existed even before the 73rd and 74th amendment of the Constitution in the year 1993, these amendments provided an impetus to the decentralisation process through a system of self-government for the panchayats and municipalities and devolve greater powers, functions and authority to them.

It also envisaged the panchayats and municipalities as an institution of self-government. These amendments also underscored the organic link in the public finances of the multi-layered federal polity in India. The devolution of financial resources to these bodies was ensured through periodic constitution of the State Finance Commissions (SFCs).

Articles 243 (I) and 243 (Y) of the Constitution spelt out the task of SFCs. Accordingly, SFCs are required to recommend

  1. the principles that should govern the distribution between the State on the one hand and the local bodies on the other of the net proceeds of taxes, etc. leviable by the state and the inter-se allocation between different panchayats and municipalities,
  2. the determination of taxes, duties, tolls and fees which may be assigned to, or appropriated by the local bodies, and
  3. grants-in-aid from the consolidated fund of the State to the local bodies. SFCs are also required to suggest the measures needed to improve the financial position of the panchayats and municipalities.

The importance of the SFCs in the scheme of fiscal decentralization is that besides arbitrating on the claims to resources by the state government and the local bodies, their recommendations would impart greater stability and predictability to the transfer mechanism.

So far, three SFCs have submitted their reports in most of the States. These cover different time period. The convention established at the national level of accepting the principal recommendations of the central finance commission without modification, is not being followed in the states.

Often, even the accepted recommendations are not fully implemented due to resource constraints. There is no synchronization of the periods covered by the reports of SFCs with that of the central finance commission, which affects the central finance commission in assessing the resource required to state governments to supplement the resources of the panchayats and municipalities.

Himanshu Arora

Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University

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By B2B

Revisiting the Basics

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