Finances of Union and States
1. The Ministry of Finance (MoF) should ensure that the finance accounts fully reflect the collections under cesses and surcharges as per the relevant heads, so that there are no inconsistencies between the amounts
released to states in any year and the respective percentage shares in net central taxes recommended by the Finance Commission for that year.
2. The states need to address the problem of losses in the power sector in a time-bound manner.
3. Initiatives should be taken to reduce the number of Centrally Sponsored Schemes (CSS) and to restore the predominance of formula-based plan transfers.(refer chaturvedi committee )
Goods and Services Tax
5. Both the Centre and the states should conclude a ‘Grand Bargain’ to implement the Model GST. The Grand Bargain comprises six elements:
i) The design of the Model GST is suggested in paras 5.25 to 5.35.
ii) The operational modalities are outlined in paras 5.36 to 5.41.
iii) The proposed agreement between the Centre and states, with contingencies for changes, is in paras 5.49 to 5.51.
iv) The disincentives for non-compliance are described in Para 5.52.
v) The implementation schedule is described in paras 5.57 to 5.59.
vi) The procedure for claiming compensation is in Para 5.60.
6. Any GST model adopted must be consistent with all the elements of the Grand Bargain.
To incentivise implementation of the Grand Bargain, this Commission recommends sanction of a grant of Rs. 50,000 crore. The grant would be used to meet the compensation claims of State Governments for revenue losses on account of implementation of GST between 2010-11 and 2014-15, consistent with the Grand Bargain.
Unspent balances in this pool would be distributed amongst all the states, as per the devolution formula, on 1 January 2015.
7. The Empowered Committee of State Finance Ministers (EC) should be transformed into a statutory council. The compensation should be disbursed in quarterly instalments on the basis of the recommendations by a three-member Compensation Committee comprising of the Secretary, Department of Revenue, Government of India; Secretary to the EC and chaired by an eminent person with experience in public finance.
8. In the unlikely event that a consensus with regard to implementing all the elements of the Grand Bargain cannot be achieved and the GST mechanism finally adopted is different from the Model GST suggested by us, this Commission recommends that this amount of Rs. 50,000 crore shall not be disbursed.
9. The states should take steps to reduce the transit time of cargo vehicles crossing their borders by combining checkposts with adjoining states and adopting user-friendly options like electronically issued passes for transit traffic.
Union Finances
10. The policy regarding use of proceeds from disinvestment needs to be liberalised to also include capital expenditure on critical infrastructure and the environment.
11. Records of landholdings of PSUs need to be properly maintained to ensure that this scarce resource is put to productive use, or made available for other public projects, or else, sold.
State Finances
12. The practice of diverting plan assistance to meet non-plan needs of special category states should be discontinued.
13. With reference to public sector undertakings:
i) All states should endeavour to ensure clearance of the accounts of all their Public Sector Undertakings (PSUs).
ii) The states should use the flexibility provided by the Comptroller and Auditor General (C&AG) to clear the backlog of PSU accounts.
iii) All states need to draw up a roadmap for closure of non-working PSUs by March 2011. Divestment and privatisation of PSUs should be considered and actively pursued.
iv) The Ministry of Corporate Affairs should closely monitor the compliance of state and central PSUs with their statutory obligations.
v) A task force may be constituted to design a suitable strategy for disinvestment/ privatisation and oversee the process. A Standing Committee on restructuring may be constituted under the chairmanship of the Chief Secretary to operationalise the recommendations of the task force. An independent technical secretariat may be set up to advise the finance departments in states on restructuring/disinvestment proposals.
14. With reference to the power sector:
i) Reduction of Transmission and Distribution (T&D) losses should be attempted through metering, feeder
separation, introduction of High Voltage Distribution Systems (HVDS), metering of distribution transformers and strict anti-theft measures. Distribution franchising and Electricity Services Company (ESCO)-based structures should be considered for efficiency improvement.
ii) Unbundling needs to be carried out on priority basis and open access to transmission strengthened. Governance should be improved through State Load Dispatch Centres (SLDCs) and this function should eventually be made autonomous.
iii) Proper systems should be put in place to avoid delays in completion of hydro projects.
iv) Instead of putting up thermal power plants in locations remote from sources of coal, states should consider joint ventures (JVs) in or near the coal-rich states.
v) Case 1 bid process should be extensively used to avoid vulnerability to high-cost purchases during peak demand periods.
vi) Regulatory institutions should be strengthened through capacity building, consumer education and tariff reforms like Multi Year Tariff (MYT). Best practices of corporate governance should be introduced in power utilities.
15. Migration to the New Pension Scheme needs to be completed at the earliest.
16. States with large cash balances should make efforts towards utilising these before resorting to fresh borrowings.
17. With reference to accounting reforms:
i) The Government of India (GoI) should ensure uniformity in the budgetary classification code across all states. The list of appendices to the finance accounts of states also needs to be standardised.
ii) Details of contra-entries as well as the summary of transactions between the public account and the consolidated fund should be provided as a separate annex to the finance accounts of the states.
iii) Public expenditure through creation of funds outside the consolidated fund of the states needs to be discouraged. Expenditure through such funds and from civil deposits should be brought under the audit jurisdiction of the C&AG.
iv) The following statements need to be provided with the finance accounts of states:
a) Comprehensive data on all subsidies.
b) Consolidated information on the number of employees at each level, along with the commitment on salary.
This statement should also include information on employees and their salary where such expenditure is
shown as grants or booked under other expenditure.
c) Details of maintenance expenditure.
Sharing of Union Tax Revenues
18. The share of states in net proceeds of shareable central taxes shall be 32 per cent in each of the financial years from 2010-11 to 2014-15. Under the Additional Duties of Excise (Goods of Special Importance) Act,
1957, all goods were exempted from payment of duty from 1 March 2006. Following this, the Centre had adjusted the basic duties of excise on sugar and tobacco products. In view of these developments, the states’ share in the net proceeds of shareable central taxes shall remain unchanged at 32 per cent, even
in the event of states levying sales tax (or Value Added Tax (VAT)) on these commodities.
19. In the event of notification of the 88th Amendment to the Constitution and enactment of any legislation following such notification, it should be ensured that the revenue accruing to a state under the
legislation should not be less than the share that would accrue to it, had the entire service tax been part of the shareable pool of central taxes.
20. The Central Government should review the levy of cesses and surcharges with a view to
reducing their share in its gross tax revenue.
21. The indicative ceiling on overall transfers to states on the revenue account may be set at 39.5 per cent of gross revenue receipts of the Centre.
22. The share of each state in the net proceeds of all shareable central taxes in each of the financial years from 2010-11 to 2014-15 shall be as specified in Table 1.1:
Revised Roadmap for Fiscal Consolidation
23. The revenue deficit of the Centre needs to be progressively reduced and eliminated, followed by emergence of a revenue surplus by 2014-15.
24. A target of 68 per cent of GDP for the combined debt of the Centre and states should be achieved by 2014-15. The fiscal consolidation path embodies steady reduction in the augmented debt stock of the Centre to 45 per cent of GDP by 2014-15, and of the states to less than 25 per cent of GDP, by 2014-15.
25. The Medium Term Fiscal Plan (MTFP) should be reformed and made a statement of commitment rather than a statement of intent. Tighter integration is required between the multi-year framework provided
by MTFP and the annual budget exercise.
26. The following disclosures should be made along with the annual Central Budget/MTFP:
i) Detailed breakup of grants to states under the overall category of non-plan and plan grants.
ii) Statement on tax expenditure to be systematised and the methodology to be made explicit.
iii) Compliance costs of major tax proposals to be reported.
iv) Revenue Consequences of Capital Expenditure (RCCE) to be projected in MTFP.
v) Fiscal impact of major policy changes to be incorporated in MTFP.
vi) Public Private Partnership (PPP) liabilities to be reported along with MTFP.
vii) MTFP to make explicit the values of parameters underlying projections for receipts and expenditure and the band within which they can vary while remaining consistent with targets.
27. Transfer of disinvestment receipts to the public account to be discontinued and all disinvestment receipts be maintained in the consolidated fund.
28. GoI should list all public sector enterprises that yield a lower rate of return on assets than a norm to be decided by an expert committee.
29. The FRBM Act needs to specify the nature of shocks that would require a relaxation of FRBM targets.
30. In case of macroeconomic shocks, instead of relaxing the states’ borrowing limits and letting them borrow more, the Centre should borrow and devolve the resources using the Finance Commission tax devolution formula for inter se distribution between states.
31. Structural shocks such as arrears arising out of Pay Commission awards should be avoided by, in the case of arrears, making the pay award commence from the date on which it is accepted.
32. An independent review mechanism should be set-up by the Centre to evaluate its fiscal reform process. The independent review mechanism should evolve into a fiscal council with legislative backing over time.
33. Given the exceptional circumstances of 2008-09 and 2009-10, the fiscal consolidation process of the states was disrupted. It is expected that states would be able to get back to their fiscal correction
path by 2011-12, allowing for a year of adjustment in 2010-11.
i) States that incurred zero revenue deficit or achieved revenue surplus in 2007-08 should eliminate revenue deficit by 2011-12 and maintain revenue balance or attain a surplus thereafter. Other states should eliminate revenue deficit by 2014-15.
ii) The General Category States that attained a zero revenue deficit or a revenue surplus in 2007-08 should achieve a fiscal deficit of 3 per cent of Gross State Domestic Product (GSDP) by 2011-12 and maintain
such thereafter. Other general category states need to achieve 3 per cent fiscal deficit by 2013-14.
iii) All special category states with base fiscal deficit of less than 3 per cent of GSDP in 2007-08 could incur a fiscal deficit of 3 per cent in 2011-12 and maintain it thereafter. Manipur, Nagaland, Sikkim and Uttarakhand to reduce their fiscal deficit to 3 per cent of GSDP by 2013-14.
iv) Jammu & Kashmir and Mizoram should limit their fiscal deficit to 3 per cent of GSDP by 2014-15.
34. States should amend/enact FRBM Acts to build in the fiscal reform path worked out.
State-specific grants recommended for a state should be released upon compliance.
35. Independent review/monitoring mechanism under the FRBM Acts should be set up by states.
36. Borrowing limits for states to be worked out by MoF using the fiscal reform path, thus acting as an enforcement mechanism for fiscal correction by states.
37. Loans to states from National Small Savings Fund (NSSF) contracted till 2006-07 and outstanding at the end of 2009-10 to be reset at 9 per cent rate of interest, subject to conditions prescribed.
38. National Small Savings Scheme to be reformed into a market-aligned scheme. State Governments are also required to undertake relevant reforms at their level.
39. Loans from GoI to states and administered by ministries/departments other than MoF, outstanding as at the end of 2009-10, to be written off, subject to conditions prescribed.
40. A window for borrowing from the Central Government needs to be available for fiscally weak states that are unable to raise loans from the market.
41. For states that have not availed the benefit of consolidation under the Debt Consolidation and Relief Facility (DCRF), the facility, limited to consolidation and interest rate reduction, should be extended, subject to enactment of the FRBM Act.
42. The benefit of interest relief on NSSF and the write-off should be made available to states only if they bring about the necessary amendments/enactments of FRBM.
Local Bodies
43. Article 280 (3) (bb) & (c) of the Constitution should be amended such that the words ‘on the basis of the recommendations of the Finance Commission of the State’ are changed to ‘after taking into consideration
the recommendations of the Finance Commission of the State’.
44. Article 243(I) of the Constitution should be amended to include the phrase ‘or earlier’ after the words ‘every fifth year’.
45. The quantum of local body grants should be provided as per Table 10.4. The general basic grant as well as the special areas basic grant should be allocated amongst states as specified. The state-wise eligibility for these grants is placed in annexes 10.15a and 10.15c.
46. State Governments will be eligible for the general performance grant and the special areas performance grant only if they comply with the prescribed stipulations. These grants will be disbursed in the manner specified. The state-wise eligibility for these grants is placed in annexes 10.15b and 10.15d.
47. The states should appropriately allocate a portion of their share of the general basic grant and general performance grant, to the special areas in proportion to the population of these areas. This allocation will be in addition to the special area basic grant and special area performance grant recommended by us.
48. State Governments should appropriately strengthen their local fund audit departments through capacity building as well as personnel augmentation.
49. The State Governments should incentivise revenue collection by local bodies through methods such as mandating some or all local taxes as obligatory at non-zero rates of levy, by deducting deemed own revenue collection from transfer entitlements of local bodies, or through a system of matching grants.
50. To buttress the accounting system, the finance accounts should include a separate statement indicating head-wise details of actual expenditures under the same heads as used in the budget for both Panchayati Raj
Institutions (PRIs) and Urban Local Bodies (ULBs). We recommend that these changes be brought into effect from 31 March 2012.
51. The Government of India and the State Governments should issue executive instructions so that their respective departments pay appropriate service charges to local bodies.
52. Given the increasing income of State Governments from royalties, they should share a portion of this income with those local bodies in whose jurisdiction such income arises.
53. State Governments should ensure that the recommendations of State Finance Commissions (SFCs) are implemented without delay and that the Action Taken Report (ATR) is promptly placed before the
legislature.
54. SFCs should consider adopting the template suggested in Annex 10.5 as the basis for their reports.
55. Bodies similar to the SFC should be set up in states which are not covered by Part IX of the Constitution.
56. Local bodies should consider implementing the identified best practices.
57. A portion of the grants provided by us to urban local bodies be used to revamp the fire services within their jurisdiction.
58. Local Bodies should be associated with city planning functions wherever other development authorities are mandated this function. These authorities should also share their revenues with local bodies.
59. The development plans for civilian areas within the cantonment areas (excluding areas under the active control of the forces) should be brought before the district planning committees.
60. State Governments should lay down guidelines for the constitution of nagar panchayats.
Disaster Relief
61. The National Calamity Contingency Fund (NCCF) should be merged into the National Disaster Response Fund (NDRF) and the Calamity Relief Fund (CRF) into the State Disaster Response Funds (SDRFs) of the respective states. Contribution to the SDRFs should be shared between the Centre and
states in the ratio of 75:25 for general category states and 90:10 for special category states.
63. Budgetary provisions for the NDRF need to be linked to expenditure of the previous year from the fund. With cesses being subsumed on introduction of the GST; alternative sources of financing need to be identified.
64. The total size of the SDRF has been worked out as Rs. 33,581 crore, to be shared in the ratio given above, with an additional grant of Rs. 525 crore for capacity building.
65. Assistance of Rs. 250 crore to be given to the National Disaster Response Force to maintain an inventory of items required for immediate relief.
66. Provisions relating to the District Disaster Response Fund (DDRF) in the Disaster Management (DM) Act may be reviewed and setting up of these funds left to the discretion of the individual states.
67. Mitigation and reconstruction activities should be kept out of the schemes funded through FC
grants and met out of overall development plan funds of the Centre and the states.
68. The list of disasters to be covered under the scheme financed through FC grants should remain as it exists today. However, man-made disasters of high-intensity may be considered for NDRF funding, once
norms have been stipulated and the requisite additional allocations made to the NDRF.
69. The administrative mechanism for disaster relief to be as prescribed under the DM Act, i.e., the National Disaster Management Authority (NDMA)/National Executive Council (NEC) at the Centre and the State
Disaster Management Agency (SDMA)/State Executive Council (SEC) at the state level. Financial matters to be dealt with by the Ministry of Finance as per the existing practice.
70. Prescribed accounting norms should be adhered to for the continuance of central assistance to the SDRFs.
Grants-in-aid to States
NPRD and Performance Incentive
71. Total non-plan revenue grant of Rs. 51,800 crore is recommended over the award period
for eight states (Table 12.4).
72. A performance grant of Rs. 1500 crore is recommended for three special category states
who have graduated from a Non-plan Revenue Deficit (NPRD) situation.
Elementary Education
74. The education grant will be an additionality to the normal expenditure of the states for elementary education. The expenditure (plan + non-plan) under elementary education, i.e., major head-2202, sub-major
head-01, exclusive of grants recommended, should grow by at least 8 per cent annually during 2010-15.
Environment
76. Grants for the first two years are untied but priority should be given to the preparation of working plans. Release of grants for the last three years is linked to progress in the number of approved working plans.
77. Twenty five per cent of the grants in the last three years are for preservation of forest wealth. These grants are over and above the non-plan revenue expenditure on forestry and wildlife (major head-2406) and shall be subject to the conditionalities given in Annex 12.3. Seventy five per cent of the grants in the last three years can be used by states for development purposes.
78. An incentive grant of Rs. 5000 crore is recommended for grid-connected renewable energy based on the states’ achievement in renewable energy capacity addition from 1 April 2010 to 31 March 2014. The
performance of states in this regard needs to be reviewed on the basis of data published by GoI on capacity addition by states.
79. An amount of Rs. 5000 crore is recommended as water sector management grant for four years, i.e,. 2011-12 to 2014-15 of the award period.
80. Release of water sector grants would be subject to setting up of a Water Regulatory Authority
and achieving the normatively assessed state-specific recovery of water charges.
81. Water sector grants should be an additionality to the normal maintenance expenditure to be undertaken by the states and shall be released and monitored in accordance with the conditionalities in Annex 12.8.
Improving Outcomes
82. States should be incentivised to enroll such of their residents who participate in welfare schemes within the Unique Identification (UID) programme. A grant of Rs. 2989 crore is proposed to be given to State Governments in this regard, as indicated in Annex 12.9.
83. States should be incentivised to reduce their Infant Mortality Rates (IMR) based upon their performance beyond 31 December 2009. A grant of Rs 5000 crore is recommended for this purpose.
84. A grant of Rs. 5000 crore is proposed to support improvement in a number of facets in the administration of justice. These include operation of morning/evening courts, promotion of Alternate Dispute Resolution (ADR) mechanisms, enhancing support to Lok Adalats, as well as legal aid and training.
85. A grant of Rs 20 crore is recommended for promotion of innovation by setting up a Centre for Innovation in Public Systems (CIPS) to identify, document and promote innovations in public services across states. The second grant of Rs. 1 crore per district is for the creation of a District Innovation Fund
(DIF) aimed at increasing the efficiency of the capital assets already created.
86. To enhance the quality of statistical systems, we recommend a grant of Rs. 616 crore for State Governments at the rate of Rs. 1 crore for every district to fill in statistical infrastructure gaps in areas not addressed by the India Statistical Project (ISP).
87. A grant of Rs. 10 crore will be provided to each general category state and Rs. 5 crore to each
special category state to set up an employees’ and pensioners’ data base. We also urge GoI
to initiate a parallel effort for preparing a data base for its own employees and pensioners.
Maintenance of Roads and Bridges
88. An amount of Rs. 19,930 crore has been recommended as grant for maintenance of
roads and bridges for four years (2011-12 to 2014-15) of our award period.
89. The maintenance grants for roads and bridges will be an additionality to the normal maintenance expenditure to be incurred by the states. Release of this grant and expenditure will be subject to the
conditionalities indicated in Annex 12.17.
State-specific Needs
90. A total grant of Rs. 27,945 crore is recommended for state-specific needs
91. In addition to the stipulations described in paras 5.52 and 9.82, state-specific grants are subject to the following conditionalities:
i) No funds from any of the state-specific grants may be used for land acquisition by the states. Wherever land is required for a project/construction, such land may be made available by the State Government.
ii) The phasing of the state-specific grants given in Table 12.6 is only indicative; states may communicate their required phasing to the Central Government. The grant may be released in a maximum of two instalments per year.
iii) Accounts shall be maintained and Utilisation Certificates (UCs)/ Statements of Expenditure (SOEs)
provided as per General Finance Rules (GFR) 2005.
Monitoring
92. The High Level Monitoring Committee headed by the Chief Secretary to review the utilisation of grants and to take corrective measures, set up as per the recommendation of FC-XII, should continue.
93. The total grants-in-aid recommended for the states over the award peroid are given in
Table 1.2.
1. The Ministry of Finance (MoF) should ensure that the finance accounts fully reflect the collections under cesses and surcharges as per the relevant heads, so that there are no inconsistencies between the amounts
released to states in any year and the respective percentage shares in net central taxes recommended by the Finance Commission for that year.
2. The states need to address the problem of losses in the power sector in a time-bound manner.
3. Initiatives should be taken to reduce the number of Centrally Sponsored Schemes (CSS) and to restore the predominance of formula-based plan transfers.(refer chaturvedi committee )
Goods and Services Tax
5. Both the Centre and the states should conclude a ‘Grand Bargain’ to implement the Model GST. The Grand Bargain comprises six elements:
i) The design of the Model GST is suggested in paras 5.25 to 5.35.
ii) The operational modalities are outlined in paras 5.36 to 5.41.
iii) The proposed agreement between the Centre and states, with contingencies for changes, is in paras 5.49 to 5.51.
iv) The disincentives for non-compliance are described in Para 5.52.
v) The implementation schedule is described in paras 5.57 to 5.59.
vi) The procedure for claiming compensation is in Para 5.60.
6. Any GST model adopted must be consistent with all the elements of the Grand Bargain.
To incentivise implementation of the Grand Bargain, this Commission recommends sanction of a grant of Rs. 50,000 crore. The grant would be used to meet the compensation claims of State Governments for revenue losses on account of implementation of GST between 2010-11 and 2014-15, consistent with the Grand Bargain.
Unspent balances in this pool would be distributed amongst all the states, as per the devolution formula, on 1 January 2015.
7. The Empowered Committee of State Finance Ministers (EC) should be transformed into a statutory council. The compensation should be disbursed in quarterly instalments on the basis of the recommendations by a three-member Compensation Committee comprising of the Secretary, Department of Revenue, Government of India; Secretary to the EC and chaired by an eminent person with experience in public finance.
8. In the unlikely event that a consensus with regard to implementing all the elements of the Grand Bargain cannot be achieved and the GST mechanism finally adopted is different from the Model GST suggested by us, this Commission recommends that this amount of Rs. 50,000 crore shall not be disbursed.
9. The states should take steps to reduce the transit time of cargo vehicles crossing their borders by combining checkposts with adjoining states and adopting user-friendly options like electronically issued passes for transit traffic.
Union Finances
10. The policy regarding use of proceeds from disinvestment needs to be liberalised to also include capital expenditure on critical infrastructure and the environment.
11. Records of landholdings of PSUs need to be properly maintained to ensure that this scarce resource is put to productive use, or made available for other public projects, or else, sold.
State Finances
12. The practice of diverting plan assistance to meet non-plan needs of special category states should be discontinued.
13. With reference to public sector undertakings:
i) All states should endeavour to ensure clearance of the accounts of all their Public Sector Undertakings (PSUs).
ii) The states should use the flexibility provided by the Comptroller and Auditor General (C&AG) to clear the backlog of PSU accounts.
iii) All states need to draw up a roadmap for closure of non-working PSUs by March 2011. Divestment and privatisation of PSUs should be considered and actively pursued.
iv) The Ministry of Corporate Affairs should closely monitor the compliance of state and central PSUs with their statutory obligations.
v) A task force may be constituted to design a suitable strategy for disinvestment/ privatisation and oversee the process. A Standing Committee on restructuring may be constituted under the chairmanship of the Chief Secretary to operationalise the recommendations of the task force. An independent technical secretariat may be set up to advise the finance departments in states on restructuring/disinvestment proposals.
14. With reference to the power sector:
i) Reduction of Transmission and Distribution (T&D) losses should be attempted through metering, feeder
separation, introduction of High Voltage Distribution Systems (HVDS), metering of distribution transformers and strict anti-theft measures. Distribution franchising and Electricity Services Company (ESCO)-based structures should be considered for efficiency improvement.
ii) Unbundling needs to be carried out on priority basis and open access to transmission strengthened. Governance should be improved through State Load Dispatch Centres (SLDCs) and this function should eventually be made autonomous.
iii) Proper systems should be put in place to avoid delays in completion of hydro projects.
iv) Instead of putting up thermal power plants in locations remote from sources of coal, states should consider joint ventures (JVs) in or near the coal-rich states.
v) Case 1 bid process should be extensively used to avoid vulnerability to high-cost purchases during peak demand periods.
vi) Regulatory institutions should be strengthened through capacity building, consumer education and tariff reforms like Multi Year Tariff (MYT). Best practices of corporate governance should be introduced in power utilities.
15. Migration to the New Pension Scheme needs to be completed at the earliest.
16. States with large cash balances should make efforts towards utilising these before resorting to fresh borrowings.
17. With reference to accounting reforms:
i) The Government of India (GoI) should ensure uniformity in the budgetary classification code across all states. The list of appendices to the finance accounts of states also needs to be standardised.
ii) Details of contra-entries as well as the summary of transactions between the public account and the consolidated fund should be provided as a separate annex to the finance accounts of the states.
iii) Public expenditure through creation of funds outside the consolidated fund of the states needs to be discouraged. Expenditure through such funds and from civil deposits should be brought under the audit jurisdiction of the C&AG.
iv) The following statements need to be provided with the finance accounts of states:
a) Comprehensive data on all subsidies.
b) Consolidated information on the number of employees at each level, along with the commitment on salary.
This statement should also include information on employees and their salary where such expenditure is
shown as grants or booked under other expenditure.
c) Details of maintenance expenditure.
Sharing of Union Tax Revenues
18. The share of states in net proceeds of shareable central taxes shall be 32 per cent in each of the financial years from 2010-11 to 2014-15. Under the Additional Duties of Excise (Goods of Special Importance) Act,
1957, all goods were exempted from payment of duty from 1 March 2006. Following this, the Centre had adjusted the basic duties of excise on sugar and tobacco products. In view of these developments, the states’ share in the net proceeds of shareable central taxes shall remain unchanged at 32 per cent, even
in the event of states levying sales tax (or Value Added Tax (VAT)) on these commodities.
19. In the event of notification of the 88th Amendment to the Constitution and enactment of any legislation following such notification, it should be ensured that the revenue accruing to a state under the
legislation should not be less than the share that would accrue to it, had the entire service tax been part of the shareable pool of central taxes.
20. The Central Government should review the levy of cesses and surcharges with a view to
reducing their share in its gross tax revenue.
21. The indicative ceiling on overall transfers to states on the revenue account may be set at 39.5 per cent of gross revenue receipts of the Centre.
22. The share of each state in the net proceeds of all shareable central taxes in each of the financial years from 2010-11 to 2014-15 shall be as specified in Table 1.1:
Revised Roadmap for Fiscal Consolidation
23. The revenue deficit of the Centre needs to be progressively reduced and eliminated, followed by emergence of a revenue surplus by 2014-15.
24. A target of 68 per cent of GDP for the combined debt of the Centre and states should be achieved by 2014-15. The fiscal consolidation path embodies steady reduction in the augmented debt stock of the Centre to 45 per cent of GDP by 2014-15, and of the states to less than 25 per cent of GDP, by 2014-15.
25. The Medium Term Fiscal Plan (MTFP) should be reformed and made a statement of commitment rather than a statement of intent. Tighter integration is required between the multi-year framework provided
by MTFP and the annual budget exercise.
26. The following disclosures should be made along with the annual Central Budget/MTFP:
i) Detailed breakup of grants to states under the overall category of non-plan and plan grants.
ii) Statement on tax expenditure to be systematised and the methodology to be made explicit.
iii) Compliance costs of major tax proposals to be reported.
iv) Revenue Consequences of Capital Expenditure (RCCE) to be projected in MTFP.
v) Fiscal impact of major policy changes to be incorporated in MTFP.
vi) Public Private Partnership (PPP) liabilities to be reported along with MTFP.
vii) MTFP to make explicit the values of parameters underlying projections for receipts and expenditure and the band within which they can vary while remaining consistent with targets.
27. Transfer of disinvestment receipts to the public account to be discontinued and all disinvestment receipts be maintained in the consolidated fund.
28. GoI should list all public sector enterprises that yield a lower rate of return on assets than a norm to be decided by an expert committee.
29. The FRBM Act needs to specify the nature of shocks that would require a relaxation of FRBM targets.
30. In case of macroeconomic shocks, instead of relaxing the states’ borrowing limits and letting them borrow more, the Centre should borrow and devolve the resources using the Finance Commission tax devolution formula for inter se distribution between states.
31. Structural shocks such as arrears arising out of Pay Commission awards should be avoided by, in the case of arrears, making the pay award commence from the date on which it is accepted.
32. An independent review mechanism should be set-up by the Centre to evaluate its fiscal reform process. The independent review mechanism should evolve into a fiscal council with legislative backing over time.
33. Given the exceptional circumstances of 2008-09 and 2009-10, the fiscal consolidation process of the states was disrupted. It is expected that states would be able to get back to their fiscal correction
path by 2011-12, allowing for a year of adjustment in 2010-11.
i) States that incurred zero revenue deficit or achieved revenue surplus in 2007-08 should eliminate revenue deficit by 2011-12 and maintain revenue balance or attain a surplus thereafter. Other states should eliminate revenue deficit by 2014-15.
ii) The General Category States that attained a zero revenue deficit or a revenue surplus in 2007-08 should achieve a fiscal deficit of 3 per cent of Gross State Domestic Product (GSDP) by 2011-12 and maintain
such thereafter. Other general category states need to achieve 3 per cent fiscal deficit by 2013-14.
iii) All special category states with base fiscal deficit of less than 3 per cent of GSDP in 2007-08 could incur a fiscal deficit of 3 per cent in 2011-12 and maintain it thereafter. Manipur, Nagaland, Sikkim and Uttarakhand to reduce their fiscal deficit to 3 per cent of GSDP by 2013-14.
iv) Jammu & Kashmir and Mizoram should limit their fiscal deficit to 3 per cent of GSDP by 2014-15.
34. States should amend/enact FRBM Acts to build in the fiscal reform path worked out.
State-specific grants recommended for a state should be released upon compliance.
35. Independent review/monitoring mechanism under the FRBM Acts should be set up by states.
36. Borrowing limits for states to be worked out by MoF using the fiscal reform path, thus acting as an enforcement mechanism for fiscal correction by states.
37. Loans to states from National Small Savings Fund (NSSF) contracted till 2006-07 and outstanding at the end of 2009-10 to be reset at 9 per cent rate of interest, subject to conditions prescribed.
38. National Small Savings Scheme to be reformed into a market-aligned scheme. State Governments are also required to undertake relevant reforms at their level.
39. Loans from GoI to states and administered by ministries/departments other than MoF, outstanding as at the end of 2009-10, to be written off, subject to conditions prescribed.
40. A window for borrowing from the Central Government needs to be available for fiscally weak states that are unable to raise loans from the market.
41. For states that have not availed the benefit of consolidation under the Debt Consolidation and Relief Facility (DCRF), the facility, limited to consolidation and interest rate reduction, should be extended, subject to enactment of the FRBM Act.
42. The benefit of interest relief on NSSF and the write-off should be made available to states only if they bring about the necessary amendments/enactments of FRBM.
Local Bodies
43. Article 280 (3) (bb) & (c) of the Constitution should be amended such that the words ‘on the basis of the recommendations of the Finance Commission of the State’ are changed to ‘after taking into consideration
the recommendations of the Finance Commission of the State’.
44. Article 243(I) of the Constitution should be amended to include the phrase ‘or earlier’ after the words ‘every fifth year’.
45. The quantum of local body grants should be provided as per Table 10.4. The general basic grant as well as the special areas basic grant should be allocated amongst states as specified. The state-wise eligibility for these grants is placed in annexes 10.15a and 10.15c.
46. State Governments will be eligible for the general performance grant and the special areas performance grant only if they comply with the prescribed stipulations. These grants will be disbursed in the manner specified. The state-wise eligibility for these grants is placed in annexes 10.15b and 10.15d.
47. The states should appropriately allocate a portion of their share of the general basic grant and general performance grant, to the special areas in proportion to the population of these areas. This allocation will be in addition to the special area basic grant and special area performance grant recommended by us.
48. State Governments should appropriately strengthen their local fund audit departments through capacity building as well as personnel augmentation.
49. The State Governments should incentivise revenue collection by local bodies through methods such as mandating some or all local taxes as obligatory at non-zero rates of levy, by deducting deemed own revenue collection from transfer entitlements of local bodies, or through a system of matching grants.
50. To buttress the accounting system, the finance accounts should include a separate statement indicating head-wise details of actual expenditures under the same heads as used in the budget for both Panchayati Raj
Institutions (PRIs) and Urban Local Bodies (ULBs). We recommend that these changes be brought into effect from 31 March 2012.
51. The Government of India and the State Governments should issue executive instructions so that their respective departments pay appropriate service charges to local bodies.
52. Given the increasing income of State Governments from royalties, they should share a portion of this income with those local bodies in whose jurisdiction such income arises.
53. State Governments should ensure that the recommendations of State Finance Commissions (SFCs) are implemented without delay and that the Action Taken Report (ATR) is promptly placed before the
legislature.
54. SFCs should consider adopting the template suggested in Annex 10.5 as the basis for their reports.
55. Bodies similar to the SFC should be set up in states which are not covered by Part IX of the Constitution.
56. Local bodies should consider implementing the identified best practices.
57. A portion of the grants provided by us to urban local bodies be used to revamp the fire services within their jurisdiction.
58. Local Bodies should be associated with city planning functions wherever other development authorities are mandated this function. These authorities should also share their revenues with local bodies.
59. The development plans for civilian areas within the cantonment areas (excluding areas under the active control of the forces) should be brought before the district planning committees.
60. State Governments should lay down guidelines for the constitution of nagar panchayats.
Disaster Relief
61. The National Calamity Contingency Fund (NCCF) should be merged into the National Disaster Response Fund (NDRF) and the Calamity Relief Fund (CRF) into the State Disaster Response Funds (SDRFs) of the respective states. Contribution to the SDRFs should be shared between the Centre and
states in the ratio of 75:25 for general category states and 90:10 for special category states.
63. Budgetary provisions for the NDRF need to be linked to expenditure of the previous year from the fund. With cesses being subsumed on introduction of the GST; alternative sources of financing need to be identified.
64. The total size of the SDRF has been worked out as Rs. 33,581 crore, to be shared in the ratio given above, with an additional grant of Rs. 525 crore for capacity building.
65. Assistance of Rs. 250 crore to be given to the National Disaster Response Force to maintain an inventory of items required for immediate relief.
66. Provisions relating to the District Disaster Response Fund (DDRF) in the Disaster Management (DM) Act may be reviewed and setting up of these funds left to the discretion of the individual states.
67. Mitigation and reconstruction activities should be kept out of the schemes funded through FC
grants and met out of overall development plan funds of the Centre and the states.
68. The list of disasters to be covered under the scheme financed through FC grants should remain as it exists today. However, man-made disasters of high-intensity may be considered for NDRF funding, once
norms have been stipulated and the requisite additional allocations made to the NDRF.
69. The administrative mechanism for disaster relief to be as prescribed under the DM Act, i.e., the National Disaster Management Authority (NDMA)/National Executive Council (NEC) at the Centre and the State
Disaster Management Agency (SDMA)/State Executive Council (SEC) at the state level. Financial matters to be dealt with by the Ministry of Finance as per the existing practice.
70. Prescribed accounting norms should be adhered to for the continuance of central assistance to the SDRFs.
Grants-in-aid to States
NPRD and Performance Incentive
71. Total non-plan revenue grant of Rs. 51,800 crore is recommended over the award period
for eight states (Table 12.4).
72. A performance grant of Rs. 1500 crore is recommended for three special category states
who have graduated from a Non-plan Revenue Deficit (NPRD) situation.
Elementary Education
74. The education grant will be an additionality to the normal expenditure of the states for elementary education. The expenditure (plan + non-plan) under elementary education, i.e., major head-2202, sub-major
head-01, exclusive of grants recommended, should grow by at least 8 per cent annually during 2010-15.
Environment
76. Grants for the first two years are untied but priority should be given to the preparation of working plans. Release of grants for the last three years is linked to progress in the number of approved working plans.
77. Twenty five per cent of the grants in the last three years are for preservation of forest wealth. These grants are over and above the non-plan revenue expenditure on forestry and wildlife (major head-2406) and shall be subject to the conditionalities given in Annex 12.3. Seventy five per cent of the grants in the last three years can be used by states for development purposes.
78. An incentive grant of Rs. 5000 crore is recommended for grid-connected renewable energy based on the states’ achievement in renewable energy capacity addition from 1 April 2010 to 31 March 2014. The
performance of states in this regard needs to be reviewed on the basis of data published by GoI on capacity addition by states.
79. An amount of Rs. 5000 crore is recommended as water sector management grant for four years, i.e,. 2011-12 to 2014-15 of the award period.
80. Release of water sector grants would be subject to setting up of a Water Regulatory Authority
and achieving the normatively assessed state-specific recovery of water charges.
81. Water sector grants should be an additionality to the normal maintenance expenditure to be undertaken by the states and shall be released and monitored in accordance with the conditionalities in Annex 12.8.
Improving Outcomes
82. States should be incentivised to enroll such of their residents who participate in welfare schemes within the Unique Identification (UID) programme. A grant of Rs. 2989 crore is proposed to be given to State Governments in this regard, as indicated in Annex 12.9.
83. States should be incentivised to reduce their Infant Mortality Rates (IMR) based upon their performance beyond 31 December 2009. A grant of Rs 5000 crore is recommended for this purpose.
84. A grant of Rs. 5000 crore is proposed to support improvement in a number of facets in the administration of justice. These include operation of morning/evening courts, promotion of Alternate Dispute Resolution (ADR) mechanisms, enhancing support to Lok Adalats, as well as legal aid and training.
85. A grant of Rs 20 crore is recommended for promotion of innovation by setting up a Centre for Innovation in Public Systems (CIPS) to identify, document and promote innovations in public services across states. The second grant of Rs. 1 crore per district is for the creation of a District Innovation Fund
(DIF) aimed at increasing the efficiency of the capital assets already created.
86. To enhance the quality of statistical systems, we recommend a grant of Rs. 616 crore for State Governments at the rate of Rs. 1 crore for every district to fill in statistical infrastructure gaps in areas not addressed by the India Statistical Project (ISP).
87. A grant of Rs. 10 crore will be provided to each general category state and Rs. 5 crore to each
special category state to set up an employees’ and pensioners’ data base. We also urge GoI
to initiate a parallel effort for preparing a data base for its own employees and pensioners.
Maintenance of Roads and Bridges
88. An amount of Rs. 19,930 crore has been recommended as grant for maintenance of
roads and bridges for four years (2011-12 to 2014-15) of our award period.
89. The maintenance grants for roads and bridges will be an additionality to the normal maintenance expenditure to be incurred by the states. Release of this grant and expenditure will be subject to the
conditionalities indicated in Annex 12.17.
State-specific Needs
90. A total grant of Rs. 27,945 crore is recommended for state-specific needs
91. In addition to the stipulations described in paras 5.52 and 9.82, state-specific grants are subject to the following conditionalities:
i) No funds from any of the state-specific grants may be used for land acquisition by the states. Wherever land is required for a project/construction, such land may be made available by the State Government.
ii) The phasing of the state-specific grants given in Table 12.6 is only indicative; states may communicate their required phasing to the Central Government. The grant may be released in a maximum of two instalments per year.
iii) Accounts shall be maintained and Utilisation Certificates (UCs)/ Statements of Expenditure (SOEs)
provided as per General Finance Rules (GFR) 2005.
Monitoring
92. The High Level Monitoring Committee headed by the Chief Secretary to review the utilisation of grants and to take corrective measures, set up as per the recommendation of FC-XII, should continue.
93. The total grants-in-aid recommended for the states over the award peroid are given in
Table 1.2.
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