Professional Documents
Culture Documents
Legislative
A. Background
The Constitution in its very first article describes India as a Union of
States. When the British power was established in India it was highly
centralized and unitary. To hold India under its imperial authority,
the British had to control it from the Centre and ensure that power
remained centralized in their hands. A strong central authority was
for the British both an imperial and an administrative necessity. The
country continued to be ruled under the 1919 Act by a central
authority until 1947. And, since under the 1919 Act, there was a
central government, a central legislature, a system of central laws etc.,
the use of these terms continued under the colonial hangover.
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altered and many relationships have been transformed. As at present,
the Union consists of 28 States and seven Union Territories. Some
unique solutions of regional councils, development boards, etc., have
been attempted with varying degrees of success. The three newest
States are Uttaranchal, Jharkhand and Chhatisgarh.
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Constitution. Neither the Union Parliament nor the State Legislature
is, therefore, sovereign in the legalistic sense. Besides the distribution
of powers between the Union and the States the Constitution imposes
many more limitations on them. For example, the exercise of
legislative power (of Union as well as State Legislatures) is subject to
the fundamental rights guaranteed by the Constitution. Similarly
Article 276(2) limits the powers of State Legislature to impose a tax
on professionals and Article 303 limits the powers of Parliament and
State Legislature with regard to Legislation relating to Trade and
Commerce.
(i) The territory over which the Union and the States shall
respectively, have their jurisdiction.
(ii) The subjects to which their respective jurisdiction shall extend.
We would discuss here the legislative powers of the Union and the
States under both these heads.
Territorial Jurisdiction
The Union Parliament has, on the other hand, the power to legislate
for the whole or any part of the territory of India, which includes not
only the States but also the Union Territories, or any other area for the
time being included in the territory of India (Article 246 (4)). It also
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possesses the power of extra-territorial legislation which no State
Legislature Possesses. It means that the laws of Union Parliament can
govern not only persons and property within the territory of India,
but, also Indian subjects, resident any where in the world as well as
their property. Such powers are not available to the States beyond
their territory.
Distribution by Subjects
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List-I or the Union List includes subjects over which the Union has
exclusive power Legislation. It includes 97 items or subjects. Some of
the major items in this list are Defence, Foreign Affairs, Banking,
Currency and Coinage, Union Duties and Taxes etc.
List-II or the State List contains sixty two items or entries over which
the State Legislature has exclusive power of legislation. Some of the
important items in the State List are Public Order and Police, Local
Government, Public Health and Sanitation, Agriculture, Animal
Husbandry and Fisheries, State Taxes and Duties etc.
While in the case of an item in the Concurrent List the Union as well
as State Legislature have jurisdiction, in case of repugnancy between
a Union Law and a State Law on the same subject, the former
prevails. If, however, the State Law was reserved for the assent of the
President and has received such an assent, the State Law may prevail
in spite of such repugnancy. The Parliament can, however, over ride
such State Law by a subsequent legislation – Article 254 (2).
Residuary Powers
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C. Extraordinary Circumstances
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behalf by their respective legislatures. This is nothing but an
extension of the jurisdiction of the parliament by the consent of
the State Legislatures.
Article 252 has been used by the States a few times. For
example, in order to have a uniform law for the control and
regulation of price competition, several States passed
resolutions authorizing the Parliament to enact requisite
Legislation the need for a central law was felt because these
competitions were run by out-of-state journals which a State
Law could not effectively control. Parliament then enacted the
Price Competition Act 1955.The States of West Bengal and
Bihar authorized the Parliament to legislate for the setting up of
the Damodar Valley Corporation to control the Damodar River
which caused floods in both the States. Similarly Parliament
enacted the Urban Land (Ceiling and Regulation) Act 1976
after eleven Legislatures authorized it to do so under Article
252 (1) of the Constitution.
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according to the provision of the Constitution, the powers of the
Legislature of the State become exercisable by or under the
authority of the Parliament. This gives the Parliament full
powers to legislature on any matter included in any List with
respect to the State, for which a proclamation has been made
under Article 356 of the Constitution.
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Chapter – II
Administrative
The distribution of executive powers between the Union and the State
Government is somewhat more complicated although it follows a similar
pattern, similar to the distribution of legislative powers between the Union
and the State Governments. We propose to study here the constitutional
provisions regarding the distribution of executive powers and then have a
look on the way this distribution has worked in actual practice.
A. Scheme of Distribution
(i) The matters with respect to which the Parliament has exclusive
power to make laws (i.e. matters in List-1 of Schedule-VII).
(ii) The exercise of its powers conferred by any treaty or agreement
(Article 73).
Concurrent List
The above mentioned principle states that the Centre has executive
jurisdiction over all matters included in List-1 of Schedule VII and a
state has executive jurisdiction over all the matters included in the
List-II. The position regarding the Concurrent List i.e. List-III is a
little more complicated. The general principle is that regarding the
matters included in the Concurrent legislative list (List-III) the
executive functions shall ordinarily remain with the States, but subject
to the provisions of the Constitution or of any law of the Parliament
conferring such functions exclusively upon the Union. Under the
Government of India Act 1935, the Centre had only the power to give
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directions to provincial executive to execute a central law relating to a
concurrent subject. But this power of giving direction proved
ineffective. Therefore, the Constitution provides that the Union may,
whenever it thinks fit, itself take up administration of the Union laws
relating to any concurrent subject.
(iii) The Union has the power to give directions to the State
Governments as regards the exercise of their executive power in
certain matters provided for in Article 256,257,339,344 (6),
347, 350(A), 353, 356 and 360 of the Constitution.
Emergencies
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Governments extend to the giving of directions as to the
manner in which the executive power of the State is to be
exercised, relating to any matter (Article 353 (a)). This brings a
State Government under the complete control of the Union
without suspending it functioning.
(ii) When the President on the report of the Governor or otherwise
is satisfied that the Government of the State cannot be carried
out in accordance with the provisions of the Constitution, he
may make a proclamation to this effect. When such a
proclamation of the failure of Constitutional machinery in a
State has been made, the President can assume to himself all or
any of the executive powers of the State (Article 356). It may
be recalled that during such a proclamation, the legislative
powers of the State Legislature are also reserved for the
parliament. It means that the entire legislative and executive
control of the State Government vests in the Union Government
and the Parliament. This is in fact a complete assumption of the
legislative and the executive functions of the State. Usually the
Government of the State during such proclamation is carried
out by the Governor acting on behalf of the President.
(iii) When the State Government is found unable to manage the
financial affairs prudently, the President may issue a
proclamation of financial emergency in the State. On
declaration of financial emergency, the President may issue the
following directives to the State Government.
B. Delegation by Consent
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To mitigate the rigidity which might arise form the Centre-State
division of administrative power, the Indian Constitution make
provision for inter-governmental delegation of administrative powers.
This may happen either under an agreement between the Governments
or by legislation. While the Centre can use both the methods to
delegate administrative power to the State, the State can use only the
first method to delegate administrative power to the Centre.
Article 258 (1) provides that the President may, with the consent of
the State Government, entrust either conditionally or unconditionally,
to the State or its officers, any functions in relation to a matter to
which the Centre Executive Power extends. It is entirely for the
Centre to determine whether the entrustment to be made to the State
concerned should be conditional or unconditional, and if conditional,
what conditions are to be imposed on the State concerned. So while
making delegation under Article (258 (1), the Central Government
reserves to itself power to issue directions to the State Governments
for the exercise of delegated power. It also reserves to itself a
concurrent power to continue to exercise along with the State
Governments, the functions being delegated to them. Delegation may
be specific or general to one State or many States, of any function
whether within the Union list or the Concurrent List. The
Constitutional provision can be used to delegate Central functions to a
State Government, when a state makes no provision for the delegation
of the powers of the Central Government to the States, but even when
a statute contains a provision authorizing the Central Government for
the purpose instead of the statutory provision. Some examples of such
delegation are indicated below:
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(b) Notwithstanding the entrustment, the Central
Government may itself exercise all these functions
should it deem fit to do so from time to time.
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Under Articles 258(A), a State Government may, with the consent of
the Government of India, entrust either conditionally or
unconditionally to the Central Government or its officers, functions in
relation to any matter to which the executive power of the State
extends. The article was inserted in the Constitution in 1956 as the
corresponding provision to Article 258 (1). The lack of the provision
enabling the State to entrust its functions to Centre was found to be of
practical consequences in connection with the execution of certain
development works in the States. The High Court has ruled that the
relationship arising by virtue of Article 258 (A) between the Centre
and the State Governments is not that of the Principal and the agent.
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D. Center’s Executive Control over States.
Apart from Article 256 and 257 (1), mentioned above, several other
constitutional provisions authorize the Centre to issue directive to
States in several matters falling under their purview. Thus,
communication is a State subject but under Article 257 (2), the Centre
may give directions to a State as to the construction and maintenance
of means of communication declared in the direction to be of national
or military importance. This, however, does not restrict the power of
the Parliament to declare highways or waterways to be national, or to
construct and maintain the means of communication needed for naval,
military and air force works. Article 257 (3) empowers the Centre to
give directions to a State as to the measures to be taken for the
protection of Railway within the State.
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in the mother tongue at the primary stage of children belonging to a
linguistic minority. The President has been empowered to issue such
directions to the State as he considers necessary.
Consequences of Disobedience
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creation of one or more All India Services and regulate recruitment
and conditions of service for them. At present, three All India
Services are in existence, namely, Indian Administrative Service,
Indian Police Service, and Indian Forest Service.
E. Coordination Mechanisms
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b. Under article 262, Parliament may by law provide for adjudication of
any dispute or complaint with respect to the use, distribution or
control of the waters of, or in, any inter-State river or river valley.
This empowers the Parliament to set up suitable machinery for
adjudication of any dispute or complaint with respect to the use,
distribution, or control of the waters of inter state rivers and river
valleys.
c. Article 280 provides for constitution of a Finance Commission for
distribution between the Union and the States of the net proceeds of
taxes.
d. In the area of inter-state trade and commerce article 307 of the
Constitution contemplates the appointment of an authority for
carrying out the purposes of articles 301-304. These articles provide
that there would be freedom of trade and commerce throughout the
territory of India subject to restrictions stipulated in the Constitution
and that the Parliament may by law impose as may be required in
public interest.
Apart from potential disputes there is another feature of our political set
up which warrants standing institutionalized consultation. Keeping this in
view, the framers of our Constitution conceived Inter-State Council to be
set up under article 263. Various subject-special consultative forums have
also been established under article 263. Besides this, several inter-state
consultative bodies have been set up under executive orders at different
times since the commencement of the Republic. Five Zonal Councils
were set up under the States Reorganization Act, 1956 to deliberate on
contentious regional issues. A North East Council was set up in 1981,
with a mandate, inter-alia, covering zonal issues of the North East.
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The Administrative Reforms Commission in its report on Centre-State
Relations submitted in 1969 recommended, inter-alia that an Inter-State
Council should be constituted under article 263 of the Constitution and
that it might consist of the Prime Minister as Chairman and the Union
Home Minister, the Union Finance Minister, leader of the opposition in
the Lok Sabha and five representatives, one each from the five Zonal
Councils, as members. The Commission noted that the phrase 'common
interest' occurring in article 263 was a comprehensive one which might
be construed to cover problems relating to or arising out of the
Constitution, legislative enactments, administration and finance.
Rajamannar Committee
Sarkaria Commission
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largely dependent on State administrations. Union and States can entrust
their executive functions to each other. States are dependent on Union for
fiscal resources and in many administrative matters. Interdependence is
indispensable in a diverse and developing society. Institutionalized and
sustained consultation is indispensable in view of this interdependence.
The Commission recommended setting up of a Council under article 263
of the Constitution for this purpose. ( Also refer chapter 5 of this module)
The bodies which were set up under the executive orders are as under :-
In addition to above, the following bodies have been set up under article
263 of the Constitution;
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iii. Council for Sales Tax and State Excise Duties - for each of
Northern, Eastern, Western and Southern Zones.
iv. Transport Development Council.
v. Central Councils for Research in Ayurveda, Unani,
Homeopathy, Yoga and Nature cure.
vi. Central Family Welfare Councils.
vii. Inter-State Council.
Inter-State-Council (ISC)
Article 263 provides that the President may by order appoint an Inter-
State Council; if it appears to him that public interest would be served
by its establishment. The President may define the organization,
procedure, and duties of the council. Generally, it may be charged
with the duties of:
(a) Enquiring into and advising upon disputes which may have
arisen between the States.
(b) Investigating and discussing subjects in which some or all of
the States or the Union and one or more of the States have
common interest.
(c) Making recommendations upon any subject and in particular
recommendations for better coordination of policy and action
with respect to a binding decision.
Not much use has been made of Article 263 so far and only a few
bodies of minor importance have been created under it. The General
Council of Health, created by a Presidential order under Article 263
consists of Central Health Minster as Chairman and State Health
Ministers as Members. Similarly, a Central Council of local Self-
Government has been created comprising the Union members. Both of
these are advisory bodies. They advise on broad policy matters in
which coordination between Centre and State Government is
necessary. Similarly, Under Article 263, four more regional councils
have been set up for making recommendations for better coordination
of policy and action with respect to sales tax, a State subject.
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Administrative Reforms Commission also suggested the establishment
of an inter-state Council under Article 263 with a view to strengthen
cooperation and coordination and evolution of common policies
among the Centre and State Governments in many areas where the
measures taken by these Governments form time to time are mutually
interactive. The Commission did not work out the details of the type
of duties which such a council can discharge. It only made a general
statement that the establishment of an Inter-State Council would be
conducive to a better understanding. Some State Chief Ministers have
also demanded setting up of such a Council so that the federal
problems may be discussed on a formal basis. The Central
Government has, however, remained cool to the idea. Presumably it
may have thought that the establishment of such a Council might blow
up controversies on contentious issues rather than promote
cooperation.
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upon the responsibilities and powers which, under the Constitution,
are the exclusive concern of the Union and States respectively.
The ISC, since its inception, has held nine meetings, the first on
October 10, 1990 and the ninth on June 28, 2005. The Council, which
so far has primarily been considering the recommendations of the
Sarkaria Commission on Centre-State relations, completed
considerations of all of its 247 recommendations.Of these, 179
recommendations have been accepted and implemented, 64
recommendations have not been accepted either by the Inter-State
Council or the Administrative Ministries concerned and 4 are under
different stages of consideration in the concerned Ministries /
Departments.
Zonal Councils
Five Zonal Councils have been set up under the States’ Re-
organisation Act, 1956. These are high level advisory bodies with the
Union Home Minister as their Chairman and the Chief Ministers of
the respective States as members. These Councils play a key role in
resolving inter- State and Centre-State problems and fostering
balanced socio-economic development in the respective zones.These
councils are sub-federal links between the centre and the states,
having the following main objectives:
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(i) to cooperate with each other in the successful and speedy
execution of major development projects.
(ii) To enable the centre and the states which are dealing
increasingly with matters, economic and social, to cooperate
and exchange ideas and experiences in order that uniform
policies for the common good of the community are evolved.
(iii) To secure some kind of political equilibrium between different
regions of the country.
(iv) To help in arresting the growth of acute state consciousness,
regionalism and particulars trends;
(v) To solve problems concerning border disputes, linguistic
minorities or inter-state transport.
The principal factors that have been taken into account in constitution
of different zones are:
Control Boards
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(c) Prepare schemes for regulating and developing inter-state river
or river valley.
(d) Allocation among the Governments of the cost of executing
such schemes.
(e) To watch the progress of measures undertaken by the
Government entrusted with the implementation.
(f) Any other matters.
The Commission is to complete its work and submit its report with
recommendations within two years. Terms of Reference (TOR) of the
Commission include:
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1. To examine and review the working of the existing arrangements
between the Union and the States as per the Constitution of India and
various pronouncements of the courts in this regard;
2. To address the growing challenges of ensuring good governance for
promoting welfare of the people, strengthening the unity and integrity
of the country; and
3. To make particular recommendations, but not limit its mandate, on:
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namely, the Chief Ministers’ Conference and Food Ministers
Conference are of pre-independence origin.
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Chapter – III
Planning
A. Planning set up
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as Chairman. It has a few Central Ministers and a number of official
experts as members. There is no State representative as such on the
Planning Commission which can thus be regarded as a purely Central
organ. The role of the Planning Commission is only advisory. It takes
stock of the resources available in the Country and formulates plans
for national Government. Usually, a perspective plan of 15 years is
prepared along with a 5 Year Plan. For concrete action annual plans
are also prepared. During all this process the Central Ministers and
the State Governments are consulted by the Planning Commission
through a number of working groups, study groups, task forces etc.
The plan initially formulated by the Planning Commission is in the
nature of recommendations to the Central Government as well as to
the State Government through National Development Council. The
responsibility of taking final decisions rests with these bodies and the
implementation of the plans rests with the Central and the State
Governments. A close cooperation is established between the
Planning Commission and the Central Government because of the fact
that the Prime Minister heads both these organs. Other Central
Ministers are also invited to the Commissions’ meeting from time to
time.
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The Council reviews the working of the plan from time to time,
considers important questions of social and economic policy affecting
national development and recommends measures for the achievement
of aims and targets set out in the national plan. The Council is
envisaged as the supreme body in regard to planning and
development. It can play a major role in reconciling the views of the
Central and State Governments and in securing full co-operation and
coordination between them in planning matters and those ensuring
development of a uniform approach and outlook towards working of
national plans and programmes.
During the last five decades of planning, the country has formulated
and implemented nine Five Year Plans and the tenth one is in
progress. We now have sufficient experience of the planning process
to discern some of the important features which have a bearing on the
Centre-State relations. We will discuss some of these features briefly.
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Predominant Position of the Planning Commission
(i) The Prime Minister and a few important Cabinet Ministers are
the members of the Planning Commission along with the
experts. The association of such high level functionaries of the
government of India and specially that of the Prime Minister
lends a great deal of prestige to the Planning Commission.
When a recommendation has been made by a body presided
over by the Prime Minster, it becomes difficult for any one to
over rule or modify it. Naturally, such a recommendation
acquires the force of a directive.
(ii) It is a permanent body with a permanent secretariat. Naturally,
over a period of time, it tends to acquire a body of knowledge
which nobody else can. This gives the Commission an edge
over other institutions. For example. The Finance Commission
meets once in 5 years. Its recommendations therefore, do not
have a stamp of continuity. Consideration of economic
problems starts with the setting up of a new commission.
(iii) The Planning Commission is a body of experts. It consists of
noted personalities in economic, scientific, agricultural and
planning fields. They are able to give a perspective to national
thinking on economic matters which is very difficult for any
other body to acquire. Naturally, their recommendations
command a high respect which no one can easily ignore.
(iv) The most important reason for the influence of Planning
Commission with the Ministries and the States is the approval
of their plans and programmes by the Planning Commission. In
respect of the State Governments, even the Central grants are
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released by the Central Government to the States on the
recommendations of the Planning Commission. These are
discretionary grants given under Article 282 of the Constitution.
Similarly, the loans to the State Governments are also released
on the recommendation of the Planning Commission. Although
this procedure is nowhere prescribed in the Constitution or any
law, it has now the force of a long and continued tradition. As
we shall presently see, this gives rise to good deal of stresses
and strains in the Centre –State relations.
(v) In the initial stages, the hold of the Planning Commission over
State Governments was also facilitated by the rule of the
Congress Party at the Centre as well as in the States. Even when
a Chief Minster would not find himself in agreement with the
recommendations of the Planning Commission, he could be
silenced by the discipline of the party. The Prime Minster being
naturally senior to him in the party hierarchy would command
his obedience. With the opposition parties forming Government
in different States, this mode of achieving coordination between
the Centre and the State Governments as well as between the
Planning Commission and the State Governments is undergoing
a change. The opposition State Governments now openly voice
their disagreement in the meetings of the National Development
Council as well as in other fora.
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the Planning Commission. Therefore, in regard to even the State
subjects, the Planning Commission and the Central Government have
acquired a great say much against the division of legislative and
administrative powers as envisaged in the Constitution.
Discretionary Grants
The State Governments desire that they should get adequate resources
to implement their development plans. They want a big size supported
by the Central Government. At the same time, they do not want
centrally sponsored programmes. The Central Government on the
other hand wishes to continue some of the programmes which are of
vital importance to the nation. For example, the Government of India
attaches a great deal of importance to family planning and would like
to run a number of centrally sponsored programmes in this field.
There is a general apprehension that the State Governments may not
give such programmes the priority they deserve. The Central
Government, therefore, wishes to push some programmes by giving
the State Governments some financial assistance. This financial
assistance is given in the nature of specific purpose grants under
Article 282 of the Constitution. These grants are different from the
Statutory grants given to the states on the recommendations of the
Finance Commission Under Article 275. The crux of the matter is that
the Constitution had envisaged the Fiancé Commission to be the
statutory body for recommending the manner of sharing the resources
between the Central and the State Governments. However, in the
course of time, the discretionary grants given under Article 282 on the
basis of the recommendations of Planning Commission, which is a
non-statutory body, now exceed the grants given under Article 282 on
the recommendations of the statutory Finance Commission. The State
Planning Sector consists of centrally aided schemes and non-centrally
aided schemes. The central sector comprises central schemes and the
central sector sponsored schemes which fall for administration
within the State sphere. They are counted not in the State but in the
Central Sector and for their administration, the Centre gives aid to the
States. Therefore, the State Sector consists of not only the State sector
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as such, but also the Central sponsored schemes. For such schemes,
the grants are given to the States under Article 282 of the Constitution
on matching basis. It seems that the States themselves have to find a
part of the money to earn the central aid for particular scheme. The
matching contribution may vary from scheme to scheme and from
State to State. A uniform matching basis may be inequitable as it may
favour rich state against the poorer because the former are in better
position than the latter to find the matching funds. On the whole the
State Governments do not like the system of conditional grants for
following reasons:
(i) Being tied to specific purpose, the States are not free to use the
money for any other purpose. They may have a different system
of priorities than the Central Government. In fact it is precisely
for this reason that the central Government wants to give
specific purpose grants.
(ii) The State Governments are required to find matching
contribution to avail of the central grants. Most of the
Government are perpetually short of resources and find it
impossible to provide the matching contribution. At times, it
results in non-utilization of the grant provided by the Central
Government. On several occasions the State Governments
resort to the device of using the grant for some purpose and
showing it for another. At times they resort to various gimmicks
to book the expenditure incurred by them for other purposes as
their matching contribution.
(iii) The system of matching grants may be prejudicial to the poorer
states who may not be able to provide their contribution. To a
certain extent this problem is sought to be solved by keeping
their matching contribution small but that does not appear to be
enough to take care of the development needs of the backward
States.
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ii) The Central Government feels that it is primarily the State
activity which they are financing, and it is not unfair to expect
the State Government to contribute a part of the expenditure.
iii) If the Central Government provides the entire expenditure of
the plan programme, the State Government tends to neglect it
because it has no financial stake in it. It is therefore, better for
the implementation of the project if the State Government also
contribute a part of the cost.
iv) The necessity of providing matching grants to avail of Central
assistance may spur the State Government to put in more efforts
for resource mobilization.
v) The State Government being autonomous in their functioning,
the only way to induce them to take certain programmes is
through providing them some financial assistance. It is a better
method of ensuring the State Government’s acceptance than
any coercive process even if the Central Government has the
power to do so.
State Autonomy
While the arguments for and against the system of discretionary grant
may go on and on, the most important implication of these grants is an
attack on the States’ autonomy. The problem has become more acute
with the opposition governments coming to power in different states.
Their main contention is that the autonomy of the state Governments
is sought to be undermined by keeping their share in the resources
small and then forcing them to adopt the Central programmes by the
device of discretionary grants. They argue that the State Governments
should be given, as a matter of right, necessary resources to discharge
their functions effectively. They should not be required to depend
upon the Central Government for carrying out their development
programmes. They feel that resource transfer form the Centre to the
States should be large and should be on the basis of statutory grants.
This will enhance their resources as well as give them freedom to
implement the programmes that they consider most suitable for their
states. In other word, the argument is to enhance the function of the
Finance Commission in respect of the devolution of resources.
Planning Commission may be reduced to its proper status of giving
advice to the Central and the State Governments.
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C. Coordination between Finance and Planning Commissions
36
(i) Planning Commission has no statutory or Constitutional
basis and the Government does not want to formulize this
body because it will lose its flexibility in the process.
(ii) Its composition has a political element whereas the
Finance Commission is supposed to be a non-political
body. The State will not like Finance Commission to be a
political body closely associated with the Central
Government. The Third alternative of entrusting to the
Finance Commission only tax sharing ad giving the task
of fixing the share of grants (both under the fiscal need
and under Article 282) to the planning Commission also
des not appear to be feasible. It is not possible to consider
tax sharing in isolation from fiscal need grants and vice-
versa. The common purpose of both is to close the
revenue gap of the State. Their separation would make
the coordination between the two very difficult.
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Chapter –IV
Financial
Firstly, some of the ever growing and realistic sources of revenue like
customs and excise duties have been allocated by the Central Government
and the States have been left with comparatively inelastic sources of revenue
like taxes on agricultural income, land and buildings etc.
Thirdly, politico-economic trends of the 20th century have also helped in the
centralization process.
All this has made the States financially dependent on the Centre. The whole
situation has necessitated the Centre to play an effective coordinating role in
the fiscal affairs of the nation. This is as true of India as it is about the
United States, Canada and Australia.
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Centre to the States. These are the principles of compensation, derivation,
need and national welfare.
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(i) Taxation of income other than agricultural income.
(ii) Duties of Customs including export duties.
(iii) Corporation tax.
(iv) Excise duties on tobacco and other goods produced and
manufactured in India except on alcoholic liquors for human
consumption and narcotics, but including, medicinal and toilet
preparations.
(v) Taxes on Sale or purchase of goods where such sale or purchase
takes place in course of inter-state trade.
(vi) Taxes on vehicles.
The allocation of items of taxation between the Union and the States
is based on the general principle that the taxes which are location-
specific and relate to subjects of local importance have been assigned
to States, while the taxes of inter-state significance have been
assigned to the Union. The entries in the legislative list are so framed
as to make a clear-cut demarcation of taxation powers between the
Union and the States. Such a clear cut division is essential to avoid
conflicts and litigation between the two tiers of the polity. Older
federations like USA and Australia do not have such clear-cut
demarcation. There are overlapping powers of taxation leading to a lot
of complications which require a great deal of time and effort to be
resolved. Our Constitution avoids these pitfalls. There are many
grievances of the States, which will be dealt later in the chapter, but
there is no confusion about the distribution of taxation powers.
Even though a legislature may have been given the power to levy a
tax, the yield of different taxes coming within the competence of State
legislature may not be large enough to serve the purpose of a State. To
meet this situation, the Constitution makes several special provisions:
(i) Some duties are leviable by the Union but these are to be
collected and entirely appropriated by the States after
collection.
(ii) Some taxes which are levied and collected by the Union, but
the proceeds are then assigned by the Union to those States
within which they have been levied.
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(iii) Again there are taxes which are levied and collected by the
Union but the proceeds are distributed between the Union and
the States.
There are several items in the list on which taxes are levied, collected
as well as appropriated by the Central Government. Some of these
important items are:
(i) Customs.
(ii) Corporation tax.
(iii) Taxes on capital value of assets of individuals and companies.
(iv) Surcharge on income tax etc.
(v) Fees in respect of matters in the Union List.
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alcohol. They are included in the Union List. These taxes are levied
by the Union, but collected by the States and appropriated by them
(Article 268).
Taxes levied and collected by the Union and distributed between the
Union and States
Certain taxes are levied and collected by the Union, but their proceeds
are distributed between the Union and the States in certain proportion,
in order to effect an equitable division of financial resources. These
are:
C. Non-tax Revenue
Apart from the revenue received by the Union and the State
Governments from the levy of taxes as mentioned above, they have
some sources of non-tax revenue also. Such sources of revenue are:
(i) The Union Government may earn non-tax revenue form the
following sources:
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(a) Commercial operation of Railways.
(b) Posts and Telegraphs.
(c) Television and Radio Broadcasting
(d) Currency and Mint.
(e) Income from the industrial, commercial undertakings of
the Central Government such as:
- Industrial Finance Corporation.
- Indian Airlines.
- Air India
- Several Fertilizer Corporations
- Hindustan Shipyard
- India Telephone Industries, etc.
(a) Forests
(b) Irrigation
(c) Commercial enterprises (Electricity Boards, Transport
Undertakings etc.)
D. Grant-in-aid
Even after the transfer of tax revenues form the Central Government
to the State Governments, the needs of the latter are not fully met.
Therefore, with a view to augment State resources, in addition to what
they would get through their taxes, provisions have been made in the
Constitution for Central grant to the States. The Constitution divided
such grants into two categories:
Statutory Grants
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The Statutory grants are given to the State Governments on the
recommendations of the Finance Commission. Article 275 gives the
impression that the grant-in-aid depends on the discretion of the
Parliament. However, Article 280 (3) makes it clear that the grant is to
be given on the recommendation of the Finance Commission. By now
it is clear that devolution of grants-in-aid under article 275 is
governed not so much by the Parliamentary discretion as by the
recommendation of the Finance Commission.
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E. Finance Commission
Functions
Article 280 (3) of the Constitution lays down the functions of the
Finance Commission as follows:
(a) 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 allocation between the States of the
respective shares of such proceeds.
(b) The principles which should govern the grants-in-aid of the
revenues of the States out of the consolidated fund of India.
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(c) Any other matter referred to the Commission by the President
in the interest of sound finance.
It has already been stated that under Article 268,269, the net proceeds
of certain taxes are to be wholly assigned to the States. Taxes under
Article 268 are only levied by Union while taxes under Article 269 are
both levied and collected by the Union. The reason behind inclusion
of these taxes in the Union List is the maintenance of uniformity. In
the case of items under Article 269 the additional purpose is to avoid
the difficulties of administration.
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other than agriculture income and Union duties of excise were shared
with States under articles 270 and 272 respectively. The Eightieth
Amendment Act has substituted a new article for article 270 and
omitted the old article 272. The new article 270 provides as under:
(1) “270(1) All taxes and duties referred to in the Union List,
except the duties and taxes referred to in articles 268 and 269,
respectively, surcharge on taxes and duties referred to in article
271 and any cess levied for specific purposes under any law
made by Parliament shall be levied and collected by the
Government of India and shall be distributed between the
Union and the States in the manner provided in clause (2).
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cent of the proceeds to be devolved to the States under this Scheme.
This percentage share included devolution on account of additional
excise duties levied in lieu of sales tax as well as the grant-in-lieu of
the tax on railway passenger fares.
(a) All Central taxes and duties, except those referred in articles
268 and 269 respectively and surcharges and cesses, are to be
shared between the Centre and the States.
(b) Only States in which these taxes and duties are ‘leviable in that
year’ are entitled to get a share in these taxes and duties.
(c) A percentage of “net proceeds” of these taxes and duties as may
be prescribed by the President by order after considering the
recommendations of the Finance Commission is to be shared by
States.
(d) The percentage of “net proceeds” of these taxes and duties
which is assigned to the States in any financial year shall not
form part of the Consolidated Fund of India.
(e) The article 270(2) which referred to taxes on income prior to
the amendment contained the following provision:
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proceeds represent proceeds attributable to Union
Territories or to taxes payable in respect of Union
emoluments, shall not form part of the Consolidated Fund of
India.” In the new article 270 which refers to all taxes the words
“net proceeds” attributable to Union Territories or to “taxes
payable in respect of Union emoluments” have been omitted.
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Criteria and Relative Weights for Determining Inter se
Shares of States
1. Population 10.0
3. Area 7.5
It will be thus noted that there are three main considerations in the
selection of criteria namely: (i) resource deficiency; (ii) higher cost of
providing services; and (iii) fiscal discipline.
Twelfth Finance Commission (2005-2010)
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The Commission submitted its report on November 30, 2004 covering
the period 2005-10. The recommendations of the Commission include
a plan for restructuring of public finances of the Centre and the States
through improvement in revenue mobilization and bringing down debt
levels, and through enactment of fiscal responsibility legislation by
States. The Commission recommended debt relief to States linked to
fiscal reforms, doing away with the present system of Central
assistance to State plans in the form of grants and loans and transfer of
external assistance to States on the same terms and conditions as
attached to such assistance by external funding agencies. The TFC
raised the share of States in shareable Central taxes from 29.5 per cent
to 30.5 per cent. Total transfers to States recommended by the TFC
amount to Rs.7,55,752 crore over the five year period 2005-10. Of
this, transfers by way of share in Central taxes and grants-in-aid
amount to Rs.6,13,112 crore and Rs.1,42,640 crore, respectively. The
total transfers recommended by the TFC are higher by 73.8 per cent
over those recommended by the Eleventh Finance Commission
(EFC). Within the total transfers, while the share in Central taxes is
higher by 62.9 per cent, grants-in-aid recommended by the TFC are
higher by 143.5 per cent over those recommended by the EFC.
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States to follow a recruitment policy in a manner so that the
total salary bill, relative to revenue expenditure, net of interest
payments, does not exceed 35 per cent.
Each State to enact a fiscal responsibility legislation providing
for elimination of revenue deficit by 2008-09 and reducing
fiscal deficit to 3 per cent of State Domestic Product.
The system of on-lending to be brought to an end over time.
The long term goal should be to bring down debt-GDP ratio to
28 per cent each for the Centre and the States.
Local Bodies
52
Calamity Relief
Grants-in-aid to States
53
Central loans to States contracted till March,2004 and
outstanding on March 31, 2005 amounting to Rs.1,28,795 crore
to be consolidated and rescheduled for a fresh term of 20 years,
and an interest rate of 7.5 per cent to be charged on them. This
is subject to enactment of fiscal responsibility legislation by a
State.
A debt write-off scheme linked to reduction of revenue deficit
of States to be introduced. Under this scheme, repayments due
from 2005-06 to 2009-10 on Central loans contracted up to
March 31,2004 will be eligible for write-off.
Central Government not to act as an intermediary for future
lending to States, except in the case of weak States, which are
unable to raise funds from the market.
External assistance to be transferred to States on the same terms
and conditions as attached to such assistance by external
funding agencies.
All the States to set up sinking funds for amortization of all
loans.
States to set up guarantee redemption funds through earmarked
guarantee fees.
Others
The Centre should share ‘profit petroleum’ from New Exploration and
Licensing Policy (NELP) areas in the ratio of 50:50 with States where
mineral oil and natural gas are produced. No sharing of profits in
respect of nomination fields and non-NELP blocks.
Every State to set up a high level committee to monitor the utilization
of grants recommended by the TFC.
Centre to gradually move towards accrual basis of accounting.
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Chapter V
Report of Sarkaria Commission on Centre-State Relations
It has already been mentioned that the central Government had set up the
Sarkaria Commission in 1983 to conduct a comprehensive inquiry into the
Central-State relations and to suggest measures for proper and smooth
functioning of the federal system of the country. The commission submitted
its report in January 1988 giving a comprehensive review of the centre-state
relations.
In the light of the past 37 year’s experience, several suggestions were given
by the Sarkaria commission for the improvement of the center-state
relations. The general conclusion of the commission is that under the Indian
conditions a strong center is necessary not only to protect and preserve the
independence, integrity and unity of the country but also to ensure a uniform
integrated policy of basic issues of national concern. The commission felt
that the considerations which weighted with the constitution makers is given
a principally mentioned rule to the center are still relevant today. According
to the commission the distribution of powers between the center and the
state made by the constitution is by and large a proper reconciliation of the
imperative need for a strong center with need for State autonomy. The
commission, therefore, felt that the basic scheme and provisions of the
constitution are sound and no structural changes in the functional and
operational aspects of center-state relationship. With this introduction we
may now study the major recommendation of the Sarkaria commission.
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However, the Commission made the following suggestions for minor
changes in the legislative relations:
(i) The Commission was of the general view that the principle f Union
supremacy in the executive field as envisaged in Article 265 and 257
should remain intact. it has, therefore, recommend measures for
smooth administrative relations between the Centre and the States.
More extensive use should be mad of Article 258 which permits
entrustment of central functions of the State.
(ii) One of the major recommendations of the Commission regarding
administrative relations is that the requirement of consultations with
the Chief Ministers on the appoint of any person as Governor of the
State should be prescribed in the Constitution itself. It has been
suggested that on demitting office, the Governor should not be
eligible for any other appointment or office of profit except the office
of Governor or Vice President. He should also not be allowed to enter
politics.
(iii) The Commission has tried to set out certain guidelines to be adopted
in appointing Chief Ministers and for the dismissal of Ministry. The
general principle is that majority of the Chief Ministers should be
tested on the floor of the House. However, the Commission found that
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it is neither feasible nor desirable to provide for a guideline for the
exercise of the Governors’ discretion.
(iv) Regarding the Governor’s powers to refer State Bills to Centre for
assent, the Commission has suggested that Centre should observe a
proper time frame for dealing with such bills. If the assent is withheld,
the reasons should be communicated to the State Government. It has
also been suggested that the assent should not be withheld merely on
policy differences on matters relating to States List and matters
relating to concurrent list on the ground that the Union is
contemplating comprehensive law. Regarding the emergency
provisions (Article 353, 355, and 356), the Commission felt that these
provisions are meant to ensure integrity of the National and not to
establish supremacy of the Union.
The Commission was of the view that Article 356 regarding the
imposition of President’s Rule should continue to exist. However, this
power should be used sparingly and with extreme caution. The report
of the Governor should contain a clear statement of material facts and
should be given wide publicity.
(v) The Article 356 should be amended to provide that the material facts
ad grounds justify President’s Rule, should form part of the
proclamation.
(vi) Regarding the use of Armed Forces the Commission was of the view
that it is entirely for the Union Government to decide, suo moto,
where the situation demanded sue of such Armed Forces. However, it
is desirable to consult the State Government, whenever possible,
before deploying its Armed Forces otherwise than at the request of the
State Government.
(vii) The Commission found that All India Services are as necessary today
as when the Constitution was framed. It has recommended further
strengthening of the service and regular consultation on their
management between the Centre and the State. For this purpose it has
suggested constitution of Advisory Council under the Cabinet
Secretary. It has also been suggested that in agreement with the States,
more All India Services should be created.
Financial Relations
57
The Commission has made following recommendations regarding the
financial relations between the Centre and the State:
(i) It has accepted the major role of the Finance Commission. However,
suggestion has been made that the terms of reference of the Finance
Commission should be drawn up after informal consultations with the
States.
(ii) The Commission has recommended that the Constitution should be
amended to enable the Parliament to provide for the sharing of the
corporate tax. It has also suggested amendment of the constitution to
enable levying taxes on advertisement in broadcast to be distributed to
State under Article 269 of the Constitution.
(iii) The Commission has made some suggestions about the sharing of
Income Tax and Excise duty. It has been also suggested that surcharge
on income should be levied for specific purposes and for limited
periods. Similar suggestions have also been made abut the special
cess. The Commission has suggested that grant should be given to the
States in lieu of railway passenger fare tax as recommended by the
Finance Commission.
(iv) The Commission has suggested review of royalty rate of minerals etc.,
once every two years as against the practice of reviewing it every four
years.
(v) In regard to the assistance for natural calamities, it has suggested that
State should be given discretion to make some suggestions for the use
of relief fund. Strict penalties should be imposed for diversion and
misappropriation of funds. The centre should give its consent to the
State for borrowing from Banks etc. for a period of less than one year.
(vi) The system of Municipal Bonds should be introduced to enable local
bodies to raise resources.
(vii) The Commission also suggested setting up an Expert Body to
recommended taxation and resources mobilization of Union and
States. It has also suggested preparation of comprehensive and proper
plans on the special Government subsidy and the setting up of an
official body to evolve steps for coordination of economic policies
and t ensure a consensus on financial matters.
Planning Commission
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(i) It has been suggested that Planning Commission should hold effective
consultations with the State at all stages and should evolve healthy
conventions to give weightage to the opinion and suggestions of the
state.
(ii) National Development Council should be renamed as National
Economic and Development Council. It emerged as the highest
political level inter-Governmental body and gave thrust to planned
development. The Commission has suggested that instead of its
present informal status, the National Development Council should be
given constitutional status under Article 263. This body should be
involved in the formulation of plans from the beginning and should
provide a forum for arriving at a consensus on the mobilization and
use of resources. The loan grant pattern of central assistance and the
system of earmarking of outlays should be reviewed. On the subject of
centrally sponsored schemes, the Commission observed such schemes
may be kept to the minimum. The States should be fully involved in
determining the coverage of such schemes.
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Inter-State Council
Other suggestions
Besides the suggestions mentioned above, the Commission has also made
several other suggestions. Some of the important ones are given below:
General reactions
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(i) Power of the Central Government to impose President’s rule should
be severely curtailed. State Government should be free to operate
within their areas of legal and territorial jurisdiction. These state
governments desire that the Union List should be severely curtained
and should include only defence, foreign relations, general
communications, currency etc., and all other powers should be versed
in the States. The Commission has, however, rejected this demand on
the ground that this would weaker the Centre to the extent of
threatening the integrity of the country.
(ii) The State Government desired that they should have grater share in
the Revenues out of taxation. They feel that at present they are too
much dependent on the Center for running and carrying out even
limited functions assigned to them in the Constitution. The state also
desired that the discretionary grants of the Centre should be totally
abolished. They should get their share of resources as a mater of right
and this should be enshrined in the Constitution itself.
(iii) Some of the States have gone to the extent of suggesting that the
institution of Governor should be abolished. According to them the
Governor have been used as agents of the Centre to create trouble for
the opposition ruled states. On this point the Commission has argued
that most of the problems can be got over if good persons are
appointed as Governors in consultation with the Chief Ministers of the
concerned States. The Commission has suggested development of
healthy conventions to guide the actions of the Governors.
61