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Indian Economic Policy

Notes The figures indicate the rising contribution of the Centre to State resources. On an average, the States
received ` 280 crores per year from the Centre during the First Plan, ` 3,020 crores per year during
the fourth plan, and ` 21,000 crores per year during the the Seventh Plan.
During the first plan, 36 per cent of the State expenditure was met by resources transferred by the
Centre. Currently, transferred resources from the Centre pay for 46 per cent of the total expenditure
of the States. The growing transference of resources from the centre to the states is evidence of : (a)
increasing integration between the Central and State finances; (b) helpless dependence of States on
the Centre; and (c) growing power and interference of the Centre in the affairs of the State.
Table 1 : Gross Devolution and Transfer of Resources from the Centre to the States
(`` `` ` crores)
Shared Grants Loans Total Transferred Resources
Taxes (net) as percentage of States’
total expenditure

1951-52 50 30 70 150 25
First Plan (1951-56) 340 290 800 1,430 36
Second Plan (1956-61) 670 790 1,430 2,870 42
Third Plan (1961-66) 1,200 1,300 3,100 5,650 43
Fourth Plan (1969-74) 4,560 3,830 6,710 15,100 37
Sixth Plan (1980-85) 23,730 15,470 14,120 53,320 46
Seventh Plan (1985-90) 49,460 42,810 31,260 1,23,530 46
For the period (1990-95)* 98,890 90,720 54,650 2,44,260 43
Source : Report of the Twelfth Finance Commission (2005-10) and other Finance Commissions
The Finance Commission Awards

Under the provisions of Article 280 of the Constitution, the President is required to appoint a Finance
Commission for the specific purpose of devolution of non-plan revenue resources. The functions of
the Commission are to make recommendations to the President in respect of
(i) the distribution of net proceeds of taxes to be shared between the Union and the States and the
allocation of share of such proceeds among the States,
(ii) the principles which should govern the payment by the Union of grants-in-aid to the revenues
of the States, and
(iii) any others matter concerning financial relations between the Union and the States.
The appointment of the Finance Commission is of great importance, for it enables the financial relation
between the Centre and the units to be altered in accordance with changes in need and circumstances.
The elasticity in relationship introduced by this provision has great advantage.
(a) Division and Distribution of Income Tax
The personal income tax is imposed and collected by the Union Government but the net proceeds
are shared between the Centre and the States under Article 270 of the Indian Constitution. The
Finance Commissions have to give their award on two points :
(a) the share of the States in the total collection of income tax (this is known as vertical division)
and
(b) the principle/principles which should govern the share of each State in the divisible pool
(this is konwn as horizontal division of resources between states).
Vertical division of Income Tax
The First Finance Commission (presided over by J.P. Neogi) recommended that the States should
share 55 per cent of the proceeds of the income tax. But the successive Finance Commissions

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