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Indian Economic Policy

Notes have always insisted that the quantum of grant should be fixed as a given amount. This amount
was originally fixed at ` 23 crores. The Railways’ case for a fixed amount of grant was based on
the following arguments :
(a) The impact of social obligations has been rising continuously and the annual loss to the
Railways by way of subsidisation of passenger fares and tariff on low-rated commodities
was around ` 2,000 crores. In other words, the Railways have been subsidising not only
passengers traffic but also freight traffic.
(b) Railway receipts should not be treated on part with Central Government tax revenues,
part of which devolves on the States. The Railways –being a major public utility undertaking
- have to find adequate resources to provide a modern and efficient transport infrastructure
to meet the demands of a growing economy which is acquiring further complexity and
sophistication. Accordingly, increasing the amount of grant in lieu of the tax on passenger
fare beyond the current size would put their development efforts at jeopardy.
Evaluation of the First Eleven Finance Commission Awards

The appointment of a Finance Commission at intervals of five years or less has great significance for
the financial relations between the Union and the States. Periodic examination of the division of
resources and suitable modifications in it imparts a degree of flexibility to the finance of both the
Centre and the States. This flexibility is of great value in these days of changing needs and resources.
The planned development of the country involves growing expenditure and, therefore, larger revenues,
and an elastic system of finance is a great necessity. Through the transfer of resources from the
Centre to the States, the elasticity of the Union sources of revenue is transmitted to the State finances
also. The Finance Commissions help in this process by making suitable suggestions.
The general complaint against the awards of Finance Commissions is that they generally estimate
revenue gaps of States (excess of revenue expenditure over their own revenues) and devise measures
for ‘gap filling’. In other words, the Finance Commission awards have been characterised as ‘gap-
filling’ awards. This type of criticism may not hold good especially for the awards of Seventh and
Eighth Finance Commissions. The Seventh Finance Commission was probably the first finance
commission to be deeply concerned with the equitable system of federal transfers and accordingly the
devolution under the Seventh Finance Commission award was twice that of the Sixth Finance
Commission. The Eighth Finance Commission was also deeply concerned with the need to help the
most poverty-stricken states, hill states and backward states and its award almost doubled the devolution
of the Seventh Finance Commission. There was, therefore, some justification in the claim of the Eighth
Finance Commission that its award was not simply ‘gap-filling’, but that it attempted to achieve the
twin objectives of a more equal relationship between the Centre and the States and interstate equity.
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In this context, a major shift in the awards of the Finance Commission from 7 to 11 Finance
Commissions may be mentioned here. In their attempt to fill the resource gap of the states, the first
Six Finance Commissions relied heavily on grants-in-aid to cover their revenue deficits. The Seventh
Finance Commission raised the states’ share in the divisible pool of taxes by (a) raising the states’
share in income tax from 80 per cent to 85 per cent, (b) bringing all excise duties under the divisible
pool and (c) by raising the states’ share in excise duties from 20 per cent to 40 per cent. The Eighth
Finance Commission further increased the states’ share in excise duties to 45 percent (the additional
5 per cent to be meant for deficit states). As a result of these recommendations, the devolution of tax
revenue to the states was so much that the Seventh and Eighth Finance Commissions did not find it
necessary to recommend large grants-in-aid to cover the revenue deficit of States. This trend was
reversed by the successive Finance Commissions and we do find sizable grants-in-aid to cover revenue
deficit of the states by Ninth to Eleventh Finance Commission.
Centre-State Conflict on Finances
In the last few decades, there has always been growing conflict and tension between the Indian
Union and the States in the matter of finance. This con flict has often been aggravated by political and
ideological differences between the different parties governing the Centre and the States.

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