Public Sector Plan : Resources and Allocations
Introduction || Measure to Ensure Projected Resources for Central Plan || Annexures

Measures to ensure projected resources for Central Plan

3.45 Successful implementation of Central Plan pre-supposes resource mobilisation commensurate with projections. The aggregate resources required for financing the Ninth Plan of the Centre and for providing Central Assistance to States and UTs amounts to Rs.664094 crore at 1996-97 prices. Of this, Rs.290094 crore will be raised by CPSEs leaving the balance of Rs.374000 crore to be financed by way of budgetary resources.

3.46 In order to raise budgetary resources to the extent of Rs.374000 crore, a number of measures are required to be undertaken. The fiscal deficit has to be contained within the limit indicated at para 3.19 above. The growth of non-plan revenue expenditure (NPRE) during the Ninth Plan also needs to be restricted to the rate mentioned in para 3.19. The receipts from disinvestment may have to be substantially improved in the remaining three years of the Plan so that the total of such receipts would rise to at least Rs.23895 crore during the Plan period. In addition, the following measures are necessary to bring about substantial improvement in the tax-GDP ratio as envisaged in paragraphs 3.21 and 3.22.

1. Efforts aimed at simplification of tax laws and streamlining of tax collection procedures need to be continued and strengthened. In the case of direct taxes, compliance with tax laws is enforced through the assessment of tax returns filed by tax payers every year. On examination of the existing assessment system, it was found that scrutiny assessment tended to enlarge the litigation list. Scrutiny assessments should be made less irksome and more efficient. Equally important is the need to establish tax courts, as the final arbiter of tax matters. Tax administration should be improved through computerisation, better records management, establishment of a tax research and guidance cell, etc.
2. The tax-GDP ratio registered perceptible increase in a period of five years in response to tax reforms which were carried out under fiscal pressure in some developing countries. This achievement was facilitated by reducing the scope of exemptions and deductions (even as tax rates were generally scaled back) and improvement in tax administration. Though tax reforms in India in the early 1990s were also carried out under fiscal pressure, tax-GDP ratio registered a diminution. While several initiatives have already been taken for modernisation of tax administration which have started yielding positive revenue results, much still remains to be done. The improvement in the direct tax-GDP ratio witnessed in the post-reform period has been largely due to broadening the scope of tax deduction at source. Presumptive taxation of corporate and business incomes is equally important. Introduction of a minimum asset-based levy on corporate enterprises assumes importance in this context. It is also necessary to introduce presumptive schemes to bring into the tax net the hard-to-tax sectors such as small business, agriculture and services. What is important is to develop occupation-specific presumptive norms which can facilitate identification of potential tax payers. Such norms can be used as a bench-mark in the selection of cases for scrutiny as well as in the process of scrutiny for all enterprises irrespective of income level. These norms should be backed by detailed book-keeping requirements, which can be simplified for lower income groups.
3. Tax deduction at source (TDS) has become a major tool for the collection of income-tax. The contribution of TDS has declined in 1990s, despite the fact that its coverage has widened. The share of TDS in gross collection of income-tax increased from about 23 per cent in 1980-81 to about 37 per cent in 1989-90, but declined subsequently to about 31 per cent in 1994-95. One of the major loopholes which contributes to the decline in revenue from TDS relates to the branch-wise threshold of Rs. 10,000 for the purpose of deducting income tax at source from interest on time deposits with banks. Further, the provision for TDS does not apply to non-banking financial companies. Other deficiencies from which the TDS scheme suffers arise from lack of proper monitoring and scrutiny. Often this receives low priority. Sample exercises done in selected States/ Metropolitan cities have indicated immense potential for raising additional revenue under TDS through proper checking of annual returns. Computerisation of TDS functions coupled with upgradation of manpower skills can go a long way in improving the revenue raising capacity of TDS.
4. One important reason for the decline in revenue from indirect taxes expressed as a ratio of GDP lies in the fact that the revenue loss due to reforms could not be made good by adequate reductions in the exemption regimes. The introduction of MODVAT with effect from March 1, 1986 and further extension in coverage under MODVAT during the subsequent years encompassing raw materials, capital goods, petroleum products, tobacco, specified textiles and equipments, etc. have raised the proportion of revenue from MODVAT in the total Union Excise revenue to 85 per cent. The additional resource mobilisation measures relate to removal of exemptions/ concessions, extension of MODVAT to service sector and efficient tax administration. Exemptions under MODVAT system have scope for misuse of provisions by tax payers. Exemptions relate to two broad groups: general and specific. General exemptions relate to SSI units, goods produced for captive consumption within factory, capital goods meant for use in production of exportable items, etc. whereas specific exemptions relate to 81 identified items ranging from coffee, tea and spices to pens, pencils and combs. The need to extend MODVAT to the service sector is reinforced by the faster growth of this sector vis-a-vis other sectors and increase in the proportion of services in the consumption basket of richer families. Countries adopting VAT generally levy sumptuary excise on some commodities to discourage consumption or for reasons related to health and/ or environment. Such an excise on cigarettes, motor cars, petroleum products and alcoholic drinks can yield substantial ARM . As for tax administration, most important measures relate to simplification of forms and procedures, effective cross verification of invoices, and a selective yet incisive audit programme. With the help of latest computer-aided techniques it should be possible to identify and focus on a small percentage of dealers who have a big probability of being defaulters. As regards the other important indirect tax, viz. customs, despite reduction in tariff rates, a number of exemptions still prevail which result in revenue loss. Though all exemptions cannot be deleted (as a good number of general exemptions relate to bilateral/ multilateral agreements, defence, etc.), a review should be made and wherever possible exemptions eliminated. Besides exemptions, the other important factor resulting in loss of customs revenue relates to undervaluation of imports. The establishment of a Centralised Valuation Organisation under the Bombay Custom House which handles nearly 50 per cent of India’s total imports, can reduce the incidence of undervaluation of imports through effective monitoring and by tracking trends in world prices.

3.47 Equally important are measures aimed at controlling non-plan expenditure. Subsidies have become an important and growing component of Public Expenditure. There are a number of hidden subsidies whose magnitude and quantum are rarely measured or monitored. It is therefore of utmost importance that subsidies be transparent and closely targeted.

3.48 Since the plan outlay of Public Enterprises accounts for about two-thirds of the total Central Plan outlay, it is necessary to improve their financial viability through appropriate pricing strategies and reduction of non-transparent subsidies. In order to overcome the resource constraints being faced by these enterprises, it is necessary to ensure more productive utilisation of existing assets. Improvement in financial performance can go a long way in enabling public enterprises to borrow from the market for financing plan investment and thereby reduce their dependence on budgetary resources which are required for social sectors which depend exclusively on budgetary support for financing their plan outlay.

Measures to be taken by the Centre to improve the Resources of the States

3.49 In order to help the States to raise required level of resources, the Centre has to play supportive role in certain areas as detailed below:

3.50 A higher Statutory devolution of funds from the Centre to the States through Finance Commissions is an issue which needs support of the Central Government. The Tenth Finance Commission recommended an alternative scheme wherein 29per cent of the gross revenues from all Central taxes, pooled together, may be given to the States. This has been supported by the Central Government also. Necessary legislative measures need to be taken expeditiously.

3.51 Even though the alternative scheme of TFC may improve devolution to the States in so far as tax revenues are concerned, the basic question that is to be addressed is whether there is an increase in total gross as well net devolution to the States. The net flow of grants and loans to States has declined over a period of time as a percentage of GDP. The net revenue flow has become negative in the case of a number of States; and net capital flow has also substantially slowed down. These issues have to be looked at in a larger perspective, taking into account the growing needs of the States in the developmental activities like education, health care, etc. and non-developmental obligations like maintenance of law and order, and fast growing debt servicing. It is necessary to adopt a holistic approach and work out a positive solution.

3.52 A number of tax proposals are being sent by the States and UTs to the Central Government from time to time for approval. The Central Ministries should clear these proposals expeditiously. There is a tendency to view these proposals largely in terms of the sectoral interests on technical grounds. The paramount importance of facilitating resource mobilisation by the States and UTs should be given due weightage in the scrutiny of these proposals.

3.53 The revision of royalty rates of major minerals is another measure which will go a long way to improve the resources of the States. The Mines and Minerals (Regulation and Development) Act 1957 was enacted, empowering the Central Government to fix the rates of the royalty on major minerals including coal. Two general issues raised by the mineral producing States, in this connection, are (i) frequency in the revision of royalty rates and (ii) fixing the rates on advalorem basis. The Act envisaged that the royalty may be revised only once in a period of 4 years. The revision in 1991 took place after a gap of 10 years though the subsequent revision in 1994 had a gap of a little more than 3 years. The Sarkaria Commission recommended that review of royalty rates on minerals, petroleum and natural gas should be made every two years and well in time as and when they fall due. It is necessary to have frequent revisions in the royalty rates including coal in order to augment the revenue resources of the States. Similarly there is a case for shifting specific duties on coal to advalorem duties to avoid erosion of the resources of the States in real terms. This may lead to some administrative problems in fixing ex-factory price, which need to be tackled appropriately in order to avoid revenue leakage. Considering the fact that Mineral rich States like Bihar, Orissa, Madhya Pradesh, A.P. and West Bengal are resource-scarce States and relatively backward, these two measures need to be taken up as early as possible.

3.54 Revenue growth from the Sales tax in many States has become slow due to competitive reduction in tax rates by the States and also due to large number of incentives and concessions provided by States to attract industries. The Sales tax is the most important tax measure with the States and it provides about 60per cent of the tax revenues. It is necessary that this tax should be strengthened. A committee of State Finance Ministers on Sales tax Reform had recommended that (a) the base should be broadened by reducing the number of exemptions to a few, (b) by having only 3 rates apart from zero, (c) by putting an end to the policy of competition among the States in offering sales tax concessions and (d) by graduallly moving over to a system of value added tax in each State. Though the adoption of the value added tax may take considerable time, it is possible to implement other recommendations. This needs to be encouraged and facilitated through a suitable initiative from the Central Government.

3.55 The administration of the Central Sales Tax has become weak due to evasion of tax through transfer of goods on consignments. In order to check evasion and to get additional revenues from levy of tax on consignments, Constitution was amended to enable the Parliament to enact necessary legislation for levying of consignment tax in 1982-83. Subsequently the issue was discussed a number of times but the necessary legislation could not be carried out for one or the other reason. The Sarkaria Commission has noted that it is a matter of serious concern that after a lapse of about five years no legislation has been brought in for giving effect to the intent of the consignment tax and the Union Government should bring in legislation in this regard without further loss of time. On the other hand there is a view which is opposed to the introduction of a consignment tax and favours eventual elimination of Central Sales Tax on the ground that such taxes may impede introduction of a comprehensive VAT and discourage evolution of an integrated national market. However, the point to be noted is that considerable effort was made to amend the Constitution to enable the Government to introduce consignment tax to check evasion of C.S.T. through disguise of consignments. The revenue loss to the States by withdrawing C.S.T. and not implementing the consignment tax may be as high as Rs. 50,000 crore in the Ninth Plan period. It is therefore necessary that consignment tax is implemented and C.S.T. is continued without dilution.

3.56 The Service sector has been lightly taxed. This sector has registered impressive growth during the recent years and is expected to grow even more during the Ninth Plan period but its contribution to the budgetary resources is not commensurate with its share in GDP which is over 40 per cent. The MODVAT presently under operation under excise of the Centre should be extended to the service sector as well. The Sarkaria Commission had suggested taxation of advertisement broadcast by radio or television by suitable legislation. State Governments have argued that tax on services should normally form a part of the consumption tax, which is within the purview of the State Governments. The States have, therefore, argued that the Centre should delegate to the States the powers to levy, collect and retain yield of such taxes. In order to provide these powers to the States, it may be necessary to enact appropriate legislation as the power to tax services is not with the States at present.

3.57 The commercial losses of the State Electricity boards in absolute terms have shot up to Rs.10,941 crore in 1996-97 (RE) as against a little over Rs.4,000 crore in 1991-92. The hidden subsidy for the agriculture and domestic uses has increased from Rs.7,248 crore in 1991-92 to Rs.19,277 crore in 1996-97 RE and is projected to go up to Rs. 1580 crore in 1997-98. In the agricultural sector many states are providing energy either free or at negligible rates. The restoration of financial health of the SEBs and improvement in their operational efficiency are most crucial issues in the power sector. According to the Electricity (Supply) Act 1948, the SEBs are required to earn a minimum rate of return of 3 per cent on their net fixed assets in service after meeting the financial charges and depreciation. Most of the SEBs do not conform to this standard and the overall rate of return on their fixed assets is negative estimated at (-) 16 per cent in 1997 -98. While inefficiencies in the operation in respect of T and D losses and plant load factor and billing and related matters are some of the reasons for their losses, the more important reason for commercial losses is irrational fixing of rates of tariff for electric power specially in relation to the agricultural sector and in some cases, to the domestic consumers. In this context it is considered desirable to establish Central Electricity Regulatory Commission which will set the bulk tariffs for all Central generating and transmission utilities and State Electricity Commissions in the States to fix tariff rates. It is also necessary to ensure that the PPAs signed by SEBs with enterprises in the rush to attract investment from IPPs do not have built-in conditions and clauses which will compromise or adversely affect the financial health of SEBs in the medium and long run.

3.58 The State Road Transport Corporations/Undertakings are second largest enterprises of the States. These enterprises as a whole earn negative returns to their fixed capital mainly because these enterprises were required to run on non-viable basis. There should be an automatic mechanism to revise fares to offset increase in input prices. Social obligation should be duly compensated. While inducting private sector operators, the SRTC should not be put to a disadvantageous position by limiting their operations to non-viable routes while releasing all or most profitable routes to private operators. Also equity support should be extended in deserving cases.

Local Bodies and Decentralised Planning

3.59 The Constitution Seventy-Third Amendment Act, 1992 on the Panchayats and the Constitution Seventy-Fourth Amendment Act, 1992 on Municipalities have introduced a three-tier system of Government. These Acts have added Eleventh Schedule identifying subjects within the jurisdiction of Panchayats and twelfth schedule identifying subjects of Municipalities. Both Acts have provision for constitution of Finance Commissions by the States to review financial position of Local Bodies and to make recommendations on the distribution of tax proceeds between the State and the Local Bodies and on assignment of taxes etc. to the latter. Following these Acts, State Finance Commissions have been set up by the States. The State Governments are further required to endow the Local Bodies with power and authority necessary to enable them to function as institutions of self Government with the responsibility of preparing plans for economic development and social justice and implementing them. The task of financing plans of Local Bodies will have to be integrated with the implementation of the States’ Finance Commission Reports. These reports are expected to give the details of schemes of revenue raising for meeting current expenditure and grants-in-aid for meeting requirements to aid the process of restructuring these Bodies, which at present are financially unviable in most of the cases. These require exercises to be followed up by detailing sources of finance for capital expenditure. While estimating the resources for the Ninth Five Year Plan, resources from the Local Bodies have not been separately quantified for want of adequate information. However, a process has to be initiated in regard to dove-tailing plans of Local Bodies and State Governments and assessing resources of these Bodies by the State Governments.

Public Sector Resources – Allocations

3.60 The distribution of public sector outlay between the Centre and the States is determined by the respective resource generation capabilities, on the one hand, and the distribtuion of the developmental responsibilities, on the other. In so far as the resourcesare concerned, the summary position for the Ninth Plan is given in Table 3.7.

3.61 It may be seen that the outlay of the Central Ministries account for almost 57 per cent of the total public sector plan outlay. This high percentage is due primarily to the IEBR of the Central sector which accounts for 59.3 per cent of the outlay of the Central Ministries. These IEBR are not reappropriable both between the Centre and the States and between the different Ministries. The re-appropriable parts of the Centre’s resources are distributed in the proportion of 53.3 per cent for Central Ministries, including Centrally Sponsored Schemes, and 46.0 per cent as Central support to State Plans and 0.7 per cent for UTs with legislature and 0.8 per cent for UTs without legislature respectively.

Table 3.7 : Resources Dimensions and Allocations 
            for the Ninth Plan (1997-2002)
                                (Rs. in Crore at 1996-97 prices)
---------------------------------------------------------------
Sl.    Resources       Central  States  and  UTs  UTs with-   Total
No.    Components      Minist-  with Legis-   out Legis- (3+4+5)
                       ries     lature        lature
---------------------------------------------------------------
1         2                3        4            5         6
---------------------------------------------------------------
I.   Domestic Budget
     Support (DBS)       179249   131873       2860     313982
II.  External Aid routed     
     through Budget(EAP)  20018    40000        -        60018
III. Gross Budgetary
     Support (I+II)      199267   171873       2860     374000
IV.  Internal  and  Extra
     Budgetary Resour-
     ces(IEBR) of CPSEs  290094     -           -       290094
V.   States' Own 
     Resources             -      195106*       -       195106
GRAND TOTAL (III+IV+V)   489361   366979       2860     859200
---------------------------------------------------------------
* Includes States'Own Budgetary Resources and IEBR of States' 
  Public Enterprises.

3.62 The allocation of the available public sector resources by the major heads of development is summarised in Annexure Table II A. In making these allocations, high priority has been given to three broad areas : (a) agriculture and rural development ; (b) energy and (c) social services, which are central to the objectives of the Ninth Plan. It needs to be realised, however, that there are limitations on the extent to which the allocations by heads of development can be changed from one plan to another. A five year plan is part of continuum in which programmes and projects of relatively long duration are begun and need to be sustained over subsequent plan periods. Abrupt reduction in the flow of resources can lead to potentially large wastage of investment already made. On the other hand, with growth and development, the priorities of public action do need to change, and these are reflected in the objectives of the Five Year Plans. Reorientation of the structure of the public sector outlays to reflect the priorities and objectives of a plan perforce have to be incremental in nature. Thus, although dramatic changes cannot be made from one plan to another, changes that are made in a given plan would continue to accelerate in the future so long as objectives and priorities are maintained.

3.63 An important conceptual and ethical basis of the Ninth Plan is the concept of cooperative federalism, whereby considerable freedom is to be granted to the States in determining their plan outlays in order to suit their specific needs and aspirations. As a consequence, the allocation of outlays by the States have been arrived at through the process of consultation between the individual States and the Planning Commission. These allocations, therefore, primarily reflect the desires of the States while reflecting, for the most part, the national objectives. These are presented in Annexure III

3.64 The Central sector bears the residual responsibility for meeting the plan objectives to the extent that these could not be realised through the State plans or through private sector initiatives. There are, however, limitations to the ability of the Centre for bridging the perceived gaps primarily due to the resource constraints that have been experienced and the need to make adequate provisions for support to the State plans. The Department-wise allocations of outlays in the Central sector and their financing through budgetary support and internal and extra budgetary resources are indicated in Annexure Table IV A and IV B for Departments implementing SAPs and the others respectively.

3.65 Even so, the allocation of Central sector outlays reflect the constraints placed on the planning process by the need to maintain continuity with the past and resource stringency in fully reflecting the objectives of the plan. The principal lacuna in the allocations that have been made lie in not providing the requisite budget support for the priority social service sectors. To fully meet the funds requirements for providing safe drinking water, universalisation of primary education and primary health care and to ensure nutrition security for children it would be necessary to provide additional outlay, over and above the amounts allocated by the Centre and States to these sectors. Since the resources position of the States is already strained in view of the additional resource burden for salary revision predicated by the implementation of the Fifth Pay Commission recommendations by the Centre, many of the States are unlikely to be able to raise even part of these requirements. Therefore, the burden of additional resource mobilisation falls largely on the Centre.

3.66 The Steering Group on Financial Resources had projected an amount of Rs.25,000 crore by way of disinvestment as resources for the Ninth Plan. While working out the balance from current revenues of the Centre, the fiscal deficit/GDP ratio was kept at 4.1 per cent average for the Ninth Plan by the Steering Group. The fiscal deficit of the Centre can be raised to 5 per cent average for the Ninth Plan period without disturbing the sustainability of fiscal balance.

3.67 Taking into account the additional resource mobilisation through disinvestment of equity of Central PSUs and enhancement of fiscal deficit within the limit of sustainability, it has been feasible to provide additional allocation for priority sector social services through the SAPs.