Cooperative Federalism and Decentralisation
Cooperative Federalism || Decentralisation and Panchayati Raj

Cooperative Federalism

Introduction

6.1 In a vast country like ours, the spirit of co-operative federalism should guide the relations between the Centre and the States on the one hand, among different States and between the States and the Panchayati Raj Institutions (PRIs) and the Urban Local Bodies (ULBs) on the other. The essence of co-operative federalism is that the Centre and the State Governments should be guided by the broader national concerns of using the available resources for the benefit of the people. Co-operative federalism encourages the Government at different levels to take advantage of a large national market, diverse and rich natural resources and the potential of human capabilities in all parts of the country and from all sections of the society for building a prosperous nation. Co-operative federalism makes it possible to raise all the available resources by the Government at different levels in a co-ordinated way and channel them for use for the common good of the people. This requires a harmonious relationship and co-operative spirit between the Centre and the States and among the States themselves. While a healthy competition among the States for evolving efficient and socially desirable policies and programmes is welcome, any competition which nullifies each other's advantages in development and erodes the resource base of the States should be avoided. Co-operative federalism is intended to ensure a minimum bundle of basic services and a nationally acceptable level of living for all the people of the country.

Centre-State Relations

6.2 The relations between the Centre and the States in political, economic, financial and administrative spheres have been periodically reviewed. The Administrative Reforms Commission and the Sarkaria Commission were appointed to review the whole gamut of relations between the Centre and the States and to recommend measures, including changes in the Constitutional provisions, to harmonise the relationship between the Centre and the States. While the Government has accepted and implemented several recommendations of the Administrative Reforms Commission, the recommendations of the Sarkaria Commission are under consideration in the Inter-State Council (ISC) which is trying to reach a consensus on various issues. Out of the 247 recommendations of the Sarkaria Commission, the Inter-State Council has taken a decision on 91 recommendations. These recommendations pertain to All India Services, Administrative Relations, Deployment of Union Armed Forces, Agriculture, Forest, Food, Civil Supplies, Mines and Minerals, Trade, Commerce, Mass Media etc. The re-activisation of ISC has opened a new chapter in the Centre-State relations and provided a useful forum for building a common national approach on various issues.

Formulation and Implementation of Plans

6.3 In the sphere of planning, the balance of decision making process tilted more towards the Centre during the early years of planning. This was probably inevitable as there was lack of adequate experience in the formulation and the implementation of Plan programmes at the State level. No doubt, planning from the grass-roots level has been emphasised from the very beginning, but its implementation has been sporadic and tardy. Even so, the Planning Commission encouraged District Planning Committees (DPCs) and taluk level planning process from the Fourth Plan. Subsequently, a significant step was taken through the enactment of the 73rd and the 74th Amendments to the Constitution in 1993, which conferred a Constitutional status not only on the PRIs and the ULBs but also on the DPCs. It is now fully realised that the spirit of co-operative federalism should get reflected in the strong encouragement given to participative planning processes. In other words, the Central Government, the State Governments, the PRIs, the ULBs, and the non-Governmental organisations, the voluntary action groups and most of all, the people at the grass-roots have to be involved in the process of formulation and implementation of the Plans. It is realised that the process of democratic decentralisation can have true meaning only when sufficient autonomy and freedom is available to the States as well as to the PRIs and the ULBs in the formulation and the implementation of the Plans. At the same time, autonomy pre-supposes maturity in decision making and responsibility in the use of national resources. Decentralisation of the process of formulation and implementation should, therefore, ensure accountability.

6.4 Various steps have been taken in the past to improve the interaction with the States in the process of formulating and implementing the Five Year Plans. The National Development Council (NDC), which approves and reviews the Five Year Plans is chaired by the Prime Minister and includes Union Ministers and the Chief Ministers of all the States. In addition to this, periodic conferences of State Chief Ministers on major specific policy issues are held not only to elicit their opinion but also to take them into confidence in regard to the thinking of the Central Government. Over and above these, conferences of State Ministers of various development departments are also held to monitor the progress of Plan schemes and to find solutions to the problems faced by the State Governments in the course of implementing the Plan strategies, programmes and schemes. These conferences and meetings help resolve the day-to-day problems faced by the implementing agencies and the delivery system. At the administrative level, the secretariat of the Planning Commission interacts regularly with the administrative departments of the State Governments on all matters relating to the formulation and the implementation of the Five Year Plans. Thus, the regular and periodic interactions with the State Governments have helped in sorting out various policy issues and chalking out mutually agreed policies and programmes for achieving the goals of the Five Year Plans. There have also been frequent conferences and meetings of State Chief Ministers and Ministers at the zonal level to sort out the administrative problems relating to mobilisation of resources, implementation of Plan programmes and even maintaining law and order. In a vast country like ours, such periodical conferences and meetings of the State Chief Ministers and Ministers will go a long way in resolving certain unique problems relevant to the particular zones.

6.5 Similarly, at the State level, the State Governments should develop machanisms and forums for interacting with the elected representatives of the PRIs and the ULBs to resolve the issues relating to the formulation and the implementation of district and grass-root level development programmes. In some States like Karnataka, a State Development Council has been constituted, which is presided over by the Chief Minister and attended by the Presidents of Zilla Panchayats and Municipal Presidents. This is a replica of the NDC, which is worth emulation in other States also. There is also a need for a horizontal consultation process between the PRIs and the ULBs to learn from each other's experiences and to resolve day-to-day problems, if any. During the Ninth Five Year Plan such initiatives will be further encouraged and supported.

Share of States in Public Sector Plan Outlay

6.6 An important area of concern in the sphere of planning is the decreasing share of the States in the overall public sector Plan outlay. The share of the States in the actual public sector expenditure is going down continuously from the Fifth Plan onwards, so much so that while the share of the States was about 50% in the Fifth Plan it came down to almost 37% in the Eighth Plan. Further, the share of the States in terms of total public sector expenditure has been lower than the originally envisaged outlay in successive Five Year Plans since the Sixth Plan. In the Eighth Plan, while the share of the States in the total public sector outlay was envisaged to be 41.46%, in actual realisation it is likely to be of the order of 37 percent. The main reason for the declining share of the States has been the shortfall in the mobilisation of resources by the State Governments. Besides others, the non achievement of the States' envisaged outlays has adverse implications for sectors like Agriculture, Education, Health and other Social and Basic Minimum Services.

6.7 The States' own resources (SOR) for their Eighth Plan were projected at Rs.1,01,485 crore. As against this, the expected realisation would be only Rs.70,335 crore, i.e., 69.3 percent of the projected SOR. The major shortfall was in respect of the Balance from Current Revenue (BCR) and internal contributions of public enterprises of the States. The BCR was projected at Rs.12,985 crore, while the expected realisation is (-) Rs.2,009 crore only, showing a shortfall of Rs.14,994 crore. An important reason for such a severe shortfall was the failure of many State Governments to raise the budgetary resources through additional revenue raising measures, increase in the non-Plan revenue expenditure on the target group oriented programmes, effect of the adoption of Central Pay scales and Central Dearness Allowances by many State Governments. The financially unviable operations of the State Electricity Boards, the State Road Transport Corporations and other State enterprises in most of the States had an adverse impact on the BCR of the State Governments, as these resulted in higher subsidies and grants to these enterprises, in addition to substantial loss of revenue in terms of interest and dividends, while States were forced to pay interest on their loans. The unwillingness of most of the States to revise the irrigation rates at least to meet the O and M expenditure was another reason for the shortfall in the States own resources. The most worrisome aspect was the increasing number of States providing free electricity to the farmers at a time when the country is facing a severe power shortage.

6.8 The internal resources of the State public sector enterprises was projected at Rs.4,000 crore for the Eighth Plan but the realisation is expected to be around (-) Rs.2,723 crore showing a deterioration in resources to the extent of Rs.6,723 crore. The shortfall in this was mainly due to the financially unviable operations of the State Electricity Boards and State Road Transport Corporations. Had the States implemented the agreed decision to levy a minimum of 50 paise tariff per unit of energy supplied to the agricultural sector and contained the T and D losses, thefts and arrears to a reasonable level, the SEBs would have been able to generate resources as committed in the Plan. The losses of the State Transport Corporations have been attributed mainly to social responsibilities undertaken by them to ply buses on uneconomic routes and providing concessions to a large number of weaker sections and students.

6.9 The Planning Commission has been emphasising that the States should plug the drain of resources in the operation of State level public enterprises, especially in the case of State Electricity Boards and State Road Transport Corporations. These include restructuring the State Electricity Boards, modernisation and other efficiency improvement as well as tariff revisions to make these Boards financially viable. The State Electricity Regulatory Commissions should also be set up without delay. The State Road Transport Corporations also should be made viable through proper fare revisions and improvements in the efficiency norms. They should be given support for strengthening their equity base. Further, the Planning Commission has emphasised the need for improving the Balance from Current Revenue (BCR) of the States through specific budgetary measures and containing the growth of non-Plan revenue expenditure. All these measures will improve the share of SOR which will enable the States to increase the size of their public sector Plan outlay. On its part the Government of India should help by providing a suitable macro economic framework. Efforts are also needed to build up a consensus on various issues like recovery of user charges, etc. to facilitate decisions at the State level.

Transfer of Centrally Sponsored Schemes

6.10 Another issue which has been cropping up from time to time in the relations between the Centre and the States pertains to the Centrally Sponsored Schemes (CSS). The CSS are being implemented right from the beginning of the First Plan. When they were conceived, they were welcomed as they were intended to serve certain specific national goals. One classic example of CSS, which has made a far reaching impact, has been the introduction of HYV seed. This ushered in the Green Revolution in the country. But the number of CSS has grown over the years and they have made deep inroads even into the spheres falling within the domain of the States. There have been efforts from time to time for transferring the CSS to the States along with the corresponding funds, but not to much avail. A review undertaken by the Planning Commission showed that in 1995-96 there were 182 CSS under implementation with the Central funding of the order of Rs.16,000 crore. This level of Central funding is even more than the normal Plan assistance given to the States for the State Plans. In principle, the CSS should be confined to schemes of an inter-State character, matters impinging on national security, selected national priorities where Central supervision is essential for effective implementation and multi-State externally financed projects where the Central coordination is necessary for operational reasons. Except for such schemes, all other schemes should be transferred to the States along with the corresponding funds. A detailed exercise has been done by the Planning Commission to identify the schemes which could be transferred to the States in the light of the above approach.

6.11 A final decision in the matter would be taken after ascertaining the views of the State Governments/Central Ministries with the approval of the NDC.

Inter-se Allocation of Plan Assistance

6.12 Since 1969, the Central assistance for the State Plans has been distributed to the States as per the Gadgil Formula. Some marginal changes have been made in this formula from time to time, but the emphasis has always been on channelising larger Central assistance to the backward States. The formula was last amended in 1991-92. As per the existing formula, after setting apart the funds required for Externally Aided Projects (EAPs) and reasonable amounts for Special Area Programmes, 30% of the balance is earmarked for ten Special Category States. The balance amount is distributed among Non-Special Category States on the basis of following criteria and weightage :

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Criteria             Weightage
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Population (1971)       - 60%
Per Capita Income     - 25%
Performance Criteria  - 7.5%
Special Problems      - 7.5%
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6.13 During the Plan discussions, various Chief Ministers have asked for a revision of this formula for allocation of Central assistance to the State Plans so as to change both the criteria and the relative weights. While the backward States have argued for higher weightage to be given to backwardness, (equity), the better-off States have argued that they should be rewarded for maintaining financial discipline and achieving better productivity, (efficiency). No formula can satisfy the demands of all the States. The formula for the allocation of Central assistance has to be such that it helps in a balanced regional development on the one hand and encourages financial discipline and better economic performance on the other. The solution to this contentious problem has to be found by a consensus. The views of the State Governments have been sought regarding the revision of the formula. The NDC will have to take a final view on this matter.

Nature of Central Assistance

6.14 Besides the issue of inter-se distribution of Central assistance among the States, the nature of Central assistance, that is, the grant-loan component, has also been raised from time to time. The States argue that when 30% of the grant component was introduced in 1969, the revenue component of the States' Plans was around 30 percent. Subsequently, it has gone on increasing, reaching upto 45 percent. They maintain that this justifies the increase in the grant component of Central assistance for State Plans under Gadgil Formula. Further, the States argue that among other reasons, the 70% loan component in the Central assistance for the States Plans has been a major reason for their increasing debt burden. They argue that their debt burden has been increasing so much so that in some cases there is net reverse flow of funds. They have, therefore, been asking for an increase in the proportion of the grant component in the Central assistance. The Special Category States have demanded Central assistance to be given as 100 per cent grant. The Sarkaria Commission had examined this issue and recommended different patterns of loan-grant assistance, depending upon the paying capacity of the States. The Finance Commissions in the past had also looked into the debt position of the States and recommended a scheme for general debt relief for all States, linked to fiscal performance and specific relief for States with high fiscal stress, the Special Category States and the States with debt problems warranting special attention. It has to be recognised that any change in the grant-loan component of the Central assistance has implications for the resource position of the Central Government. The NDC may have to decide on the issue of grant-loan proportion in the Central assistance while considering the question of inter-se distribution of the Central assistance among the States.

Basic Minimum Services (BMS) Approach

6.15 A special focus on meeting the minimum needs of the people has been given since the Fifth Five Year Plan. However, the minimum needs programme, which was formulated and implemented for this purpose, did not make much headway, partly because of allocation of inadequate funds. Because of the persisting gaps in BMS prevailing particularly in rural areas, it was decided to give a big push to this programme from 1996-97. Accordingly, the Central Government has made an allocation of a special Central assistance for seven Basic Minimum Services (BMS). Instead of being routed through the Central Ministries / Departments, this special assistance has been given to the States as additional Central assistance towards their Plan. With a view to ensuring that the special Central assistance for BMS is indeed an additionality, it has been emphasised to the States that this assistance should not be made a substitute for the normal provisions which were being made by the States for the BMS. By mutual consensus, it has also been agreed that the States should provide at least 15% of the special Central assistance for BMS as their share over and above their normal provisions for these schemes. While the States have been allowed flexibility in deciding their priorities among various components of Basic Minimum Services, the consensus at the Chief Ministers' Conference was to give the highest priority to the three services viz., Primary Health, Primary Education and Drinking Water for universal coverage. Only when the prescribed norms for these services have been achieved, the States could choose from other BMS for their attention. However, some States have deviated from the decisions of the Chief Ministers Conference and allocated huge funds for services other than the three which were to be given the highest priority. Another problem that has been encountered is that some States have failed to make adequate provisions for the BMS as per the agreed formula. Considering the difficulties of the Special Category States in mobilising resources, they have been exempted from providing 15 per cent contribution. To ensure additionality of Additional Central Assistance (ACA) over normal provisions of the States, the release of ACA will have to be linked to suitable provisions being made to BMS as per the decisions already taken. From the Annual Plan 1997-98 onwards the allocation of Central assistance for BMS has been made on the basis of identified gaps in providing these BMS. This process will continue during the Ninth Plan period and larger amounts would be made available to the States for meeting the requirements of BMS so that the basic minimum needs of the people are met by a target date. The approach adopted in respect of BMS has also been followed for the development of urban slums. The same model can be replicated in respect of other programmes, as may be found feasible, in future. Since there are backward regions within the States, it is expected that while making allocations, the States would also keep in view the requirements of the backward areas within the State so that the basic minimum needs of the people in these areas are also catered to.

Procedure of Plan Formulation

6.16 The States should have full autonomy and freedom to draw up their Plans in accordance with the national priorities. There are, however, still some areas where the approval of Central agencies are required for the State projects, specially in the areas of power and irrigation projects as well as environmental clearances. Often, these clearances take long time leading to unnecessary delays and consequent time and cost overruns of the projects. The endeavour should be to delegate powers to the extent possible to the State Governments and also to ensure time-bound clearances in cases where the projects would need to be cleared at the Central level. The Planning Commission has already examined the position pertaining to the approval required for irrigation and power projects. As regards the power projects, investment approval was earlier necessary for all projects costing Rs.100 crore or more. After reviewing the position, a decision has been taken that power generation projects upto 100 MW (except where inter-State issues are involved) would not require clearances from the Planning Commission. Transmission schemes of only 220 KV and above are required to be referred to the Planning Commission. All renovation and modernisation schemes need not be referred to the Planning Commission. Similarly, guidelines have been issued that medium irrigation projects need not come for the approval of the Planning Commission (unless where inter-State angle is involved).

6.17 Efforts have been initiated to involve the State Governments more closely in the formulation of Five Year Plans. The occasion of the Annual Plan discussion for 1996-97 was utilised to ascertain the views of the State Governments relating to the objectives, approaches, priorities and strategies for the Ninth Plan. These views were taken into consideration while preparing the Approach Paper to the Ninth Plan which was subsequently endorsed by the NDC. The State Governments are also represented on various Steering Committees and Working Groups which are set up by the Planning Commission for various sectors to review the progress made in the previous Plans and to decide the prospects and strategies for different sectors. The reports of these Steering Committees and Working Groups are a valuable input to the Planning Commission in the formulation of Five Year Plans.

6.18 Considerable thought has been given to the issue as to how the State Governments can have greater autonomy in formulating their Plans within the national objectives and priorities as reflected in the Five Year Plan Document. The procedure for State Plan formulation was amended from the Annual Plan 1993-94. As per the procedure prior to 1993-94, the sectoral Working Groups set up in the Planning Commission and having representation from the State Governments used to project the requirements of different sectors which invariably totalled up to a much larger Plan size than was feasible keeping in view the availability of resources. The Plan size used to be fixed at the meetings between the Deputy Chairman, Planning Commission and the State Chief Ministers, after the sectoral Working Groups had projected their demands. Since the Plan size was not able to accommodate the projected requirements of different sectors, there used to be arbitrary cuts while fixing the final sectoral allocations. Since 1993-94, the procedure has been altered and the meeting between the Deputy Chairman, Planning Commission and the State Chief Ministers is organised to finalise the Plan size before working out the sectoral allocations within the Plan size so determined. Many a time, the States show over-optimism regarding raising their own resources with a view to getting a higher Plan size fixed, as compared to the previous year even though the achievement in the previous year may be much less than the originally fixed Plan size. Fixation of unrealistic Plan size which does not materialise, has affected the credibility of the whole planning exercise. The Planning Commission would, therefore, in future indicate the level of Central assistance under the various heads to the State Governments and the States would decide their Plan size taking into account the Central assistance and their own resources and would seek legislative approval for both the Plan outlay as well as the additional measures for resource mobilisation. This system will encourage better accountability and commitment of the State Governments to achieve the Plan size as decided by them.

6.19 The interaction of the Planning Commission with the State Governments is at various levels in the process of formulation of Plans. An exercise is done by the financial resources Working Group to assess the likely availability of resources. Another exercise is done regarding the flow of assistance under externally aided projects. These interactions have proved very useful because while assessing the resources available under various heads, it is possible to assess the contribution of various items including the State public sector undertakings. The achievement in respect of tax and non tax revenues, vis-a-vis the potential, recovery of user charges, growth of non-Plan expenditure are also gone through in detail. These have not only provided crucial insight to the Planning Commission into various aspects of the functioning of the States' economy, but the interactions are useful for the States also because various deficiencies in the functioning of State PSUs or other sectors of the economy come to light. The position of different States in respect of various items facilitate comparisons and can encourage action in various areas.

6.20 The interactions with the State Chief Ministers at the level of Deputy Chairman have also proved to be mutually beneficial. The focus of these meetings has been changed from fixing the Plan size to discussing various sectoral issues, the performance of the States' economy, intra-State economic disparities, environmental status and remedial steps which may be necessary to improve the shortcomings. Any problems which the State may have with the Central Government are also projected at these meetings. Model practices adopted in various States in different schemes/projects are also shared at these meetings so as to learn useful lessons.

6.21 Another level of interaction with the State Governments is through the mechanism of the Working Groups, which are set up in the Planning Commission to decide the sectoral allocations within the overall Plan size fixed at the level of Deputy Chairman and Chief Ministers. These Working Groups have, in the past, not only been utilised to finalise the sectoral allocations, but have also provided an important forum of mutual exchange of views regarding the performance in the previous years, the strategies for development in future and any problem areas. Useful data is also exchanged at these Working Group meetings pertaining to various aspects. These Working Group discussions would, therefore, continue, albeit the number of suchWorking Groups may be reduced to a minimum.

6.22 It is essential for the Planning Commission to know the detailed sectoral Plans of the States at least in respect of the sectors crucial for the national economy like power, irrigation, communication, other infrastructural sectors, etc. so that the growth and strategies at the national level can be worked out. While working out the detailed Five Year Sectoral Plans, the policy perspective for private sector participation and the investment expected have to be considered. Once the Five Year Plan outlays have been finalised, the annual phasing of sectoral /sub sectoral allocations can be decided by the State Governments keeping in view the approved Five Year Plan outlays, national priorities and their own needs. A detailed examination of these sectoral allocations at the Planning Commission level is not necessary. The Annual Plan documents prepared by the States would be examined in the Planning Commission to ensure their broad adherence to the Five Year Plans.

Earmarking of Outlays

6.23 An area which has often been mentioned as affecting the autonomy of States in allocating resources among different sectors within the overall Plan size pertains to earmarking of outlays for particular sectors/schemes/projects. Upto 1969, the Central assistance used to be given for individual schemes/projects. On the recommendation of the NDC it was, however, decided that the Central assistance may be given in block form. However, to ensure compliance with the national priorities the system of earmarking of outlays for crucial sectors/schemes was initiated. Presently, the earmarking is restricted to 50% of the Plan outlay for Non-Special Category States while for Special Category States it can be higher. Under the existing guidelines the earmarking is being followed for the following

1. Selected ongoing projects for power and irrigation;
2. Externally aided projects;
3. Schemes in one or two sectors which are of importance to the State's economy And fall priority areas of Five Year Plans;
4. Basic Minimum Services.

6.24 The areas and the actual projects to be earmarked are settled with the State Government officials during the Working Group discussions. The earmarking has helped in ensuring minimum provisions for important schemes/projects in accordance with the national priorities. The system would continue even though a flexible approach would be adopted and earmarking would be restricted to the minimum extent necessary.

Review and Monitoring

6.25 Under the present system of review and monitoring, a brief general review of the performance of the States, specially in financial terms, is made at the meetings at the level of Deputy Chairman and the Chief Ministers. A more detailed exercise is done through the mechanism of Working Groups set up under the auspices of Planning Commission. The Working Groups set up for major sectors meet to discuss the performance of the previous year and the proposals of the following year including the need for earmarking for particular schemes / sectors on one day for each State. However, this exercise is done once a year and there is no mechanism for getting regular feedback from the States regarding the implementation of the various Plan schemes.

6.26 In order to be effective, the review and monitoring of the State Plans has to be a participative exercise with the State Governments. Further, these detailed exercises for review and monitoring may not be held only at Delhi, but in various State capitals to the extent feasible. Action in this direction has already been initiated and meetings at the level of Deputy Chairman in the State capitals have already been started. More such meetings would be organised in the State capitals.

Equity-Promoting, Holistic and Coordinating Role of Central Planning

6.27 While the question of greater autonomy to the States in the process of development planning is considered, the holistic, equity-promoting and coordinating role of central planning cannot be over-looked. The role of central planning has to be seen not as a constraint to the State's autonomy but as a necessary complement to decentralised, flexible and cooperative mode of development planning. The equity- promoting role demands that greater efforts are made to remove the gaps in the provision of BMS, the level of development of rural agricultural hinterland and infrastructure so that no region or sub-region and no group or groups of people remain deprived of the fruits of development and every region and all people at least reach a minimum standard of living. The equity-promoting role of central planning assumes added importance in the wake of the emerging policy environment in the country as well as globally. With the opening up of the economy and removal of controls, the market forces have been unleashed, which may have a tendency to exacerbate the disparities among groups of people and regions which can be further widened because of the operation of large global players. As the economy gets integrated more and more with the global economy, the Centre may be required to play a stronger equity-promoting role and to secure sufficient space for all the federal units to work out their own strategies of development without being overtaken by global regimes or forces. The Centre would also be required to ensure suitable macro economic policy framework for the growth of economy for meeting the aspirations of the people. A judicious balance on the part of the Centre between decentralisation and autonomy on the one hand and intervention to protect the interests of the weak and to provide space for autonomous decision making on the other is required to sustain the faith of the States in the philosophy of co-operative federalism.

Mobilisation and Sharing of Resources

6.28 The sphere of financial relations between the Centre and the States has been the most difficult one and despite continuous efforts, unanimity has not been reached on various issues involved. The issues, which have a bearing on resource availability, need careful analysis and discussion. The Sarkaria Commission had paid enough attention to the issue of financial relations between the Centre and the States and had made a large number of recommendations in this regard. These are being considered by the Inter-State Council and its Standing Committee.

6.29 Essentially, the problem of resource availability, which affects both the Centre and the States, can be overcome only if there are greater efforts to tap the resource potential both at the level of Central Government as well as at the State Governments. Unless the resource availability of the Central Government improves, it may not be possible to channelise a larger quantum of Central assistance or to increase the grant component to the States. The Government of India has recently agreed to a share of 29% to the States in the total gross revenues from all the Central taxes with effect from April, 1996. This will increase the flow of funds in absolute terms on non-Plan account. With this increased share of the States in the total devolution, the States would be in a position to benefit from the revenue buoyancy from all the taxes levied by the Centre. While the share of 29% of the net yield from all Central taxes has not satisfied all the States, the decision itself marks a watershed in the approach to the sharing of tax revenues of the Centre, because the sharing which was so far limited to two taxes, viz., Excise and Income Tax, will now include all Central taxes. In other words, the divisible pool of Central taxes has been broadened by implementing the Alternative Scheme of Devolution recommended by the Tenth Finance Commission.

6.30 Notwithstanding such a widening of the divisible pool of Central taxes, the financial needs of the States will increase during the Ninth Plan because of the large gaps which remain in the field of BMS and infrastructure. Therefore, the States need to raise more of their own resources to meet such increased outlay. In order to improve the resources of the States and to enable them to raise the required level of resources for Plan purposes, the Centre has to play some supportive role in certain specific areas. These areas relate to statutory devolution of funds from the Centre to the States through Finance Commission, discretionary grants and loans through Planning Commission, revision of royalty rates once in two years and application of these rates on ad valorem basis, helping the States to move towards a uniform tax structure and Modvat with the possibility of imposing Consignment Tax in the interim period. The Central Government has already constituted the Central Electricity Regulatory Commission under the Electricity Regulatory Commission Act, 1998. Some of the States have also set up their own State Electricity Regulatory Commissions which, inter alia, provide for unbundling and corporatisation of State Electricity Boards, fixation of electricity tariff and introducing competition. Many other States are in the process of setting up their own Electricity Regulatory Commissions in due course. All these steps are expected to improve the financial health of the State Electricity Boards which would result in increased size of State Sector Plan Outlay.

Inter-State Relations

6.31 Harmonious and cooperative relations between different States are as important as that between the Centre and the States for the healthy functioning of our federation. Various problems have been cropping up in inter-State relations from time to time. On the one hand, there are problems like increasing competition among the States and on the other, there are disputes over sharing of river water etc.

6.32 With the dismantling of controls and greater freedom for the location of industries, the competition among the States for attracting industries and other economic activities by offering incentives has intensified. While a healthy competition among the States for providing better and efficient services is to be welcomed, the practice of granting tax rebates and subsidies need to be seen in the right perspective of whether they lead to national welfare. Instances are not lacking where the States have joined a sort of a race in granting sales tax and other rebates for attracting new industrial units. This has affected the resource position of the concerned States without commensurate benefits, because in so far as the same concessions are allowed by a number of States, these concessions do not remain the main guiding factor for the location of an industry and other important considerations like efficiency of services and infrastructure facilities may become more important.

6.33 Similarly, often there is a tendency on the part of the States to allow tariff concessions to various sections. Power tariff is a case in point and many States have been supplying power to various sectors at a price much lower than the cost of generation. A national consensus had evolved at the Chief Minister's Conference for fixing the minimum tariff for agriculture and to move over to a regime of fixing tariffs for recovering the costs. Some States have, however, gone against this consensus and allowed free electricity to agriculture sector. This has not only put the financial condition of the State Electricity Boards in a precarious position but also created problems for the neighbouring States where vociferous demands have been made for similar concessions. Populist measures have a tendency to spread because once they are granted by one State, pressure builds up in the neighbouring States for allowing the same concessions. Similar is the position regarding the administrative charges for other services like irrigation and water. Despite various Commissions recommending minimum rates for such services, so that at least O and M costs are recovered, many States have not implemented these recommendations, depriving them of an important source of revenue and putting their financial position under great strain. It is essential to have a national consensus regarding such issues like harmonisation of tax structure, minimum tariff for certain services, cap on the level of subsidies and facilitation of inter-State trade flows. It is necessary that all the States should fall in line for implementing mutually beneficial policies.

6.34 Another important problem that keeps cropping up time and again is in respect of share in natural resources like river waters which has given rise to severe tensions and prevented optimal utilisation of such resources. There is a need for evolving a national policy on this issue and for putting in place a suitable mechanism for resolving such disputes.