UNIT 3

Public debt vs Private debt:

1)Power of Compulsion. The government holds the sovereign power in her hands and can force the
people of the country to lend to her in case; of need or emergency. Any avoidance or defiance of orders
may be declared illegal. An individual’ cannot force another individual to lend him money even in
emergency.

2) Power of Repudiation. The government can repudiate loans taken by it from the public at any time
and without an obligation but an individual can, under no circumstances refuse to pay loans to another
person. He can be forced to repay loans through legal recourse.

3) Durability of Debts: The government is a continuous changing institution. So, a government can
contract loans from the public for a very long time. But, an individual cannot however contract loans for
such a long period. He can secure loan only for a short period.

4) External and Internal Debt: The government can borrow funds from internal and external sources. In
other words, the government can borrow funds from itself or from others. When government resorts to
print paper notes etc., to cover the deficit, it is amount to taking loans from itself. But when it borrows
from the public or from foreign governments or international agencies, it amounts to loans taken from
outside sources. An individual, on the other hand, cannot borrow from himself and from a foreign
government or agency. He can borrow only from another person or national institutions.

5) Payment through Taxation. The payment of public debt is done through taxing the people. Additional
taxation is levied on the people with a view to repay the amount of loan. The burden of which is also
borne by the creditors. As against this, an individual cannot increase the volume of income to repay
loans and the burden of private debt is never borne by the creditors in any form.

6) Rate of Interest: Since the credit of the government is high in the eyes of the public and those of the
foreign people and governments, the rates of interest on public loans are very low as compared to rates
of interest on private loans.

7) Purpose of Loan. The main aim of public debt is to promote public welfare including the ‘creditors.
The amount of loan spent on developmental’ projects benefit the people including the .creditors. On the
contrary private debt does not benefit the creditor at all. Public debt is always spent for productive
purposes whereas; private debt may be spent for productive and non-productive purposes.

8) Impact on Economy. The impact of public debt is to contain the inflationary pressure in the economy,
because the purchasing power of the people is reduced by public debt. On the contrary, the individuals
are not allowed to take loan with such a view.

9) Liquidity. Public debt certificates can be sold in or purchased from the market if the creditors like to
realize the loan or invest their surplus funds. But the private debt can be repaid only by the debtor and
the creditor cannot realize it as and when he likes before maturity.

Sources Of Public Debt:

The borrowings of the government may be from within the country or from outside the country or both.
Government debt can be categorized as internal debt, owed to lenders within the country, and external
debt, owed to foreign lenders. Thus, there are two major sources of public borrowings: (i) Internal and
(ii) External.

Internally, the government may borrow from citizens, commercial banks, other financial institutions in
the money market and from the central banks. Normally the Government of the country has a large
variety of debt obligations. Therefore public debt may be defined in several different ways covering their
attractive combinations and to suit the purpose of the definitions. Thus, at one extreme it may include
all financial liabilities of a government (including its currency) while at the other extreme, It may include
only a few of them.

External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside
the country. The debtors can be the government, corporations or private households. The debt includes
money owed to private commercial banks, other governments, or international financial institutions
such as the IMF and World Bank.

SOURCES OF PUBLIC DEBT IN INDIA

Public debt in Indian context refers to the borrowings of the central and State governments. Debt
obligations of the Central government are broadly divided into three categories (1)Internal debt,
(2)External debt and (3) Other liabilities. For analytical purpose, however, other liabilities are to be
included in internal debt.

Debt Obligations of the Central Government

1) Internal Debt

This includes: (a)current market loans, (b)bonds, (c)Treasury Bills, (d)special floating and other loans,
(e)Special securities issued to reserve Bank of India, (f)Ways and means Advances, (g)Securities against
small savings, (h)Small savings, (i) Provident Funds, (j) Other accounts and (k)Reserve Funds and
Deposits.

Debt Obligations of the Central Government

1) Internal Debt

This includes: (a)current market loans, (b)bonds, (c)Treasury Bills, (d)special floating and other loans,
(e)Special securities issued to reserve Bank of India, (f)Ways and means Advances, (g)Securities against
small savings, (h)Small savings, (i) Provident Funds, (j) Other accounts and (k)Reserve Funds and
Deposits.

a) Market Loans: These have a maturity period of 12 months or more at the time of issue and are
generally interest bearing. The government issues such loans almost every year. These loans are
raised in open market by sale of securities or otherwise.

b) Bonds: This category comprises gold bonds 1998, compensation and other bonds such as national
Rural Development Bonds and Capital Investment Bonds.
c) Treasury Bills: Treasury bills have been a major source of short term funds for the government to
bridge the gap between revenue and expenditure. They have a maturity of 91 or 182 or 364 days
and are issued every Friday. Treasury bills are issued to the reserve Bank of India, State governments
commercial banks and other parties.

d) Special Floating and Other Loans: Special floating and other loans represent the contribution of
Government of India towards the capital of international. Financial institutions such as International
Monetary Fund, International Bank for Reconstruction and Development and International Development
Association. These are non-negotiable, non interest bearing securities and the government of India is
liable to pay the amount at the call of these institutions.

e) Special Securities Issued to RBI: The government takes loans temporary nature from the Reserve Bank
and issues special securities which are non negotiable and non interest bearing. Such borrowings are
short term (not more than 12 months.

2) External Debt

External debt is usually raised in foreign currency and a substantial part of it is also repayable in foreign
currency. The Government of India has raised foreign loans from a number of countries like USA, UK
France former USSR, Germany, Japan etc., and international financial institutions like IMF, IBRD and IDA
etc.

Burden of Public Debt :

The burden of public debt refers to the sacrifice that the debt imposes on the community through a rise
in taxation, effected for financing the repayment of the principal amount and annual interest on the
public debt.

• Public debt constitutes the financial obligation or liabilities of the government

• Debt burden is measured as ratio of outstanding debt to GNP

• Debt= Outstanding Debt/ GNP

• Burden of Public Debt consist of the sacrifice that tax payer have to make for financial repayment of
principle and interest.

Repayment of Public Debt:

• Refers to escaping from the burden of public debt. various methods of Debt Redemption are as
follows:

 Various methods of Debt Redemption are as follows:

1. Repudiation: Writing off the loans i.e. not repaying

2. Refunding: Issue of new bonds and securities by the Govt. to repay the matured loan

3. Conversion: Refers to a process by which public debt with higher interest is converted to a debt
of lower interest rate.
 4. Capital levy: Refers to a very heavy once for all tax on capital assets, property and wealth.

5 .Sinking Fund: Accumulating a part of public revenue every year for the repayment of debt. The most
systematic and best method for debt redemption.

6. Surplus budget: When Public revenue is more than public expenditure there is a surplus budget. The
surplus budget is used to clear off the public debts.

Concept of Deficit Financing:

• Deficit Financing can happen when the total income of the government (revenue account + capital
account) falls below its total expenditure.

•Budgetary deficit refers to the excess of total expenditure (both revenue and capital) over total receipts
(both revenue and capital).

• The government resorts to withdrawing money from its cash deposited in the RBI or orders the RBI to
print new currency notes or borrows money from the public in the form of bonds and other securities.

•The deficit is financed by borrowing loans from the central bank, commercial banks, and even state
governments through Ad-hoc Treasury Bills.

Implications of Deficit Financing:

• Deficit financing has been resorted to during three different situations in which objectives and impact
of deficit financing are quite different. These three situations are war, depression and economic
development.

• At the time of war, government has to spend more than its revenue receipts from taxes and
borrowings. Government has to create new money (printed notes or borrowing from the Central Bank)
in order to meet the requirements of war finance.

• Deficit financing during war is always inflationary because monetary incomes and demand for
consumption goods rise but usually there is shortage of supply of consumption-goods.

• Keynes advocated that during depression, government should resort to construction of public works
wherein purchasing power would go into the hands of people and thereby demand would be stimulated.
This will help in fuller utilization of already existing but temporarily idle plants and machinery. Def cit
spending by the government during depression helps to start the stagnant wheels of productive
machinery and thus promotes prosperity.

• When government resorts to deficit financing for economic development, large sums are invested in
basic heavy industries with long gestation periods and in economic and social overheads. This leads to
immediate rise in monetary incomes while production of consumption goods cannot be increased
immediately with the result that prices go up. It is also called the inflationary way of financing
development. However, it helps rapid capital formation for economic development.
• Deficit financing in a developing country is inflationary while it is not so in an advanced country. In an
advanced country the government resorts to deficit financing for boosting up the economy.

• There is all-round unemployment of resources which can be employed by raising government

investment through deficit financing.

• The result will be an increase in output, income and employment and there is no danger of inflation.
The increase in money supply leading to demand brings about a corresponding increase In the supply of
commodities and hence there is no increase in the price level.

• Public outlays financed by newly-created money immediately create monetary incomes and, due to
low standards of living and high marginal propensity to consume in general, the demand for
consumption of goods and services increases. But if the public investment is on capital goods, then the
increased demand for the consumer goods will not be satisfied and prices will rise.

Consolidation and Corrective Measures of FRBM Act :

FRBM i.e. The Fiscal Responsibility and Budget Management Act was introduced in the Parliament of
India by Atal Bihari Vajpayee in 2000 and the act was passed in 2003 & FRBM Act came into effect 5 July,
2004.

FRBM act totally defines how to maintain a balance between Government revenue and government
expenditure.

Objective was to ensure inter-generational equity in fiscal management, long-run macro- economic
stability, better coordination between fiscal and monetary Policy, and transparency in the fiscal
operations of the Government.

As it is now a compulsion for the central government to take all sorts of measures for reducing the fiscal
deficit and generating surplus revenue in the subsequent years.

This act binds both present and future governments to adhere to the path of fiscal consolidation.

The goal of the FRBM Act is to Increase transparency in India’s fiscal management systems.

The Act’s long-term goal is for India to attain fiscal stability and to provide flexibility to the Reserve Bank
of India (RBI) in dealing with inflation in India.

The major aim behind bringing the FRBM are:

1. To maintain fiscal discipline

2. To reduce Fiscal Deficit
3. To manage efficiently expenditure, revenue, and debt
4. To maintain macro-economic stability
5. To better coordinate between fiscal and Monetary policy.
6. To maintain proper transparency in the fiscal operation of the Government.

Features of FRBM Act:

During the implementation of this act, it was mandated that the act must be placed along with the
Budget documents annually in the Parliament:

I. Macroeconomic Framework Statement

II. Medium-Term Fiscal Policy Statement &
III. Fiscal Policy Strategy Statement

Fiscal Indicators

It was proposed that the four fiscal indicators be projected in the medium-term fiscal policy statement
they are:

✔Revenue deficit as a percentage of GDP

✔Fiscal deficit as a percentage of GDP

✔Tax revenue as a percentage of GDP and

✔Total outstanding liabilities as a percentage of GDP

 Latest Changes in FRBM Act with Union Budget 2023-24

1. The government aims to reduce the fiscal deficit to below 4.5% of GDP by 2025-26, as
announced by the Finance Minister, Nirmala Sitaraman.
2. The projected fiscal deficit for 2023-24 is 5.9% of GDP.
3. To cover the deficit, net market borrowings from dated securities are estimated at Rs. 11.8 lakh
crore, with the rest coming from other sources.
4. Gross market borrowings are expected to be Rs. 15.4 lakh crore.
5. Total receipts (excluding borrowings) and total expenditure for 2023-24 are estimated at Rs. 27.2
lakh crore and Rs. 45 lakh crore, respectively.
6. Net tax receipts are projected to be Rs. 23.3 lakh crore in 2023-24
7. In the Revised Estimate for 2023-24, total receipts (excluding borrowings)
8. The Revised Estimate for total expenditure is Rs. 41.9 lakh crore, including Rs. 7.3 lakh crore in
capital expenditure
9. The Revised Estimate for the fiscal deficit for 2022-23 remains at 6.4% of GDP, consistent with
the Budget Estimate
10. The government is supposed to restrict the central government’s debt to 40% of GDP by 2024-
25.

NK Singh Committee Recommendations:

✔In May 2016, the government appointed NK Singh to chair a committee to evaluate the FRBM Act.

✔The committee proposed that the government target a budget deficit of 3% of GDP in the fiscal years
ending March 31, 2020, then reduce it to 2.8% in 2020-21 and 2.5% by 2023.
✔The NK Singh Committee proposed that debt be the major focus of fiscal policy. In 2017, this figure was
70%.

✔NK Singh has set the following goals:

i. Debt/GDP Ratio: The review group called for a debt-to-GDP ratio of 60 percent, with a 40
percent ceiling for the federal government and a 20 percent ceiling for states.
ii. Revenue Shortfall Goal: By March 31, 2023, the revenue deficit shall be minimized to 0.8
percent of GDP. The yearly reduction objective was set at 0.5 percent of GDP.
iii. Fiscal Deficit Target: By March 31, 2023, the fiscal deficit shall be reduced to 2.5 percent.

Budget & Budgetary Procedure in India:

The word budget originally comes from the old English word “bougette” meaning a sack or a pouch. It
was really a leather bag in which the British Chancellor of the Exchequer (the equivalent of our Finance
Minister) carried the papers relating to the budget which were to be placed before Parliament for
approval. From that association, It has come to mean the papers themselves.

The budget is not just a statement of estimates of expenditure and revenue of the Government. It is a
plan of action of the government for orderly administration of its financial affairs. The budget reflects the
philosophy of the government and its manner of governance. It indicates as to how resources are to be
raised to meet the anticipated expenditure through its taxation policy.

PRINCIPLES OF BUDGET MAKING:

1 The budget must be a balanced one.

2 Estimates should be on a cash basis.

3 Budget must distinguish between recurring expenditure and income on the one hand and capital
payments and receipts on the other.

4 Budget should be gross and not net.

5 Estimating should be as exact as possible.

6 Budget form should correspond to the form of accounts, i.e., budget heads should be the same as
those of accounts.

7 The rule of lapse. No part of the grant that is unspent in the financial year can be carried forward for
the future.

The Budgetary Process:

It is an elaborate and complex process involving operations performed by several agencies as indicated
below.

1 The Executive: The various departments, which constitute the executive branch of the government
have to formulate their work program for the year
2 The finance ministry, though a pa t of the executive, has a special role to play. It administers the
finances of the government and so it is responsible for the budget. It interacts with the administrative
ministries that are the spending bodies and prepares the budget estimate. The estimates of income or
revenue and the estimates of expenditure are brought together in the budget which is presented to
Parliament.

3 The Legislature: It discusses the budget and sanctions the expenditure. In India, Parliament’s control
over government expenditure is undertaken through its financial committees.

4 Audit Department: Audit is independent of Government. It is a device to ensure the legality and
propriety of expenditure. The Comptroller & Auditor-General sees that the money is spent according to
the Appropriation Act and that the amount of expenditure does not exceed what has been sanctioned.

PREPARATION OF THE BUDGET:

The Financial Year in India is from 1st April to 31st March. The work in connection with the preparation of
the budget estimate commences around July or August about 7-8 months before the start of the
financial year. The initiative is taken by the Finance Ministry which supplies ‘skeleton forms’ to the
administrative ministries for preparing their estimates. Each form contains columns far (1) actuals for the
previous year. (2) sanctioned estimates for the current year. (3) revised estimates for the current year, (4)
budget estimates for the coming year, (5) actuals of the current year available at the time of preparation
of the estimates and (6)actuals for the corresponding period of the previous year.

The budget estimates have three parts-standing charges, continuing schemes and new schemes.

After revision and review, these estimates are sent by the administrative ministries some time in
November to the Finance Ministry. The Finance Ministry examines all these budget estimates from the
point of view of overall needs of the Government and total availability of funds. Proposals for new
schemes are very thoroughly scrutinized for the rule is that no proposal for new or increased
expenditure, for any department, can be incorporated in the budget without the concurrence of the
Ministry of Finance. The estimates of expenditure are finalized by the Finance Ministry. After taking into
account factors like the Five Year Plan, the policy decisions of the cabinet and the prevailing conditions in
the country. It is the guardian on the tax-payers’ interests. Above all, since it has to raise the money
required for the proposed expenditure, it must have a say in determining the level of that expenditure.

Estimates of revenue are prepared. This too is the work of the Finance Ministry. The Departments of
Income Tax, Central Excise and Customs, which are the principal revenue collecting agencies, make a
forecast of expected revenue for the coming financial year. It handles the financial business of the
government and is the custodian of the nation’s purse. The, Finance Ministry examines these estimates
and accordingly prepares the tax proposals. However, decisions in policy matters in all respects, are
taken by the cabinet. , they constitute the ‘Annual Financial Statement’. This the President causes to be
laid before both the Houses of Parliament as per Article 112 of the-Constitution.

ENACTMENT OF THE BUDGET:

A very crucial stage in the budgetary process is its passage through Parliament which is marked by five
stages.
Before we examine these five stages, it is important to bear in mind the powers of the Indian Parliament
in budgetary matters, covered in Articles 112 to 117 of the constitution. Briefly stated, they are the
following.

1 No demand for a grant shall be made except on the recommendation of the President

2 Any proposal dealing with expenditure must be on the recommendation of the President.

3 Parliament can reduce or abolish a tax, but not increase it.

4 Certain items of expenditure are charged on the Consolidated Fund of India, like the salaries and
allowances of the President, Judges of the Supreme Court, Speaker, Deputy Speaker, Comptroller &
Auditor-General of India and others. The ‘charged’ expenditure is subject to discussion though not
submitted to the vote of Parliament.

5 Parliament cannot amend the Appropriation Bill in such a way as to vary the amount, be it charged
expenditure or otherwise, or alter the destination of any grant.

6 In financial matters, the powers of the Rajya Sabha arc restricted. It must accept the Finance Bill with
or without any recommendations within 14 days. The Lok Sabha may accept or reject any or all of these
recommendations. In any case, the Finance Bill does not go again to the Upper House but directly to the
President for his assent.

UNIT 4

Fiscal federalism: is a term that describes how the financial powers and responsibilities are divided
between different levels of government in a country. It Involves questions such as which functions
and services should be provided by the central government or the state governments, how the revenues
should be raised and shared among them, and how the transfers or grants should be allocated to ensure
efficiency and equity.

Features of Federal Finance:

1.Division of functions: The fiscal powers and functional responsibilities in India have been divided
between the Central and State government following the principles of federal finance. The division of
functions is specified In the Seventh Schedule of the Constitution in three lists vis. The Union List, the
State List and the Concurrent List.

The Union List contains 97 subjects of national importance, such as defense, railways, national highways,
navigation, atomic energy, and posts and telegraphs. 66 items of State and local interest, such as law and
order, public health, agriculture, irrigation, power, rural and community development, etc. have been
entrusted to the State governments.

47 items such as industrial and commercial monopolies, economic and social planning, labor welfare and
justice, etc. have been enumerated in the Concurrent List. The concurrent list is one in which both state
and the Centre can make legislations. However, in case of a conflict or tie, federal laws prevail.
2. Revenue Powers of the Center: The Central government has been given powers in respect of taxes on
income other than agricultural income, customs duties, and. Excise duties on tobacco and other goods
manufactured or produced in India, corporation, tax, taxes on capital values, estate duty in respect of
property other than agricultural land, terminal taxes on goods or railway passengers carried by railway,
sea or air, taxes other than stamp duties on transactions in stock exchanges and futures, markets, stamps
duty in respect of land, etc.; taxes on sale or purchase of news papers and on advertisements published
therein; and sale, purchase and consignment of goods involving inter-State trade or commerce. In fact,
the Central government does not get revenue from all the above taxes.

3.Revenue Powers of the State: The State governments have been given exclusive tax powers in respect
of land revenue; taxes on agricultural income; duties in respect of succession to agricultural land; estate
duty in respect of agricultural land; taxes on land and buildings; excise duties on goods containing
alcoholic liquors for human consumption; opium, Indian hemp and other narcotic drugs; taxes on the
entry of goods into local areas; taxes on the sale or purchase of goods other than newspapers; taxes on
vehicles, tolls; taxes on professions, trades, callings and employment; capitation taxes, taxes on luxuries
including taxes on entertainment, amusements, betting and gambling.

4.Division of Borrowing Powers: The borrowing powers have also been clearly mentioned in the
Constitution. Under Article 292, the central government is empowered to borrow funds from within and
outside the country as per the limits imposed by the Parliament. According to Article 293(3), the State
can borrow funds within the Country. Article 293(2) empowers the Centre to provide loans to State
subject to conditions laid down by Parliament.

5.Fiscal Imbalances in India: The Constitutional fiscal arrangement shows that fiscal imbalances were
deemed inevitable as most of the powers for elastic taxes are given to the Central government. Further,
the division of powers and functions itself leads to vertical federal fiscal imbalance while the differences
in the endowment position of natural resources across States cause horizontal federal fiscal imbalance.

Principles of Federal Finance: by Professor B.P. Adarker

1) Principle of Independence and Responsibility: Each government should have independent

financial resources and should be responsible for raising resources for meeting its obligations,
”full freedom of financial operations must be extended to both Federal as well as State
Governments in order that they may not suffer from a feeling of cramp in the discharge of their
normal activities and in the achievement of their legitimate aspirations for the promotion of
social and economic advancement.” The authority which has the pleasing job of spending money
should also do the unpleasant job of taxing it.
2) Principle of Adequacy and Elasticity: the principle of adequacy means that the resources of the
federal government and local governments should be adequate so that each layer of
government can discharge its obligations laid upon it. Principle of elasticity means that there
must be feasibility to expand its resources in response to its requirements especially during the
period of internal and external crisis.
3) Administrative Economy and Efficiency: the administrative cost of finances should be at
minimum and there should be no tax evasion. Administrative Efficiency can be achieved, if the
resources are allocated properly between the Centre and the state governments.
Other Principles

•Principle of Uniformity and Equity: Principle of Uniformity means that there should not be any
discrimination among different units in a federation, while distributing resources among various states.
Thus, the contribution of each state in federal taxes should be according to ability or economic
considerations

•Principle of Accountability: freedom and democracy are interwoven in a federal system. Therefore, the
government in a federation should be accountable to its own legislature for its spending and collecting
revenue decisions.

•Principle of Fiscal Access: this implies that there should not be bar on federal and state governments in
tapping new sources of revenue within their own prescribed areas to meet the growing financial needs.
That is, resources should grow with the expansion of responsibilities.

•Principle of Federal Supervision: there should be supervision by the federal government to ensure
whether state governments follow the rules and regulations with regard to taxation and expenditure laid
down by it from time to time.

Major Issues in Centre-State Financial Relations in India:

Financial relations between the Centre and states are set out in articles 268 to 280 of the Constitution of
India. Articles 268-293, mentioned in Part XII of the Constitution, specifies the financial relations
between the Centre and the States.

The Parliament has the authority to charge the union list taxes the state legislature has sole authority to
impose the taxes listed in the State list. The Concurrent List enumerates the taxes that can be levied by
both the parliament and the state legislatures. The Parliament has the residuary power of taxation (i.e.,
the authority to impose taxes not listed in any of the three lists). The parliament may levy a gift Tax, a
wealth tax or an expenditure tax under this article.

There are no tax entries available on the concurrent list. In terms of tax Legislation, the concurrent
jurisdiction is inaccessible. The concurrent competence to make legislators/legislation controlling goods
and services tax has been given to parliament and state legislatures by this amendment.

The Constitution has placed the following restrictions over the taxation powers of the states:

A state legislature may levy taxes on certain professions, crafts, callings and occupations. However, under
2500 p.a. cap, a state legislature is barred from levying a tax on the supply of goods or services or both,
under the following two situations:

When such supply occurs outside the state; and

Where such supply occurs during the export or import process.

The Parliament has the authority to establish standards for identifying whether a supply of commodities
or services, or both, occurs outside of the state, or in the path of import or export.
The usage or sale of electricity is subject to a tax imposed by the state legislature. However, no tax could
be levied on the sale or use of electricity, which is:

Consumed by the union or sold to the union; or Consumed in the

construction, maintenance, or operation of any railway by the union or by the concerned railway
company or sold to the union or the railway company for a similar purpose.

Any authority established by Parliament for controlling or developing any interstate river or river valley
shall charge a tax on any water or power stored, generated, consumed, distributed, or sold by a state
legislature. However, in order for legislation to be effective, it must be reserved for the President’
consideration and approval.

Distribution of Tax Revenues

The 80th Amendment Act of 2000 and the 88th Amendment Act of 2003 changed the way tax revenues
were distributed between the federal government and the states.

1. The Centre imposes taxes, while the states are in charge of collecting them. The collected duties
levied by any state (inside the state) are given to the state rather than to the Consolidated Fund
of India.
2. Taxes levied and collected by the federal government but distributed to State (article 269): This
category includes the following taxes:

Various tariffs were levied on the sale or purchase of commodities (other than newspapers) in the
course of interstate commerce or trade

All of these taxes’ net proceeds do not go into the Consolidated Fund of India (CFI). According to the
principles established by the Parliament, they are assigned to the involved states.

Conclusion: The financial relationship between the Centre and the States changes dramatically if a
financial emergency is declared under Article 280 of the Indian Constitution. In such instances, the
Centre gains enormous authority and exerts enormous influence over the States, forcing them to adhere
to specific financial propriety standards and other important protections.

TYPES OF GRANTS:

The budget embodies the ordinary estimates of income and expenditure for the year. Rut under special
or extraordinary circumstances, these estimates may not be adequate. To take care of special needs
there are four other kinds of grants, that the Lower House considers. They are:

1. Vote on account: Even though the financial year starts on 1st April, the budget takes some time to be
passed. The House is required to vote on account of the expenditure that will be incurred in the first few
months of the financial year. A vote on account is an advance grant.

ii) Vote on credit: This is to meet expenditure whose amount or details cannot be precisely stated in the
budget because of the nature or indefinite character of the service e.g, war.
iii) Exceptional grant: The Lok Sabha can make an exceptional grant which is not a part of the current
service of any financial year. For unforeseen expenditure advances can be made by the President out of
the Contingency Fund of India, but these advances have to be duly authorized by Parliament Inter.

iv) Excess grant: This is a grant lo regularize excess expenditure.

v) Token grant: If expenditure on a new service can be met by reappropriation of funds, this is
regularized by a demand for a token amount (say Rs. 10/-) which is approved by Parliament by voting.

vi) Supplementary grant: If original estimates are insufficient, additional funds arc sought in the course of
the financial year through supplementary grants. This is more in the nature at a supplementary budget
which is frequently resorted to in India and follows the procedure prescribed for the original budget.

Finance Commission; Evaluation Of its Working, NITI Aayog & GST Council.

1.NITI (NATIONAL INSTITUTE FOR TRANSFORMING INDIA): Since 1950, Government of India has
attempted to bring about a rapid social and economic growth in the entire country through planned
effort. The prime institution to carry out this task was the Planning Commission, which was launched in
1950 and was functioning till the end of 2014. Thereafter, on January 1 2015, the Planning Commission
got replaced by the National Institute for Transforming India, known as, NITI.

The composition of the NITI is, as follows:

1) Chairperson: Prime Minister of India.

2) Vice-Chairperson: appointed by the Prime Minister
3) Governing Council comprising the Chief Ministers of all the States and Lt. Governors of Union
Territories.
4) Regional Councils that are formed to address specific issues or contingencies impacting more
than one state or region. These are formed for a specified tenure. The Regional Councils are
chaired by the Prime Minister and comprise of the Chief Ministers and Lt. Governors of the
respective states region.
5) Full time members.
6) Part-time members: maximum of 2 members from any leading universities/ research
organizations/other relevant institutions in an ex-officio capacity. Part time members are
appointed on a rotational basis.
7) Ex-officio members: maximum of 4 members of the Union Council of Ministers nominated by the
Prime Minister.
8) Chief Executive Officer, appointed by the Prime Minister for a fixed tenure and is of the rank
parallel to the Secretary to the Government of India.
9) Experts, specialists, and practitioners with relevant domain knowledge, as special invitees
nominated by the Prime Minister.
10) Secretariat.

Seven Pillars of NITI

There are seven pillars based on, which the NITI works:
 1) Pro-people
2) Pro-activity
3) Participation
4) Empowerment
5) Inclusion
6) Equality
7) Transparency

Functions of NITII

Based on these pillars, NITI performs the following functions:

1) Involves a shared vision along with active involvement of States on national development
priorities and strategies.
2) Fosters cooperative federalism through structured support initiatives and mechanisms with the
States on a continuous basis, recognizing that strong States make a strong nation.
3) Develops mechanisms to formulate credible plans at the village level and aggregate these
progressively at higher levels of government.
4) Ensures that the interests of national security are incorporated in economic strategy and policy.
5) Pays special attention to the sections of society that may be at risk of not getting benefited
adequately by the economic progress of the country.

GST COUNCIL

As per Article 279A of the amended Constitution, the GST Council is a joint forum of the Centre and the
States, and consists of the following members: -

Union Finance Minister Chairperson

The Union Minister of State, in-charge of Revenue, Min, of Finance

The Minister In-charge of Finance or Taxation or any other Minister nominated by each State
Government.

The Council is empowered to make recommendations to the Union and the States on the following:-

(a) The taxes, ceases and surcharges levied by the Union, the States and the local bodies which may
be subsumed in the goods and services tax;
(b) (b) the goods and services that may be subjected to, or exempted from the goods and services
tax.
(c) Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and
Services Tax and the principles that govern the place of supply;

(d) the threshold limit of turnover below which goods and services may be exempted from goods and
services tax;

E) the rates including floor rates with bands of goods and services tax;
(f) any special rate or rates for a specified period, to raise additional resources during any natural
calamity or disaster;

(g) special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir,
Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and

(h) the date on which GST shall be levied on petroleum crude, high speed diesel, motor spirit (petrol),
natural gas and aviation turbine fuel.

(i) Any other matter relating to the goods and services tax, as the Council may decide.

The mechanism of GST Council would ensure harmonization on different aspects of GST between the
Centre and the States as well as amongst the States. It has been provided In the Constitution (One
Hundred and First Amendment) Act, 2016 that the GST Council, in discharge of various functions, shall
be guided by the need for a harmonized structure of GST and for the development of a harmonized
national market for goods and services.

The Constitution (One Hundred and First Amendment) Act, 2016 provides that every decision of the GST
Council shall be taken at its meeting by a majority of not less than 3/4th of the weighted votes of the
Members present and voting. The vote of the Central Government shall have a weightage of 1/3rd of the
votes cast and the votes of all the State Governments taken together shall have a weightage of 2/3rd of
the total votes cast in that meeting. One half of the total number of members of the GST Council shall
constitute the quorum at its meeting.

On 12th September, 2016 the Union Cabinet under the Chairmanship of the Hon’ble Prime Minister
approved setting up of GST Council and creation of its Secretariat as follows:

A) GST Council as per Article 279A of the amended Constitution;

(b) GST Council Secretariat, with its office at New Delhi

C) Secretary (Revenue) as the Ex-officio Secretary to the GST Council;

(d) Inclusion of the Chairperson, Central Board of Excise and Customs (CBEC), as a permanent Invitee
(non-voting) to all proceedings of the GST Council;

e) One post of Additional Secretary to the GST Council in the GST Council Secretariat (at the ( level of
Additional Secretary to the Government of India), and four posts of Commissioners in the GST Council
Secretariat (at the level of Joint Secretary to the Government of India).

The Cabinet also decided to provide for adequate funds for meeting the recurring and non- recurring
expenses of the GST Council Secretariat, which shall be borne by the Central Government. The GST
Council Secretariat shall be manned by officers taken on deputation from both the Central and State
Governments.