Fiscal responsibility - the issues

When the fiscal situation is grave and, as in the case of some States, virtually on the point of breakdown, it is imperative to examine how fiscal responsibility can be statutorily imposed and accountability emphasised, says K. Venkataraman.

Fiscal management through legislative fiat or Constitutional amendment is not the complete answer. A change in mindset and a strong public opinion is necessary; but legislation and, in a selective way, Constitutional amendments, would evoke a better sense of fiscal responsibility and make pronouncedly noticeable any failure in this respect.

THE INDIAN Constitution's view of the fiscal system comprises roughly the following:

(1) on financial procedure, Article 112 requires that every financial year an annual financial statement of estimated receipts and expenditure should be presented to the Parliament. Such a statement shall distinguish expenditure on revenue account from other expenditure. Articles 113 to 116 describe other aspects of the financial procedure. Article 202 and Articles following up to 207 describe a similar procedure for the States. Article 266 distinguishes between a Consolidated Fund and Public Account in both the Union and the States. Miscellaneous financial provisions include Article 282 on expenditure defrayable by the Union or a State to the effect that a grant for any public purpose may be made, ``notwithstanding that the purpose is not one with respect to which Parliament or the Legislature of the State, as the case may be, may make laws".

(2) The Constitution recognises the need for borrowing by the Union and the States. It states in Article 292 that the Union may borrow ``within such limits, if any, as may from time to time be fixed by the Parliament by law" and give guarantees `within such limits if any, as may be so fixed." Similarly, limits can be fixed by State Legislatures; the consent of the Union Government for borrowing is also necessary as along as a State is indebted to the Centre (Article 293).

(3) Chapter I on Finance in Part XII spell out the distribution of revenues between the Centre and the States (Art. 268 to 272), grants-in-aid by the Centre (Art. 275) and the mechanism of a five yearly Finance Commission to recommend devolution (Art. 280).

Briefly, there are (a) duties levied by the Centre and collected and appropriated by the States, namely, stamp duties and excise duties on medicinal and toilet preparations (Art. 268); (b) eight categories of taxes levied and collected by the Centre but assigned to the States, of which the most important is inter- State sales tax (Art. 269); (c) taxes levied and collected by the Union and distributed between the Centre and the States, namely, taxes on income other than agricultural income, excluding corporation tax (Art.270); and (d) taxes which are levied and collected by the Centre and may be distributed between the Union and the States, namely, excise duties other than on medicinal and toilet preparations (Art. 272).

The Centre may levy a surcharge on taxes mentioned in (b) and (c) for its own purposes. It has also levied `additional excise' under (d).. Art. 275 provides for grants-in-aid by the Centre `to such States as Parliament may determine to be in need of assistance and different sums may be fixed for different States'. It may be noted that the lion's share of the transfers are income tax and excise duties. The Finance Commission recommends the principles of such transfer and of the grants-in-aid for `non- Plan' activities. Plan grants are not a category mentioned in the Constitution but are covered by Art. 275. The Constitution does not mention a Plan or a Planning Commission though the idea of a Plan had been very much there since the latter half of the Thirties.It should also be noted that Centre-State transfers have often come under scrutiny and debate, particularly after the report of each Finance Commission, but more on their quantum than on the Constitutional provisions.

(4) The 1993 amendments in Part IX and IX(A) stipulate the constitution of State Finance Commissions by the respective States for recommending devolutions to local bodies. They also provide for the audit of local bodies as well as powers to impose taxes. (Art. 243-I for panchayats and Art. 243-Y for municipalities).

(5) As part of emergency provisions in Part XVII, Article 360 states that if the President is satisfied that a situation has arisen whereby the financial stability or credit of India or any part thereof is threatened, he may, by a proclamation, make a declaration to that effect. During the proclamation period the executive authority of the Centre shall extend to the giving of directions to any State to observe such canons of financial propriety as may be specified in the direction and to the giving of such other directions as may be necessary. The direction may include reduction in salaries and allowances of persons serving in connection with affairs of a State. A similar provision exists in regard to the Central Government staff as well.

The foregoing is a little noted provision. This is the only place where a reference is made to `canons of financial propriety' which are not however defined. This lack of definition may also be a problem if the Centre were to invoke this Article.

(6) Chapter V of Part V concerns the Comptroller and Auditor General of India (CAG). Article 149 stipulates that pending adoption of any law by the Parliament, the CAG will continue to perform such duties and exercise such powers as he did before the commencement of the Constitution.

A law has been adopted for this purpose. A Constitutional amendment in 1976 stipulated that the accounts of the Centre and the States would be kept in such form, as the President may, after consultation with the CAG, prescribe. An amendment in 1978 replaced the words `after consultation with' by the words `on the advice of' the CAG. This seems to give better scope for the CAG to take the initiative to propose changes to the format of the accounts.

While the foregoing is a broad enumeration of the core provisions of the Constitution in regard to financial matters, the VII schedule which lists the functions of the Centre and the States and those concurrent to both, has a bearing on the adequacy of finances to discharge the functions required of the Centre and the States. The mechanism of devolution of tax revenues and grants and aids is expected to create a balance between functions and finances. One of the inherent problems of the polity is the disequilibrium between functions and finances.

The centralisation of taxation and collection in an integrated economy (which would also facilitate macro-economic management) result in the accrual of more resources for the Centre, while much of the functions needed to be discharged for the benefit of the common man are the responsibilities of the States and the local bodies.

It may be noted that no major amendments have been made so far in regard to the financial system, except the inclusion of inter- State sales tax and tax on consignment of goods as assignable taxes; and additional terms of reference for the Finance Commission calling upon it to recommend measures to augment the resources of the States to supplement the resources of local ebodies. En passant, it may be noted that the upper limit on taxes on professions, trades, callings and employment leviable by a State or local body was revised to Rs. 2,500 per annum (Art. 276) by a Constitutional amendment in 1988.

The figure can at least be doubled for the benefit of the local bodies. The Article could be amended, substituting the words `shall not exceed Rs. 2,500 per annum' by the words `shall not exceed a sum that may be fixed by law from time to time'.

The author is Chairman, Public Expenditure Round Table.

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