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Posts Tagged ‘budget’

Does the financing of “Rights” laws impinge on the rights of states

August 20th, 2013 1 comment

In the last decade, some schemes have been recast as statutory entitlements – right to employment, right to education and right to food.  Whereas schemes were dependent on annual budgetary allocations, there rights are now justiciable, and it would be obligatory for Parliament to allocate sufficient resources in the budget.  Some of these rights also entail expenditure by state governments, with the implication that state legislatures will have to provide sufficient funds in their budgets.  Importantly, the amounts required are a significant proportion of the total budget.

There has been little debate on the core constitutional issue of whether any Parliament can pre-empt the role of resource allocation by future Parliaments.  Whereas a future Parliament can address this issue by amending the Act, such power is not available to state legislatures.  Through these Acts, Parliament is effectively constraining the spending preferences of states as expressed through their budgets passed by their respective legislative assemblies.  I have discussed these issues in my column in Pragati published on August 16, 2013.

Special Category status and centre-state finances

April 12th, 2013 5 comments

“No one can ignore Odisha’s demand. It deserves special category status. It is a genuine right,” said Odisha Chief Minister, Naveen Patnaik, earlier this month. The Odisha State assembly has passed a resolution requesting special category status and their demands follow Bihar’s recent claim for special category status.

The concept of a special category state was first introduced in 1969 when the 5th Finance Commission sought to provide certain disadvantaged states with preferential treatment in the form of central assistance and tax breaks. Initially three states Assam, Nagaland and Jammu & Kashmir were granted special status but since then eight more have been included (Arunachal Pradesh,  Himachal Pradesh,  Manipur, Meghalaya, Mizoram, Sikkim, Tripura and Uttarakhand). The rationale for special status is that certain states, because of inherent features, have a low resource base and cannot mobilize resources for development. Some of the features required for special status are: (i) hilly and difficult terrain; (ii) low population density or sizeable share of tribal population; (iii) strategic location along borders with neighbouring countries; (iv) economic and infrastructural backwardness; and (v) non-viable nature of state finances. 1 The decision to grant special category status lies with the National Development Council, composed of the Prime Minster, Union Ministers, Chief Ministers and members of the Planning Commission, who guide and review the work of the Planning Commission.

In India, resources can be transferred from the centre to states in many ways (see figure 1). The Finance Commission and the Planning Commission are the two institutions responsible for centre-state financial relations.

Figure 1: Centre-state transfers (Source: Finance Commission, Planning Commission, Budget documents, PRS)

Planning Commission and Special Category

The Planning Commission allocates funds to states through central assistance for state plans. Central assistance can be broadly split into three components: Normal Central Assistance (NCA), Additional Central Assistance (ACA) and Special Central Assistance. NCA, the main assistance for state plans, is split to favour special category states: the 11 states get 30% of the total assistance while the other states share the remaining 70%.  The nature of the assistance also varies for special category states; NCA is split into 90% grants and 10% loans for special category states, while the ratio between grants and loans is 30:70 for other states.

For allocation among special category states, there are no explicit criteria for distribution and funds are allocated on the basis of the state’s plan size and previous plan expenditures. Allocation between non special category states is determined by the Gadgil Mukherjee formula which gives weight to population (60%), per capita income (25%), fiscal performance (7.5%) and special problems (7.5%).  However, as a proportion of total centre-state transfers NCA typically accounts for a relatively small portion (around 5% of total transfers in 2011-12).

Special category states also receive specific assistance addressing features like hill areas, tribal sub-plans and border areas. Beyond additional plan resources, special category states can enjoy concessions in excise and customs duties, income tax rates and corporate tax rates as determined by the government.  The Planning Commission also allocates funds for ACA (assistance for externally aided projects and other specific project) and funds for Centrally Sponsored Schemes (CSS). State-wise allocation of both ACA and CSS funds are prescribed by the centre.

The Finance Commission

Planning Commission allocations can be important for states, especially for the functioning of certain schemes, but the most significant centre-state transfer is the distribution of central tax revenues among states. The Finance Commission decides the actual distribution and the current Finance Commission have set aside 32.5% of central tax revenue for states. In 2011-12, this amounted to Rs 2.5 lakh crore (57% of total transfers), making it the largest transfer from the centre to states. In addition, the Finance Commission recommends the principles governing non-plan grants and loans to states.  Examples of grants would include funds for disaster relief, maintenance of roads and other state-specific requests.  Among states, the distribution of tax revenue and grants is determined through a formula accounting for population (25%), area (10%), fiscal capacity (47.5%) and fiscal discipline (17.5%).  Unlike the Planning Commission, the Finance Commission does not distinguish between special and non special category states in its allocation.

  1. Lok Sabha unstarred question no. 667, 27 Feb, 2013, Ministry of Planning

The Budget: What happens next and some stats on what happened before

March 14th, 2013 3 comments

Authored by Vishnu Padmanabhan and Priya Soman

The Budget speech may have already been scrutinised and the numbers analysed but the Budget process is far from complete.  The Constitution requires expenditure from the government’s Consolidated Fund of India to be approved by the Lok Sabha (the Rajya Sabha does not vote, but can suggest changes). After the Finance Minister presents the Union Budget, Parliament holds a general discussion followed by a detailed discussion and vote on Demands for Grants. In the general discussion, the House discusses the Budget as a whole but no motions can be moved and no voting takes place.  In the 15th Lok Sabha, the average time spent during the Budget Session on general discussion has been 13 hours 20 minutes so far.

Following the general discussion, Parliament breaks for recess while Demands for Grants – the projected expenditure by different ministries – are examined by the relevant Standing Committees of Parliament. This year Parliament is scheduled to break for a month from March 22nd to April 22nd. After the break, the Standing Committees table their reports; the grants are discussed in detail and voted on.  Last year, the total time spent on the Union Budget, on both general and detailed discussion was around 32 hours (or 18% of total time in the session), largely in line with the average time spent over the last 10 years (33 hours, 20% of total time). A unique feature of Indian democracy is the separate presentation and discussion for the Railway Budget.  Including the Railway Budget the overall time spent on budget discussion last year was around 55 hours (30% of total time in the session).

Note: All data from Budget sessions; data from 2004 and 2009 include interim budget sessions. Source: Lok Sabha Resume of Work, PRS

During the detailed discussion, MPs can call for ‘cut motions’ to reduce the amounts of demands for grants made by a Ministry. This motion can be tabled in three ways: (i) ‘the amount of the demand be reduced to Re.1/’ signifying disapproval of the policies of that ministry; (ii)  ‘the amount of the demand be reduced by a specified amount’, an economy cut signifying a disapproval of the amount spent by the ministry  and (iii) ‘the amount of the demand be reduced by Rs.100/-’, a token cut airing a specific grievance within the policy of the government. However in practice almost all demands for grants are clubbed and voted together (a process called guillotining).

In 2012, 92% of demands for grants were guillotined. The grants for Ministries of Commerce and Industry, Health and Family Welfare, Home Affairs and Urban Development were the only grants taken up for discussion. Over the last 10 years, 85% of demands for grants have been voted for without discussion. The most frequently discussed demand for grants come from the Ministry of Home Affairs (discussed in 6 of the last 10 sessions) and the Ministry of Rural Development (5 times).  Demand for grants for Defence, the largest spending Ministry, has only been voted after discussion once in the last 10 years.

Source: Lok Sabha Resume of Work, Union Budget documents, PRS

If the government needs to spend any additional money, it can introduce Supplementary Demands for Grants during the year.  However if after the financial year government spending on a service exceeds the amount granted, then an Excess Demand for Grant has to be introduced and passed in the following year.  The Budget process concludes with the introduction and passage of the Appropriation Bill authorising the government to spend money from the Consolidated Fund of India. In addition, a Finance Bill, containing the taxation proposals of the government is considered and passed by the Lok Sabha after the Demands for Grants have been voted upon.

General Anti Avoidance Rule (GAAR)

May 17th, 2012 2 comments

The issue of the General Anti Avoidance Rule (GAAR) has dominated the news recently and there are fears that GAAR will discourage foreign investment in India.  However, tax avoidance can hinder public finance objectives and it is in this context GAAR was introduced in this year’s Budget.  Last week, the Finance Minister pushed back the implementation of GAAR by a year.

What is GAAR?

GAAR was first introduced in the Direct Taxes Code Bill 2010.  The original proposal gave the Commissioner of Income Tax the authority to declare any arrangement or transaction by a taxpayer as ‘impermissible’ if he believed the main purpose of the arrangement was to obtain a tax benefit.  The 2012-13 Finance Bill (Bill), that was passed by Parliament yesterday, defines ‘impermissible avoidance arrangements’ as an arrangement that satisfies one of four tests.  Under these tests, an agreement would be an ‘impermissible avoidance arrangement’ if it  (i) creates rights and obligations not normally created between parties dealing at arm’s length, (ii) results in misuse or abuse of provisions of tax laws, (iii) is carried out in a way not normally employed for bona fide purpose or (iv) lacks commercial substance. Read more…

Parliament’s scrutiny over government finances

December 20th, 2010 No comments

The recent 2G-controversy and the related debate over the role of the PAC as opposed to the JPC also raises a broader Issue regarding the general scrutiny of government finances by Parliament.  Oversight of the government’s finances involves the scrutiny of the government’s financial proposals and policies.  The Indian Constitution vests this power with the Parliament by providing that (a) taxes cannot be imposed or collected without the authority of law, and (b) expenditure cannot be incurred without the authorisation of the legislature.

The Indian Parliament exercises financial oversight over the government budget in two stages: (1) at the time of presentation of the annual budget, and (2) reviewing the government’s budget implementation efforts through the year.

The Parliament scrutinises the annual budget (a) on the floor of the House, and (b) by the departmentally related standing committees.

Scrutiny on the floor of the House

The main scrutiny of the budget in the Lok Sabha takes place through:

(a) General discussion and voting: The general discussion on the Budget is held on a day subsequent to the presentation of the Budget by the Finance Minister.  Discussion at this stage is confined to the general examination of the Budget and policies of taxation expressed during the budget speech.

(b) Discussion on Demand for Grants: The general discussion is followed by a discussion on the Demand for Grants of different ministries. A certain number of days or hours are allocated for the discussion of all the demands. However, not all the demands are discussed within the allotted number of days.

The remaining undiscussed demands are disposed of by the Speaker after the agreement of the House.  This process is known as the ‘Guillotine’.  Figure 1 shows the number of Demands discussed and guillotined over the last five years.  It shows that nearly 90% of the Demands are not discussed every year.

Some Important Budget Documents

Annual Financial Statement – Statement of the estimated receipts and expenditure of the government.

Demand for Grants –Expenditure required to be voted by the Lok Sabha.  A separate Demand is required to be presented for each department of the government.

Supplementary Demand for Grants – Presented when (a) authorized amounts are insufficient, or (b) need for additional expenditure has arisen.

Finance Bill – Details the imposition of taxes, the rates of taxation, and its regulation.

Detailed Demand for Grants – Prepared on the basis of the Demand for Grants.  These show further break-up of objects by expenditure, and also actual expenditure in the previous year.

For more details see detailed note on Financial Oversight by Parliament here.

Can Ministers be summoned by Public Accounts Committee?

December 16th, 2010 No comments

The Public Accounts Committee  examines how the Government spends public money. It examines the amount granted by the Parliament and the amount actually spent.

A Speaker in the past, has passed a direction which specifies clearly that a Minister cannot be summoned by the Financial Committees.  This has been incorporated in a document titled “Directions by the Speaker” available here.

The actual text of the direction reads -

“99. (1) The Committee on Estimates or the Committee on Public Accounts or the Committee on Public Undertakings may call officials to give evidence in connection with the examination of the estimates and accounts, respectively, relating to a particular Ministry or Undertaking. But a Minister shall not be called before the Committee either to give evidence or for consultation in connection with the examination of estimates or accounts by the Committee.”

-Co-authored by Chakshu

Discussion on budgets and functioning of Ministries

March 18th, 2010 3 comments

Parliament has announced the ministries whose Demands for Grants will be discussed in detail in the Lok Sabha (after April 12 when Parliament reconvenes).  They are:

Defence

Rural Development

Tribal Affairs

Water Resources

External Affairs

Road Transport and Highways

Together these ministries have asked Parliament for a total of  Rs 289,938 crore (Rs 175,772 crore for Defence alone) – which is slightly over a quarter of the total expenditure budgeted by the Central Government for 2010-11.

The Rajya Sabha does not discuss demands for grants but has announced a list of ministries whose functioning it will review after the recess.  They are:

Home Affairs

Tribal Affairs

Defence

Power

Chemicals and Fertilizers

Petroleum and Natural Gas

Youth affairs and Sports

Women and Child Development

Consumer affairs, Food and Public Distribution

Housing and Urban Poverty Alleviation

Parliament: What happens during the recess

March 16th, 2010 1 comment

Parliament is set to go into recess this week and will convene again on April 12th.  Before going into recess, both houses will have completed general discussions on the budget.

Once the recess begins, it’s time to go beyond the big budget numbers and into greater detail.   The detailed estimates by various ministries (sometimes running into a few hundred pages), of their budgeted expenditures in the next financial year (April 2010-March 2011) will be examined by the various Parliamentary Standing Committees.

When Parliament reconvenes, the Committees will table their reports on these demands for grants and the Lok Sabha will then begin more detailed discussions.  Due to lack of time however, such detailed discussions take place only for 3-4 ministries – the rest are voted on without discussion.

For a more detailed overview of the entire budget process, see our document “The Union Budget – A Primer”

For an overview of the budget documents, as well as a guide to finding the information that you want, see “How to Read the Union Budget”

Parliamentary performance this session

March 15th, 2010 1 comment

The Lok Sabha  adjourns today for a three-week recess.  The Rajya Sabha is scheduled to adjourned on March 18.  Here’s a brief look at the activity of Parliament this session (data till March 15):

Productive Hours: The session has witnessed more than its fair share of disruptions.  In the 14 sitting days, over 22 hours has been lost to interruptions in the Lok Sabha and over 26 hours in the Rajya Sabha.  The number of productive hours so far is 53 and 50 hours in the Lok Sabha and Rajya Sabha respectively.

[Click here to compare with previous sessions.]

The session began with protests by the Opposition, putting pressure on the Government to schedule a debate on price rise.  After the presentation of the Budget, the protests revolved around the petroleum price hike.  The disruptions in the Rajya Sabha were on account of the Women’s Reservation Bill, which resulted in the suspension of seven MPs. On March 9 the Rajya Sabha was adjourned five times, before the passage of the Bill.

Legislative business: This session, the government had listed 63 Bills for introduction, 16 pending Bills for consideration and passing and 10 pending Bills for consideration and passing if their Standing Committee reports are submitted.

Other than financial business transacted, which includes passage of Demand for Grants and Appropriation Bills, the only legislation that has been passed so far is the Women’s Reservation Bill in the Rajya Sabha. The Lok Sabha also has passed one Bill that replaces an Ordinance – the Ancient Monuments and Archaeological Sites and Remains Bill. In the 14 sitting days, the House has spent 6 hours on legislative business.

Question Hour: Another important aspect of parliamentary business is the Question Hour.  Interestingly, the Lok Sabha rules were amended before the start of this session to ensure that the absence of MPs does not result in the collapse of Question Hour.  However, the amount of time spent on questions in both Houses this session has remained under 5 hours.

The Union Budget

March 1st, 2010 1 comment

The budget process is covered by live TV and extensively by most newspapers each year.  Most large companies have their own analysis of the budget.  Increasingly, there is an effort by civil society groups to analyse the budget to decipher the allocations to the social sector.  All of this is hugely important and indeed necessary for greater scrutiny and analysis by citizens across the country.

But we at PRS have often spoken about the role of Parliament in effectively scrutinising the government.  If there is anything that the Parliament must scrutinise carefully each year, it is the budget – because this is the way in which the government expresses its real priorities.  Even if the Parliament passes Bills on any subject – right to education, right to health, right to food, etc. – a good measure of the true willingness of the government to implement any of this can be seen by how much money it is willing to allocate to make things a reality.

Former Finance Minister Yashwant Sinha spoke about the budget process (Times of India, Feb 27th) and has argued that the current process in India is archaic and is in urgent need of an overhaul.  He also points that Parliament has little power to change anything in the budget, and argues that this undermines the principles of our Parliamentary democracy.  We agree.

On our part, we have produced two documents to help readers understand the budget process better.  How to read the union budget and the Union Budget process can both be accessed from our website.  And we would greatly appreciate your comments on this and other posts on our blog.