1Constitutional Assignment of Expenditrure

7/28/2019 1Constitutional Assignment of Expenditrure

1/6Electronic copy of this paper is available at: http://ssrn.com/abstract=959843

EXPENDITURE ASSIGNMENT IN INDIA

(Constitutional Provision)

Kandarp Patel, Prof. Vrajlal Sapovadia

While designing expenditure assignment in any country requires efficient

allocation of revenue and resources via a responsive and accountable

government, an equitable provision of services to citizens of different

jurisdictions, preservation of macro-economic stability and promotion of

economic growth. In India, the assignment of expenditure and revenue

responsibilities enjoys constitutional sanctity. Constitutional Law of India

prescribes the assignment of expenditure responsibilities. What we would

like to specify further that the seventh schedule of the Constitutional Law of

India assign the powers and functions of the Union and the states. The

exclusive powers of the Union are outlined in the Union list; those of thestates in the State list and those falling under the joint jurisdiction are placed

in the Concurrent list. All the residuary powers are assigned to the Union.

The items like finance, income tax, excise, foreign affairs, service tax,

mines, defense, armed forces, Railways, Highways, Means of

communication, Foreign Loans, Trade and commerce with foreign countries,

inter state trade, Banking, Insurance, Stock exchange are sole right of Union,

while sales within state, Public order, Police, Local government, public

health, sanitation, libraries, museums, communications, Land, Public Debt

of the state, taxes on land, professions, trades land revenue, property,agriculture, Stamp duty are sole State matter. Home i.e. internal security,

Health, Education, Labour, and Industry are in parallel list, where Union and

State both enjoy power.

The Union enjoys over-riding powers with regard to the subjects in the

concurrent list. Although states have jurisdiction over items in the

concurrent list, in the event of conflict between the Union and the states, the

Union is vested with over-riding powers. However State legislation prevails

over Union, if former has an assent of President of India. Constitution

authorize Union to enact and execute law, regarding regulating affairs in

way of expenditure, taxes or otherwise on income and wealth from sources

other than agricultural sources and land, duties of custom including excise

duties, taxes on production except those on alcoholic liquors and narcotics,

service tax, mines, revenue, foreign affairs and exchange, defense etc.


2/6Electronic copy of this paper is available at: http://ssrn.com/abstract=959843

List Functions Subjects

Maintenance of

macro-

economicstability

Currency and coinage, foreign exchange

dealings, foreign loans, operation of the

Reserve Bank of India, international trade,bank insurance, stock exchanges, defence,

etc.

Union list

Services with a

pan-nation

implication /

with implication

in more than

one state

Railways, post and telegraph, national highways,

shipping and navigation on inland waterways, air

transport, atomic energy, space, oilfields and

major minerals, inter-state trade and commerce,

inter-state rivers etc.

State list Public order, police, public health, local

governments, communications not specified inthe union list, agriculture, irrigation, water

supplies, land rights and land revenue, fisheries,

industries, minor minerals, works, lands and

buildings vested in or in the possession of the

state, etc.

Subjects related

to economic and

social planning

All items under economic and social services-

Education, Health, transport etc.

Concurrent

list

Commercial and industrial monopolies, tradeunions, social security, employment and

unemployment, welfare of labour, price control,

trade and commerce in production of certain basic

goods like foodstuffs, cotton and other goods, etc.

The State have power to enact and execute law regarding regulating affairs

unlike Union in matter of expenditure and taxes on agricultural income and

wealth, taxes on transfer of property (stamp duties and registration fees),

taxes on motor vehicles, taxes on transportation of goods and passengers,

sales tax on goods, excises on alcoholic beverages, entertainment tax, taxes

on profession, trade, property tax, taxes on entry of goods into local areas for

consumption, octroi i.e. entry of goods tax etc. There are 28 states, and 6

Union Territories, under direct control of Union. Delhi is enjoying special

status, a mixture of State cum Union Capital Territory.


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Expenditure assignments in India are arrayed in a strict hierarchy, with those

of the central government taking precedence over state governments. The

discretionary power of the Union to decide the assignment of taxes to the

state governments is more on a political rather than an economic calculus.

The assignment of expenditure responsibilities and functions although

guided by the Constitutional provisions, the over-riding powers of the Union

give the Union a degree of competitive advantage over the States. The

system as of today results in significant costs of administration and

compliance, and inefficiencies in the allocation of scarce resources. A more

structured and scientific assignment of expenditure responsibilities and

intergovernmental fiscal transfers is required to maintain vertical fiscal

balance and horizontal fiscal balance in a large federal country like India.

This is essential to bring about stability in intergovernmental relations and

for efficient provision of public services. The Government (Executive)needs to have sanction from Legislators to draw any fund. The funds are

technically known as Consolidated fund of Union or state and Contingency

Fund. The special funds are created for President of India, Supreme Court,

Comptroller General of India; Election Commission etc. for which

Parliament have no control or the former need not any sanction from

Parliament. This makes the authority an independent body.

India has three-tier administrative set up: Centre, State and Local

Governments. In India, different functions have been assigned to these three

levels of government and along with this expenditure assignment have been

made. Local bodies get power from State. This paper on expenditure

assignment deals with the functions transferred to different levels of

government i.e. Union, State and local level and constitutional obligation

that they have to fulfil. The paper deals with different expenditures incurred

by different level of government and the weaknesses in the existing system.

At the end of paper I have given suggestions for improving the expenditure

assignment.

The major component of the revenue expenditure of the central government

is interest payments, revenue expenditure, defence, subsidies and pensions.

Expenditure on salary is another major component, which is not separately

reflected in the budget but is a part of the major items of expenditure under

various heads. Other non-plan revenue expenditure has been divided under

the three principal functional categories i.e. general services, social services;


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and economic services. Revenue transfer to state are not confined merely to

share in taxes and grant in aid recommended by the Finance

Commissions (Appointed by President every five year). Devolution of the

funds through the centrally sponsored schemes, block plans grants, and other

discretionary transfers also have become important component of the

transfer mechanism. On an average 50 to 60% of the plan expenditure of the

state is made up of revenue expenditure while plan grants meet only a part of

it. Only 30 percent central assistance for the state plans is given as grants

and the rest as loan (only the state belonging to the special category is the

exception). Special category states are defined as one that needs fiscal

assistance because of their inaccessible location, natural disasters, etc. All

State enjoys equal rights and obligation, but Delhi has special status.

Expenditure Incurred by Different Level of government

Revenue Expenditure 1999 00

UNION

Interest Payments 4.73

Pensions 0.74

General Services 2.50

Social services 0.36

Economic services 0.36

StatesInterest Payments 2.30

Pension 1.15

Other General services 1.63

Social Services of which 5.13

Elementary Education 1.32

Primary Health 0.17

Water Supply and Sanitation 0.29

Economic Services 2.90

Roads and Bridges 0.22Capital Expenditure

Union 2.62

State 2.06

Source: Budget Documents and estimates year 1999-2000


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Weakness:

Expenditure assignment of the government at the Union, State and Local

levels is not based on the extent of concentration of marginalized groups

or population size.

Party politics and regionalism prevails in position of discretionary power.

A major weakness of the budgeting process of governments is the

practice of spreading resources over too many projects. In other words,

per capita expenditure is often too low and in real terms (constant prices)

comes out to be negative.

The Plan grants as a whole do not match with revenue expenditure in any

state and so a good part of revenue expenditure incurred under the plans

is met out of borrowing in most of the states.

Increased subsidies, often on basic services, had a bad impact, though

now the trend is reversing. Upward shift of interest rates on government borrowing resulting from

near alignment with the market and greater reliance on market borrowing

is leading to deficit in revenues and increasing debt burden on local

population, though the trend is declining interest rate.

The distinction between plan and non-plan expenditure has created

several problem. And led to an excessive focus on so-called plan

expenditure neglecting.

Suggestions:

Some of the states with good infrastructure are attracting private

investments in much large measure than those where its very poor.

Central investment should be redirected taking this point into

consideration. In other words, horizontal equity is a distant dream in

expenditure assignment.

The requirement of the state for plan revenue expenditure should be

assessed with reference to their deficiencies in basic minimum needs.

Expenditure restructuring is required. The government may have to

withdraw from a number of areas and strengthen their role in selectedsectors. There is an urgent need for the retreat of the state from non-core

competency areas.

To improve the efficiency of public expenditure we need to have better

targeted, beneficiary oriented programmes and an effective monitoring

mechanism. Something like public expenditure tracking programme will

go a long way in ensuring efficiency of public expenditure.


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Several government departments are overstaffed which leads to low

productivity and thats why downsizing is required. The focus of that

should be retraining and redeployment of staff.

The reform of accounting and budgeting process, improved management

and control of government expenditure is required.

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1Constitutional Assignment of Expenditrure

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