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ACKNOWLEDGEMENTS
Thanks to the Almighty who gave me the strength to accomplish the project with sheer hard
work and honesty. This research venture has been made possible due to the generous cooperation of various persons. To list them all is not practicable, even to repay them in words
is beyond the domain of my lexicon.
This project wouldnt have been possible without the help of my teacher Dr. Avinash Samal,
Faculty of Political science at HNLU, who had always been there at my side whenever I
needed some help regarding any information. He has been my mentor in the truest sense of
the term. The administration has also been kind enough to let me use their facilities for
research work. I thank them for this would be grateful to receive comments and suggestions
for further improvement of this project report.
TABLE OF CONTENTS
Acknowledgements.................2
Introduction.............4
Research Methodology, Objectives and Scope and Limitations.5
Nature of Centre -State Relations ...6-10
Present sitiuation of the Centre-State Realtions ..11-13
Need for restructuring Centre-State Relations.14-16
Conclusion.............17
References.........................................................................................18
1. INTRODUCTION
States in India are plagued by recurrent and severe fiscal crisis from the middle of the
eighties. Mismanagement of the finances by the State governments is the reason for the
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The
Finance Commission to be appointed every five years under Article 280 of the Constitution is
the main agency for affecting such transfers. It is a semi-judicial body and is entrusted with
the twin responsibilities of apportioning Central Government revenues between the Centre
and the States on the one hand and among the individual States on the other.1
The Indian Constitution is federal in form but tends to be unitary in character. The federal
principle gets circumscribed by the dominant powers vested with the Centre in the political,
legislative, administrative and financial spheres. Strengthening the federal principle is
necessary for meeting the aspirations of the people who are governed through state
governments and for strengthening the unity of India. Theunity in diversity requires a
federal system which can accommodate the rich diversity and weld the variegated social
structure into a strong Union.
The Constitution has formally divided the legislative, administrative and financial powers
between the Centre and the States.2 The legislative powers are distributed in three lists, viz.
the Union list, the State list and the Concurrent list. The Union list gives the Centre the
authority to act in matters of national importance which include defence, foreign affairs,
currency and other areas of strategic importance related with the security of the country.
6 http://www.thehindu.com/news/cities/Visakhapatnam/trends-in-centrestaterelations-discussed/article
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Weightage
------------------------------Population (1971)
Per Capita Income
- 60%
- 25%
- 7.5%
------------------------------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.7
2.1.5 Nature of Central Assistance
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
7 http://www.epw.in/special-articles/centre-state-relations-india.html
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8 http://www.enableall.org/competitivequest/GK/IndianFederalismCenterStateRelations.html
9 HM SEERVAI, CONSTITUTIONAL LAW OF INDIA, (4th ed., vol. 3, 1996).
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Given this greater burden of the states responsibilities of developmental expenditure on the
one hand, and more powers of revenue mobilisation at the centre on the other, the pledge has
been, as mentioned earlier, for a matching transfer of resources from the centre to the states in
terms of devolution of central taxes and grants in terms of article 280 and article 275 of the
constitution. In fact, however, the share of net central transfer in terms of devolution of
central taxes and grants (net of interest payment by the states on central loans), as a
proportion of the centres total revenue receipts, has unfortunately fallen from 32.7 percent in
1990-91 to a very low figure of 29.5 percent in 2004-05, showing a gross failure of the
pledge in terms of constitutional provisions to help the states for carrying out the needed
developmental activities. Confronted with this situation, it has been worked out by the Leftled state governments (and supported by other states as well) that, given the available data on
the need of development expenditure, the state's share of central tax revenue should be at
least 50 percent.
Moreover, the states have also correctly demanded transfer of at least residuary powers in the
constitution, particularly the residuary powers of taxation of services, to the states. But, of
late, through a constitutional amendment, the centre has unjustly acquired for itself the entire
power of levy of service taxation. Fairness requires that the states may now at least be given
the concurrent powers of taxation of all services, albeit at a lower rate than that levied by the
centre.
It may also be noted that the share of total market borrowing to which the states may be
entitled is also dictated by the centre. In the 1950s, shares of market borrowing of the states
and the centre in the total governmental market borrowings were in the proportion of 50:50.
But this share of market borrowing of the states has now fallen sharply to around 15 percent,
with more than 85 percent of the market borrowing being cornered by the centre. Now,
consistent with development responsibilities of the states, the share of market borrowing of
the states should be steadily increased to 50 percent within a period of five years.
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OF INDIAS
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Websites:
www.lawmin.nic.in
www.jstor.org
www.epw.in
www.thehindu.com
www.preservearticles.com
www.polityinindia.wordpress.com
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