Raghuram Rajan Panel Report

Raghuram Rajan Panel Report
Introduction
Raghuram Rajan Committee was formed to suggest ways to identify indicators of the relative backwardness of the States for equitable allocation of Central funds.It proposes a general method for allocating funds from the Centre to the states based both on a states development needs as well as its development performance. Raghuram Rajan headed panel has been set up by the government to identify criteria to determine a states relative backwardness came out with its report.
Central allocations are governed by the Gadgil-Mukherjee formula that places the greatest weight on the States population, followed by other factors like per capita income and literacy.Rajan Committee has come up with a Multi-Dimensional Index that will help measure backwardness and aid the Centre in allocating funds to states.
Committee Formation

* Committee was formed amid the demands for Special Category status by Bihar, which lags behind the national average on all important indices to fund its development needs. Bihars demand was echoed by other states like Odisha.

* Committee to be constituted, to consider backwardness of the States in terms of measures like distance of the State from the national average under criteria such as per capita income and other human development indicators and for evolving a Composite Development Index of States.

* In his budget speech, Finance Minister had proposed to evolve new criteria and reflect them in future planning and devolution of funds.
Present Condition

* The present criteria for determining backwardness are based on terrain, density of population and length of international borders.
Raghuram Rajan Committee

* Report of the Dr. Raghuram Rajan Committee for Evolving a Composite Development Index of States has been submitted to the Union Finance Minister.
Proposals in the Report

* Any scheme of allocation should take into account both development needs as well as past performance. This committee proposes a general method for allocating funds from Centre to states based both on a states development needs as well as its development performance.

* Need is based on simple index of under development. The indexMulti-Dimensional Index is an average of following ten sub-components: (i) monthly per capita consumption expenditure as measured by the NSSO, (ii) education, (iii) health, (iv) household amenities, (v) poverty rate, (vi) female literacy, and (vii) % of SC ST population, (viii) urbanization rate, (ix) financial inclusion and (x) connectivity.

* It has proposed that 10 States that had score 0.6 and above on the Index may be classified as Least Developed; States that had score below 0.6 and above 0.4 may be classified as Less Developed; and States that had score below 0.4 may be classified as Relatively Developed in the scale of 0 to 1.

* Least developed: Odisha is the least developed state in the country followed by Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Arunachal Pradesh, Assam, Meghalaya, Uttar Pradesh and Rajasthan.

* Less Developed: This list consists of Manipur, West Bengal, Nagaland, Andhra Pradesh, Jammu and Kashmir, Mizoram, Gujarat, Tripura, Karnataka, Sikkim and Himachal Pradesh. Gujarat is a surprise on this list for most observers as its model of development is much talked about in political and economic circles.

* Relatively Developed: Goa is the most developed state in the country followed by Kerala, Tamil Nadu, Punjab, Maharashtra, Uttarakhand and Haryana.

* The value of underdevelopment index or Multi Development Index (MDI) for a state represents the need of an average individual in a state. To allocate more to underdeveloped states with large areas but small population, the Committee decided to assign 80 % weight to a states share in population and 20% to states share in area. This follows the approach of a number of committees as well as the Finance Commission.

* The report which was proposed a general method for allocating funds from the Centre to the States based on both a States development needs as well as its development performance.

* Committee has mentioned that improvements to the states development index over time (i.e. a fall in underdevelopment) as the measure of performance.

* It hasrecommended that each State may get a fixed basic allocation of 0.3 % of overall funds, to which will be added its share stemming from need and performance to get its overall share.

* In total, 28 states included for construction of index, 8.4% of funds will be allocated as a fixed basic allocation. Of the remaining 91.6%, 3/4ths is allocated based on need and 1/4th based on States improvements on its performance, which will be reviewed after every 5 years.

* It has observed that the demand for funds and special attention of different States will be more than adequately met by the twin recommendations of the basic allocation of 0.3 % of overall funds to each State and the categorisation of States that score 0.6 and above as Least Developed States. According to the Committee, these two recommendations, along with the allocation methodology, effectively subsume what is now Special Category.

* Since States now classified as special category will find their needs met through the new allocations, the term special category will be retired.
Recommendations

* Committee recommends that the framework outlined in this report be used to allocate some of the development funds that are allocated by the Centre to the states.

* It recommends that the proposed MDI be updated on a quinquennial basis and performance be measured relative to the last update.

* It recommends that the index and the allocation formula be re-examined after 10 years and revisions proposed based on experience.

* It recommends that least developed states, as identified by the index, be eligible for other forms of central support that the Central Government may deem necessary to enhance the process of development.

* The approach recommended in this report is not intended to replace all existing methodologies, but should be thought of as one that will channel some fund allocations based on need and performance. Other methodologies may serve different purposes and should be used in parallel to allocate other funds.
Significance of Report prepared by Committee

* Prime Minister has approved the proposal to place the report of the Committee in the public domain.PM has also directed that the recommendations of the Committee may be examined and necessary action in this behalf may be taken.

* Ministry of Finance, Department of Economic Affairs has been asked to examine the report and take necessary action, the Finance Minister added.
Disagreement among the Choice of Indicators
One of the panels five members, Patna-based Shaibal Gupta of the Asian Development Research Institute, has disagreed substantially with the panels choice of indicators, in a long dissent note appended to the report. His most significant disagreement is with the panels decision to use monthly per capital expenditure derived from National Sample Survey Organisation reports as a measure of income, rather than per capita State domestic product, which he said substantially altered State rankings.
In its report, the panel, however, defended its choice of indicator: Since we are interested in measuring the State populations well-being, a majority of the committee agreed that consumption from the household survey seems more appropriate than income from the national accounts. This is a judgment call, and we also present the index calculated using per capita net State domestic product. The correlation between indices is 0.997.
Consequences of Implementing the Report
If the recommendations of this Committee are accepted then

* The transfer of funds from the Centre to the States will have to follow a new pattern. So far, the Central assistance to State plans has been disbursed according to the Gadgil-Mukherjee formula that gives highest weightage to population and poverty ratio. The transfer of taxes from the Central pool is decided every five years by the Finance Commission based on another set of criteria. Then there is the Backward Region Grant Fund under which special assistance is given to backward areas that are in need of funds. Any new method of disbursing funds would be politically fraught because some States might lose while others gain. So implementing the new formula will require a lot of political will.

* Bihar, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh will get a larger share of Central funds than their current share of total Central assistance to State plans and Centrally sponsored schemes, while Kerala, Tamil Nadu and Maharashtra will lose substantially.
By S. Gopal
References
http://www.finmin.nic.in/reports/Report_CompDevState.pdf
http://pib.nic.in/newsite/erelease.aspx?relid=99675
http://in.finance.yahoo.com/news/simplified--raghuram-rajan-panel-report-on-state-backwardness-064423690.html

Union Budget In The Making

The budget process in India, like in most other countries, comprises of----

Four Phases

1) Budget Formulation- Preparation of estimates of expenditure and receipts for the ensuing financial year;
2) Budget Enactment- Approval of the proposed Budget by the Legislature through the enactment of Finance Bill and Appropriation Bill;
3) Budget Execution- Enforcement of the provisions in the Finance Act and Appropriation Act by the governmentcollection of receipts and making disbursements for various services as approved by the Legislature;
4) Legislative Review of Budget Implementation- Audits of governments financial operations on behalf of the Legislature;

Drafting commences in August- September

By convention, the Union Budget for next financial year is presented in Lok Sabha by the Finance Minister on the last working day of February. However, the process of budget formulation starts in the last week of August or the first fortnight of September. To get the process started, the Budget Division in the Department of Economic Affairs under the Ministry of Finance issues the annual budget circular to all the Union government ministries/departments around August- September. The Circular contains detailed instructions for these ministries/ departments on the form and content of the statement of budget estimates to be prepared by them.

Three kinds of figures in a Budget

The ministries are required to provide three different kinds of figures relating to their expenditures and receipts during this process of budget preparation.
These are:

* Budget Estimates (BE)

* Revised Estimates (RE)

* Actual
Lets have a look on the whole mechanism in the context of Union budget 2013-14, which was presented, as usual, on 28th of February 2013 by the Finance Minister, P Chidambaram within the arena of Lok Sabha. However, the process of its formulation would have got started in August 2012 through issuance of Budget Circular of the Budget Division and this process would have continued till February 2013.
The approval of Parliament is sought for the estimated receipts/expenditures for 2013-14, which would be called Budget Estimates (BE).
At the same time, the Union government, in its budget for 2013-14, would also present Revised Estimates (RE) for the ongoing financial year 2012-13.
The government would not seek approval from Parliament of revised estimates of 2012-13; but, these revised estimates allow the government to reallocate its funds among various ministries based on the implementation of the budget for 2012-13 during the first six months of financial year 2012-13.

Finally, ministries also report their Actual receipts and Expenditures for the previous financial year 2011-12.
Hence, the Union budget for 2013-14 consists of------


* Budget Estimates for 2013-14

* Revised estimates for 2012-13

* Actual Expenditures and Receipts of 2011-12.

Role of Planning Commission

The ministries would provide budget estimates for plan expenditure for budget estimates for the next financial year, only after they have discussed their respective plan schemes with the
Planning Commission.
The Planning Commission depends on the Finance Ministry to first arrive at the size of the Gross Budgetary Support, which would be provided in the budget for the next annual plan of the Union government.

* In principle, the size of each annual plan should be derived from the approved size of the overall Five-Year Plan (12th Five-Year Plan, 2012-13 to 2016-17, in the present instance).

* However, the size of the gross budgetary support for an annual plan also depends on the expected availability of funds with the finance ministry for the next financial year.

Reducing Deficit is on Priority

In the past few years, the Finance Ministry has been vociferously arguing for reduction of Fiscal Deficit and Revenue Deficit of the Union government, citing the targets set by the Fiscal Responsibility and Budget Management Act and its rules.

Hence, presently, the aspirations of the Planning Commission and Union government ministries with regard to spending face the legal hurdle of this Act, which has made it mandatory for the Union government to show----

* Revenue deficit as Nil (total Revenue Expenditure not exceeding total Revenue Receipts by even a single rupee);

* Fiscal deficit as less than 3 per cent of GDP by 2016-17.This means new borrowing of the government in a financial year cannot exceed 3 per cent of the countrys GDP for that year.


Final stages of Budget Formation

During the final stage of budget formation, the revenue-earning ministries of the Union government provide the estimates for their revenue receipts in the current fiscal year (Revised Estimates) and next fiscal year (Budget Estimates) to the Finance Ministry.

Subsequently, usually in the month of January, more attention is paid to finalisation of the estimated receipts. With an idea about the total requirement of resources to meet expenditures in the next fiscal year, the finance ministry focuses on the revenue receipts for the next fiscal.

At this stage of budget preparation, the Finance Minister examines the Budget Proposals prepared by the ministry and makes subsequent changes in them, if required. The Finance Minister consults the Prime Minister, and also briefs the Union Cabinet, about the Budget at this stage. If there is any conflict between any ministry and the Finance Ministry with regard to the budget, the matter is supposed to be resolved by the Cabinet.

Consultations with various stakeholders is crucial

In the run-up to Union Budget each year, the Finance Minister holds Pre-Budget Consultations with relevant stakeholders. The Finance Minister also holds consultations with Finance Ministers of States/Union Territories as well as Trade and Industry representatives. This has great significance for the process of Budget formulation as it helps the Finance Minister takes decisions on suitable fiscal policy changes to be announced during the budget.
For this years budget, representatives from the agriculture sector, various trade unions, economists, banking and financial institutions and also social sector groups participated in these consultations in January 2013.
Among others, a delegation of Peoples Budget Initiative also met Finance Ministry officials and shared the Peoples Charter of Demands in the month of January 2013. But this year too, like in previous years, the process started late. Desired changes in expenditure programmes and policies can be influenced only if the consultations are begun earlier, preferably in October.
Consolidation of Budget data

At the final step, the Budget Division in the Finance Ministry consolidates all figures to be presented in the budget and prepares the final budget documents. The National Informatics Centre (NIC) helps the budget division in the process of consolidation of the budget data, which has been fully computerised. At the end of this process, the Finance Minister takes the permission of the President of India for presenting the Union Budget to Parliament.

It would be useful to point out that while the second and the third stage in the budget cycle of our country are reasonably transparent, the First stage of actual budget preparation cannot be said to be open. The process is rather carried out behind closed channels.
Understanding the Budget: Concept And Terminologies

Union Budget is a comprehensive statement of government finances relating to a particular financial year.

Every Budget broadly consists of two parts-
(a) Expenditure Budget;
(b) Receipts Budget;

Expenditure Budget


* The amounts of intended expenditure by the Government in the next financial year are
expressed in the Expenditure Budget.

The entire Expenditure Budget can be divided into two distinct categories, viz.

(a) Capital Expenditure:

* Those expenditures by the government that lead to an Increase in the assets or a Reduction in the liabilities of the government. It is however not necessary that the assets created should be productive or they should even be revenue generating. Only the charges towards the construction of the asset are counted as Capital expenditure.

* The subsequent charges for its maintenance are considered as Revenue expenditure.

* Most capital expenditure is Non Recurring.

Examples of Capital Expenditure causing Increase in Assets:

* Construction of a new Flyover;

* Union Govt. giving a Loan to a State Govt.

Examples of Capital Expenditure causing Reduction of a Liability:

* Union Govt. repays the principal amount of a loan it had taken in the past.

(b) Revenue Expenditure:

* Those expenditures by the government that do not affect its asset-liability position.

* Most kinds of revenue expenditures are seen as Recurring Expenditures.

* The entire amount of Grants given by the Union Government to States is reported in the Union Budget as Revenue Expenditure, even though a part of those Grants get utilized by States for building Schools, Hospitals etc. This is so because the ownership of the schools or hospitals built from the Central grants would not be with the Union Government.

Examples of Revenue Expenditure are:

* Expenditure on Food Subsidy;

* Salary of staff;

* Procurement of medicines;

* Procurement of text books;

* Payment of interest, etc.

Total government expenditure can also be divided into another set of categories, viz.

(A) Plan Expenditure:

* Plan expenditure refers to government expenditure, which is meant for financing
the programmes/schemes formulated under the ongoing/ previous five year Plan.

(B) Non-Plan Expenditure:

* Those Expenditures of the government, which are not included under the Plan Expenditure are called as Non Plan Expenditure.

* It includes some of the important types of government expenditure, like:
interest payments; pension, defence expenditure, disbursement on law and order, disbursement on legislature, subsidies, and salary of regular cadre teachers, doctors and other government officials.

The Receipts Budget


* It presents the information on how much the Government intends to collect as its financial resources for meeting its expenditure requirements and from which sources, in the next fiscal year.

This can also be divided into two categories:

(a) Capital Receipts:

* Those receipts that lead to a reduction in the assets or an increase in the liabilities of the government.

Capital Receipts that lead to a reduction in assets:

* Recoveries of Loans given by the government and Earnings from Disinvestment;

Capital Receipts that lead to an increase in liabilities:

* Debt;

(b) Revenue Receipts:

* Those receipts that dont affect the asset-liability position of the government.

* Revenue Receipts comprise proceeds of Taxes (like, Income Tax, Corporation Tax, Customs, Excise, Service Tax, etc.)

* Non-tax revenue of the government (like, Interest receipts, Fees/ User Charges, and Dividend & Profits from PSUs).
Government Revenue through Taxation:

* It can be divided into Direct Taxes and Indirect Taxes.

Direct Taxes:

* Those taxes for which the tax-burden cannot be shifted are called Direct Taxes.

Examples of Direct Taxes are:

(A) Corporation Tax:

* This is a tax levied on the income of registered companies in the country, whether national or foreign, under the Income Tax Act, 1961.
(B) Personal Income tax:

* This is a tax on the income of individuals, firms etc. Other than Companies, under the Income Tax Act, 1961. This head also includes other Taxes, mainly the Securities Transaction Tax, which is levied on transaction in listed securities undertaken on stock exchanges and in units of mutual funds.

(C) Wealth Tax- This is a tax levied on the benefits derived from the ownership of property,
under the Wealth Tax Act, 1957. Wealth tax has virtually been abolished in India.

Indirect Taxes:

* Those taxes for which the tax-burden can be shifted are called Indirect Taxes. Any person, who directly pays this kind of a tax to the Government, need not bear the burden of that particular tax; he/she can ultimately shift the tax burden to other persons later through business transactions of goods/ services.

* Indirect tax on any good or service affects the rich and the poor alike!

* Unlike indirect taxes, direct taxes are linked to the tax-payees ability to pay and hence are considered to be progressive.

Examples of Indirect Taxes are:


* Customs Duties:
In this, the taxable component is import into or export from the country.


* Excise Duties:
It is a type of tax levied on those goods, which are manufactured in the country and are meant for domestic consumption. It is a tax on manufacturing, which is paid by the manufacturer, but he passes this burden on to the consumers.


* Sales Tax: It is levied on the sale of a commodity, which is produced/import and being sold for the first time. If the product is sold subsequently without being processed further, it is exempt from sales tax.
Before the introduction of VAT (Value Added Tax), sales tax used to be levied under the authority of both Central Legislation (Central Sales Tax) and State Governments Legislation (Sales Tax).


* Service Tax:
It is a tax levied on services provided by a person and the responsibility of payment of the tax is cast on the service provider. However this tax can be recovered by the service provider from the service receiver in course of his/her business transactions.


* Value Added Tax (VAT):
VAT is a multi-stage tax, intended to tax every stage of sale of a good where some value has been added to the raw materials; but taxpayers do receive credit for tax already paid on the raw materials in earlier stages.

Debt and Deficit:

* Debt is a kind of receipt that necessarily leads to an increase of the governments liabilities.

* The government incurs a Debt only for meeting the gap created by excess of its expenditure over its receipts for that year, which is called Deficit.

Fiscal Deficit:

* It is the gap between the governments total Expenditure (including loans net of repayments) and its Total Receipts (excluding new debt to be taken). Thus Fiscal Deficit for a year indicates the borrowing to be made by the government that year.

Revenue Deficit:

* The gap between Total Revenue Expenditure of the Government and its Total Revenue Receipts is called the Revenue Deficit.

Distribution of financial resources between the Centre and the States:

* A Finance Commission is setup every five years to recommend measures for sharing of resources between the Centre and the States, mainly pertaining to the Tax Revenue collected by the Central Government.

* Presently the recommendations made by the 13th Finance Commission are in effect (from 2010-11 to 2014-15), whereby 32 percent of the shareable/divisible pool of Central tax revenue is transferred to States every year and the Centre retains the remaining amount for the Union Budget.

Tax-GDP Ratio:

* Gross Domestic Product (GDP) is an indicator of the size of a countrys economy. In order to assess the extent of governments policy interventions in the economy, some of the important fiscal parameters, like, total expenditure by the government, tax revenue, deficit etc. are expressed as a proportion of the GDP.

* Accordingly, a countrys Tax to GDP ratio helps us understand how much tax revenue is being collected by the government as compared to the overall size of the economy.

* A higher tax to GDP ratio in a country is a positive sign meaning that the government is collecting a decent amount of tax revenue as compared to the size of its economy.

Ankur Sachan