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Railways, highways, airways, shipping Import duties

Posts and Telecommunications Property and wealth tax

Heavy and other strategic industries Income tax surcharges

Strategic industries Stock exchange stamp duties

External Affairs

Foreign Trade

State government expenditures State government taxes

Irrigation Personal income tax*

Power Sales tax**

Education Excise duties on alcohol

Health and narcotics

Rural Development Urban property tax

Roads Mineral taxes

Public law and order Stamp and registration duties


Shared expenditure Shared taxes

Population and family planning Personal income tax*

Excise duties (excluding alcohol

and narcotics)

Property and wealth tax

Tax on railway tickets


* Except agriculture and professional self-employment.

** India is planning to introduce Value Added Tax to substantially replace sales taxes.

Source: Hemming et al. (1997).

the constitution to share them with the states. In turn, states are responsible

for expenditures in key areas, including sectors central to poverty alleviation

such as health, education, rural development and irrigation sectors.3

With revenue raising concentrated at the center and expenditures assigned

to states, the latter are compensated by statutory provisions for transfer of

resources from the center through three channels that also seek to address

horizontal equity in terms of regional distribution across states. These

channels are the Finance Commission, the Planning Commission via support

to the states’ fi ve-year plans, and via Ministries of the Government of India

in the form of Centrally Sponsored Schemes (CSS). In 2001–02, annual

transfers from the center to the states under the Finance Commission were

approximately Rs 700 billion, while the corresponding fi gures for transfers

through the Planning Commission and the CSS are Rs 400 billion and Rs

250 billion respectively.4 Grants through these latter two channels are agreed

through the Planning Commission and the Ministry of Finance.

The Finance Commission is a constitutional body appointed by the

President of India every fi ve years, whose main objective is to recommend

devolution of tax revenues from the center to the states. It also recommends

grants-in-aid to states that need additional assistance. Finance Commissions

have been concerned primarily with the devolution of income and excise

taxes, using these grants to address residual fiscal imbalances across

the states. Transfers to states through the Finance Commission are

essentially on the revenue account, and quite fl exible in terms of their uses.

Recommendations of the Finance Commission are generally adopted by

the central government.

The Planning Commission, chaired by the Prime Minister, recommends

fi nancial support for states primarily to meet their capital expenditures,

within the framework of the existing national fi ve-year development plan

and the states’ fi ve-year plans. Transfers through the Planning Commission

are based upon socio-economic parameters including the proportion of

population below the poverty line, tax effort of the states, and special

problems facing specifi c states, but are not linked to the size of the states’

development plans.

The Centrally Sponsored Schemes (CSS) are meant to supplement

the resources of the state governments, who are responsible for the

implementation of the schemes.5 These are not statutory transfers but are

determined each year by the Finance Ministry of the Government of India

in consultation with the Planning Commission. Transfers under the CSS

are relatively infl exible, bound by the provisions and guidelines attached

to individual schemes, while the fi rst two channels transfer resources as

either grants or combinations of grants and loans. The CSS are the center

of gravity of targeted poverty interventions in India with almost all the

major targeting programs a large subset of these schemes.

The broad approach underlying the Government’s poverty-targeted

programs embodied in the CSS is three-pronged:

• Provision of assistance for creating an income-generating asset base

for self-employment of the rural poor.

• Creation of opportunities for wage employment.

• Area development activities in disadvantaged and poor regions.

This strategy is supported by a cross-cutting theme of improving basic

infrastructure and quality of life in rural areas, and by specifi c programs

for social security for the poor and destitute through income transfers.

The CSS, including targeting programs, have a political genesis starting

with the electoral strategy of Prime Minister Mrs Indira Gandhi in the late

1960s based on the populist slogan of Garibi Hatao (Eliminate Poverty).

This strategy led to several initiatives such as nationalization of commercial

banks and initiation of numerous poverty-targeted schemes sponsored by

the central government and bypassing the state governments, many of which

at that time were ruled by other political parties (Saxena and Farrington,

2003). This trend, once initiated, persisted even after the death of Prime

Minister Gandhi, with the result that central government involvement

has continually increased in subjects under the state governments, such

as education, health, and poverty alleviation. Subjects such as population

control and family planning, forests and education have been brought from

the ‘state list’ to the ‘concurrent list’, under the jurisdiction of both central

and state governments, through constitutional amendments. The central

government has steadily increased the funding and number of CSS, with

a dominant share of this funding going straight to district administration,

bypassing the state government and placing the district bureaucracy

somewhat directly under the central government. Severe deterioration in

public finances of state governments, in part due to declining aggregate

transfers to states from the center, has resulted in CSS as often being the

only schemes in the social sector that are operational at the ground level,

with states having little control over them. Poverty alleviation in India (as

in many other countries) is clearly as much about politics as it is about

the poor.

The political overtones of CSS allocations are as evident today as they

were at the start of these schemes. Much like then, several states are ruled

by political parties that are not part of the coalition in power at the center.

Rao and Singh (2000) document evidence of considerable discretionary,

non-economic considerations in transfers through CSS, with states that have

greater bargaining power at the center receiving larger per capita transfers.

In addition, many poor states are unable to provide matching transfers for

the CSS, resulting in lower utilization of central transfers. Nonetheless,

the CSS comprise the core of targeted poverty programs in the country,

aside from broad-based poverty initiatives such as expenditures on primary

health and primary education. Most specifi c programs targeted at poverty

alleviation are a component of the CSS.