Financial Relations Between Union and States

Indian possesses a federal structure in which a clear distinction is made between the union and the state functions and sources of revenue. Our Constitution provides residual power to the Center. Article 264 and 293 explain the financial relations between the Union and State Government.

Although the states have been assigned certain taxes which are levied and collected by them, they also share in the revenue of certain union taxes which are levied and collected by the Central Government but whole proceeds are transferred to the states.

The Constitution makes a clear division of fiscal powers between the Center and the State Governments.

A. The List I of Seventh Schedule of Indian Constitution enlists the union taxes which are as follows:

1. Taxes on income other then agricultural income
2. Corporation tax
3. Custom duties
4. Excise duties except on alcoholic liquor and narcotics not obtained in medical or toilet preparation.
5. Estate and succession duties other than on agricultural land of individuals and companies.
6. Taxes on the capital value of assets except agricultural land of individuals and companies.
7. Rate of stamp duties on financial documents.
8. Taxes other than stamp duties on transaction of stock exchanges and future markets.
9. Taxes on sales or purchase of newspapers and on advertisement therein.
10. Thaxes on railway freight and fares.
11. Terminal taxes on goods or passengers carrier by railways, sea or air.
12. Taxes on sale or purchase of goods in the course of inter-state trade.

(B) List II of Seventh Schedule enlists the taxes which are within the jurisdiction of the states:

1. Land revenue
2. Taxes on the sale and purchase of goods, except newspapers
3. Taxes on agricultural income
4. Taxes on land and buildings
5. Succession and estate duties on agricultural land
6. Exercise on alcoholic liquors and narcotics
7. Taxes on the entry of goods into a local area
8. Taxes on the consumption and sale of electricity
9. Taxes on mineral rights (subject to any limitations imposed by the parliament)
10. Taxes on vehicles, animals and boats
11. Stamp duties except those on financial documents
12. Taxes on good and passengers carried by bond or inland waterways
13. Taxes on luxuries including entertainment, betting, and gambling
14. Tolls
15. Taxes on professions, trades, callings, and employment
16. Capitation taxation
17. Taxes on advertisements other than those contained in newspapers

(C) Apart from taxes levied and collected by states, the constitution has provided for the revenue of certain taxes on the union list to be allotted, partly or wholly to the state. These provisions fall into various catagories:

1. Duties which are levied by the union government but are collected and appropriated by by the states. These includes stamp duties, excise duties on medical preparations containing alcohol and narcotics.
2. Taxes which are levied and colleted by the union, but the entire proceeds of which are assigned to the States, in proportion determined by the Parliament. These taxes include:
   i) Succession and Estate duty.
   ii) Terminal taxes on goods and passengers
   iii) Taxes on railway freight and fares
   iv) Taxes on transactions in stock exchanges and future markets
   v) Taxes on sale and purchase of newspapers and advertisement therein.
3. Central taxes on income and union excise duties are levied and collected by the union but are shared by it with the states in a prescribed manner.
4. Proceeds of additional excise duty on mill made textile, sugar and tobacco which are levied by the union since 1957 in replacement of state sales taxes on these commodities, are wholly distributed among the states in a manner as to guarantee their former incomes from the displaced sales taxes.

Recommendations of Narasimham Committee on Banking Sector Reform – 1998

For Banking System

• Pending the emergence of markets in India where market risk can be covered, it would be desirable that capital adequacy requirements take into account market risk in addition to credit risks.
• In the next three years, the entire portfolio of Government securities should be marketed to market and this schedule of adjustment should be announced earliest.
• The risk weight for a Government guarantee advance should be the same as for other advances.
• Foreign exchange open position limits should carry a 100% risk weight.
• An asset be classified as doubtful if it is in the substandard category for 18 months in the first instance and eventually for 12 months and loss if it has been so identified but not written off.
• Banks and financial institutions should avoid the practice of “evergreening” by making fresh advances to their troubled constituents only with a view to setting interest dues and avoiding classification of the loan in question as NPAs.
• Average level of net NPAs for all banks should be reduced to below 5% and 3% by the year 2000 and 2002, respectively, and net NPAs to 3% and 0% by these dates.
• Banks should introduce calculation of interest as monthly rests.
• There should be 100% computerization of bank’s operations. Unless 100% computerisation is made, it may not be feasible to implement the recommendation.
• It is also necessary to tone up the legal machinery for speedy disposal of collateral taken as security for the advance.
• Banks should bring out revised Operational Manual and update them regularly.

Structural Issues

• DFIs should, over a period of time, convert themselves to banks.
• If a DFI does not acquire a banking license with a stipulated time it would be categorized as a non-banking finance company.
• Mergers between banks and between banks and DFIs and NBFCs need to be based on synergies and locational and business specific complementarities of the concerned institutions and must obviously make sound commercial sense.
• A ‘weak bank’ should be one whose accumulated losses and net NPAs exceeds its net worth or one whose operating profits less its income on recapitalization bonds is negative for three consecutive years.
• The policy of licensing new private banks (other than local area banks) may continue. The start-up capital requirement is Rs. 100 crore where set in 1993 and these may be reviewed.
• Foreign banks may be allowed to setup subsidiaries or joint ventures in India. Such subsidiaries or joint ventures should be treated on par with other private banks and subject to the same conditions with regard to branches and directed credit as these banks.
• All NBFCs are statutorily required to have a minimum net worth of Rs. 25 lakh if they are to be registered.
• Then minimum period of FD be reduced to 15 days and all money market instruments should likewise have a similar reduced minimum duration.
• Foreign institutional investors should be given access to the Treasury Bill market.
• The Board for Financial Regulation and Supervision (BFRS) should be given statutory powers and be reconstituted in a way to be composed of professionals.
• RBI should totally withdraw from the primary market in 91 days Treasury Bills.

Method of National Plan Formulation

The Plan has to go through various stages in order to reach its final form. About 2-3 years before the implementation of the Plan, the discussions on the targets and programs of the plan begins. The Planning Commission collects the data of national product, national consumption, availability of resources, national investment and saving for the future plan and it prepares micro and macro plans, keeping in view their allocation arrangements. Thereafter, these plans along with the data sent to the National Development Council. The NDC again sends it back to Planning Commission with or without any amendment. On this basis, the ministries of Center and State Governments are asked to prepare their projects. The Planning Commission obtains suggestion from a panel of experts operating in various sectors. On the basis of the requisites of the plan obtained from different ministries and opinion of the different specialists, the Planning Commission prepares a draft memorandum of the plan, in which all the policies and important details of the plan are laid down. This draft memorandum is sent to central cabinet for discussion. After assessment, the central cabinet sends it to National Development Council along with its suggestions. The NDC again sends it to Planning Commission with its suggestions. The Planning Commission prepares a draft outline of the objective and programs of the plan, keeping in view the draft memorandum and suggestions given by the Cabinet and NDC. This outline is sent to the various State Governments and Central ministries. It is published after receiving acceptance from the NDC. This published format along with the reactions and suggestions of the experts is again sent to the Central Cabinet and National Development Council. The approved format is laid down in its final form, which is presented to the Lok Sabha for discussion. After getting it ratified by the parliament the government implements the Plan.

International Bank for Reconstruction and Development (IBRD)

IBRD and its associate institutions a group are known as the World Bank. The Second World War damaged economies of the most of the countries particularly of those who were directly involved in the war. The global war had completely dislocated the multilateral trade and dislocated multilateral trade and had caused massive destruction of life and property. In 1945, it was realised to concentrate on reconstructing these war affected economies in a planned way. IBRD was established in December 1945 with the IMF on the basis of recommendation of Bretton Wood Conference. This is the reason why IMF and IBRD are called ‘Bretton Wood Twins’. IBRD started functioning in June 1946. World Bank and IMF are complementary institutions.

India is a member of four constituents of the World Bank Group i.e. IBRD, IDA, IFC, and MIGA (Multilateral Investment Guarantee Agency) but not of its fifth institute ICSID (International Centre for the Settlement of Investment Disputes).

Objective of World Bank

According to the Clause I of the agreement made at he time of establishment of World Bank, it was assigned the following objectives:

1. To Provide long-run capital to member countries for economic reconstruction and development. World Bank provides capital mainly for following purposes -
   (i) To rehabilitate war ruined economies (this objective is fully achieved)
   (ii) To finance productive efforts according to peace time requirement.
   (iii) To develop resources and production facilities in underdeveloped countries.
2. To induce long-run capital investment for assuring BOP equilibrium and balanced development of international trade. (This objective was adopted to increase increase the productivity of member countries and to improve economic condition and standard of living among them).
3. To promote capital investment in member countries in following ways:
   (i) To provide guarantee on private loans and capital investment.
   (ii) If private capital is not available even after providing guarantee, then IBRD provides loans for productive activities in considered conditions.
4. To provide guarantee for loans granted to small and large units and other projects of member countries.
5. To ensure the implementation of development projects so as to bring about a smooth transference from a war-time to peace economy.

IMF Vs. World Bank

IMF and World Bank are Bretton Wood Twins. Both the institutions were established to promote international economic cooperation but a basic difference is found in the nature of economic assistance given by these two institutions. World Bank provides long term loans for balanced economic development, while IMF provides short-term loans to member countries for eliminating BOP disequilibrium. Both these institutions are complementary to each other. The eminent world economist George Schultz had suggested in American Economic Association Conference in January 1995, for the merger of IMF and World Bank.

Membership of the World Bank and Voting Right

Generally every member country of the IMF automatically becomes member of World Bank. Similarly, any country which quit IMF automatically expelled from the World Bank’s membership. But under a certain provision a country leaving the membership of IMF can continue its membership with World Bank. If 75% member of the bank gives their vote in its favour.

Any member country can be debarred from the membership of World Bank on following grounds:

1. Any member country can quit the bank simply by written notice to bank, but such country has to repay the granted loans on terms and conditions decided at the time of sanctioning the loan.
2. Any country working against the guidelines of bank can be debarred from membership by the board of governors.

Like IMF, World Bank has also two types of members: ‘founder members’ and ‘general members’ the world bank has 30 founder members who attained membership by December 31, 1945. India is also among these founder members. The countries joining the World Bank after December 13, 1945 come under the category of general members. At present total membership of the World Bank is 182. The voting right of member country is determined on the basis of member country’s share in the total capital of the bank. Each member has 240 votes plus one additional vote for each 1,00,000 shares of the capital stock held.

Capital Resources of World Bank

The initial authorized capital of World Bank was $ 10,000 million, which was divided in 1 lakh share of $ 1 lakh each. The authorized capital of the bank has been increased from time to time with the approval of member countries. On June 30, 1996 the authorized capital of the bank was $ 188 billion out of which $ 180.6  billion (96% of total authorized capital) was issued to member country in the form of shares. Member countries repay the share amount to the world bank in following ways:

1. Two percent of allotted shares are repaid in Gold, USD or SDR. 
2. Every member country is free to repay 18% of its capital share in its own currency.
3. The remaining 80% share is deposited by member country only on demand by the World Bank.

Bank is managed by an elected President. On July 1, 2007, Robert B. Zoellick became the 11th President of the World Bank. The headquarter of World Bank is at Washington DC.

IDA (established on Spetemeber 24, 1960) and IFC (established in July, 1956) are the tow main associate institutions of IBRD. These institutions work under the supervision of World Bank. MIGA is also an associate institution in the World Bank group.

Banks Lending Operations

IBRD gives loan to members in anyone or more of the following ways:

1. By granting or participating in direct loans but its own funds.
2. By granting loans out of the fund raised in the market of a member or otherwise borrowed by the bans and 
3. By guaranteeing the whole or part loans made by private investors through the investment channels.

Before a lone is made or guaranteed the bank ensure that the -

1. Project fro which the loan is asked has been carefully examined by the competenet committee as regards the merits of the proposal.
2. Borrower has reasonable prospect for the repayment of loans.
3. The loan is meant for productive purposes and 
4. Tthe loan is meant for reconstruction and development.

Functions of the World Bank

Presently, The World Bank is playing the main role of providing loans for development works to member countries, specially to under-developed countries. The World Bank provides long-term loans for various development projects of 5 to 20 years duration. The loaning system of the bank can be explained with the help of following points:

1. Bank can grant loans to a member country upto 20% of its share in paid up capital.
2. Bank also provides loan to private investors belonging to member countries on its own guarantee, but for this loan private investors have to seek prior permission from those countries where the amount will be collected. For such loans the consent of that country is also required whose currency is given in loans. For granting such guarantee, the Bank charges 1% to 2% as service charge.
3. The quantum of loans, interest rate and term and conditions are determined by the Bank itself.
4. Generally, Bank grants loan for a particular project duly submitted by the member country.
5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned.

Besides, granting loans for reconstruction and development, World Bank also provides various technical services to the member countries. For this purpose, the Bank has established ‘The Economic Development Institute’ and a Staff College in Washington.

Appraisal of the World Bank Activities

Bank has sanctioned 75% of its total loans to developing countries of Africa, Asia and Latin America while only 25% was given to developed nations of Europe. IFC, IDA and MIGA were established as the associate institutions of the World Bank in extending financial assistance to member countries. Besides, the Bank also tried its best to coordinate the functioning of nations granting loans to underdeveloped countries. In 1958, the Bank played an important role in establishing ‘India Aid Club’ for providing specific economic assistance to India. It has now been renamed as ‘India Development Forum’. Such types of clubs and forums has also been established for other developing countries. The Bank has also established its mission in various developing countries for providing technical assistance for development project in these countries. The Bank also takes the guidance of experts of various international institutions like FAO, WHO, UNIDO, UNESCO for providing assistance for various projects related to agriculture, education and water supply.

United Nations Conference on Trade and Development (UNCTAD)

UNO declared 1960-70 as the development decade. In 1961 UNO attempted to increase the income of developing countries with the growth rate of 5% p.a. during that development decade. In July 1960 a conference of developing countries was held at Cairo which resolved to convene a world conference for this purpose. Economic and Social Council of UNO organise a World Trade and Development Conference from March 31, 1964 to July 16, 1964. A worldwide International Trade Policy was determined in this conference. Various issues related to extension of international trade of developing countries were also discussed in that conference. The conference came to be known as UNCTAD-I.

Presently, UNCTAD has become a permanent organisation for promoting international trade with its head quarter at Geneva (Switzerland), Mr. Allec Irwin is its present Chairman. Generally, UNCTAD has its session after four years. IMF has got the permanent representation in all its bodies. This is reason why IMF includes all UNCTAD proposals in its policies. UNCTAD recommendations are only suggestions and no country can be compelled to accept them.

The details of various UNCTAD are as follows:

UNCTAD I	Cairo	Mar 31 – June 16, 1964
UNCTAD II	New Delhi	Feb – March 1968
UNCTAD III	Santiago (Chile)	April – May 1972
UNCTAD IV	Nairobi (Africa)	May 1976
UNCTAD V	Manila (Philippines)	May 7 – June 2, 1979
UNCTAD VI	Belgrade (Yugoslavia)	June 6 – July 3, 1983
UNCTAD VII	Geneva (Switzerland)	1987
UNCTAD VIII	Cartegina DE Indias (Columbia)	1992
UNCTAD IX	Midrand (Africa)	April 27 – May 11, 1996
UNCTAD X	Bangkok (Thailand)	Feb 12 – Feb 19, 2000
UNCTAD XI	Sao-Paulo (Brazil)	June 13 – June 18, 2004
UNCTAD XII	Accra (Ghana)	April 20 – April 25, 2008

Objectives of UNCTAD

1. To promote international trade specially with the view to accelerating the economic development of underdeveloped countries.
2. To determine policies and principles for international trade and economic development.
3. To propose the strategy for implementing pre-approved principles and policies.
4. To assist Economic and Social Council of the UNO.
5. To provide a suitable platform for trade dialogues.

Members of UNCTAD

Though UNCTAD is functioning as a permanent agency of the UNO, but its membership is fully optional. Any country may join or quit UNCTAD. 

The functioning of UNCTAD on democratic principles every member has only one voting right. For general disputes, simple majority among present members but two third majority is needed for important issues.