Republic of India

Abstract

The chapter deals with the salient features of India’s federal fiscal architecture which is regarded, by many, as unitary in nature. Like other federations, India’s multi-level fiscal system is characterized by two kinds of imbalances, i.e. vertical (due to mismatch in expenditure responsibilities and taxation powers to union, state and local governments) and horizontal (due to high degree of disparities among sub-national governments in their fiscal capacities and fiscal needs). The chapter narrates the structure, process and interplay of institutions including successive union and state finance commissions and their treatments to correct various fiscal asymmetries. It also summarizes the recent reforms in intergovernmental fiscal relations including the system of fiscal transfers, equity and efficiency concerns, role of political institutions and public debts to understand India’s federal finance.

1 Introductory Overview

The Indian constitution is the longest formulated constitution on earth. It was initially espoused by the constituent assembly of India on 26 November 1949 and came into force from 26 January 1950. The Indian constitution is based on federal principles, however, Article one of the constitution affirms that ‘India, that is Bharat, shall be a Union¹ of States’. In fact, the constitution has all the features of a federal polity, viz. (a) statutorily mandated two orders of elected government (increased to three in 1993) with clear assignment of responsibilities to federal and state governments as contained in the union list (97 items), state list (66 items) and concurrent list (47 items) of the seventh schedule in the constitution (b) union and states are competent to enact laws and (c) institutions to support a federal polity including techniques for intergovernmental fiscal transfers (IGFT) to correct vertical and horizontal imbalances. The territories of India consist of 28 states and eight union territories including three with the legislature.

India is the largest democracy in the world inhabited by about 1.36 billion people over an area of 3287 thousand square kilometres according to an estimate for 2021 based on Census 2011 (GoI, 2011). Out of total population, more than 0.9 billion were eligible to exercise their adult franchise in 2019 general election for the lower house of parliament. The population represents a large number of ethnic groups and cultures that co-exist in the country which is identified by a diversity of religious beliefs and practices. In fact, India is depicted in the preamble of the constitution as ‘sovereign, secular, socialist, democratic republic’ to protect its citizens’ social, economic and political rights; liberty of thought, expression, belief, faith and worship; equality of status and of opportunity and to promote fraternity. The Indian subcontinent is the origin of four of the world's major religions; namely Hinduism, Buddhism, Jainism and Sikhism. The largest religious group in India is Hindus which is 79.80% followed by 14.23% of Muslims and 2.34% of Christians.² Geographically, India is located in the northern hemisphere and lies in the south of Asia. It is surrounded by the Indian Ocean from the south, the Arabian Sea from the west and Bay of Bengal from the east.

The eighth schedule of the Indian constitution lists 22 official languages, which have been referred to as scheduled languages and given recognition, status, and official encouragement (see Table 1). The largest number of people around 44% speaks Hindi as their primary language, followed by eight percent Bengali, seven percent Marathi seven percent Telugu and so on, according to Census of India Report 2011.³ The official language of the union is Hindi in the Devanagari script,⁴ but the English language is also used by law due to its wide acceptability.

Table 1 Geographical and demographic information

1.1 Legal System

The legal system in India is based on common law (Setalvad 1960). Like all other federations, the judiciary interprets the provision of the constitution if any dispute arises. The Supreme Court, an apex body of the legal executive, comprises a chief justice and 33 other judges. A high court exists in every state, while district and session courts are at the district level. The apex court has jurisdiction to give judgements on all disputes between the union and states or between the states. In fact, it is the last court of appeal on civil and criminal proceedings of a high court. The Supreme Court may likewise at its own discretion, grant special leave to appeal any judgement taken by a national court or tribunal. Its verdict is binding on all courts.

India's overall set of laws depends on written law. The judiciary is independent and there exists a separation between the judiciary and the executive. The judicial system in India experiences a shortfall of judges and staff, infrastructural requirements and extraordinary procedural postponements. The lower courts apparently stay feeble and prone to corruption.⁵ Foundation of fast-track courts to resolve criminal cases, induction of modern information and communication technology in courts, national legal literacy mission and additional funding to the judicial system⁶ are few measures under judiciary reforms. In general, people have negative perception about the judiciary system as being extremely slow and extraordinarily costly for setting legal disputes (Ram Mohan et al. 2021).

1.2 Political Parties

Political parties play a key role in the functioning of democracy. They come together to contest elections and hold power in the government. In India, the concept of multi-party system is at work. The fundamental motivation behind these political groups is to nominate candidates for public office and to get most of them elected as could be expected under the given circumstances. Before each election, each political party announces its election manifesto. When chosen as elected representatives, they try to fulfil the party agenda and the objectives through legislation and programme initiatives. The bureaucracy assists them in these endeavours. The political parties keep opening their gates for new members to join and help the party grow.

Election Commission of India, an autonomous body, is mandated to conduct free and fair elections.⁷ The commission gives recognition to political parties and provides symbols to them. There are seven recognized national political parties in India namely, All India Trinamool Congress, Bahujan Samaj Party (BSP), Bharatiya Janata Party (BJP), Communist Party of India (CPI), Communist Party of India-Marxist (CPM), Indian National Congress (INC) and Nationalist Congress Party (NCP).⁸ In addition, there are more than 150 regional parties in India.

In the history of Indian politics, there have been three phases which envisage the picture of government stability from past to date. In the first phase, from the very first general election in 1952 till 1977 government at the centre was stable and it was INC which was in power throughout this period. In 1977, many parties including Janata Party joined hands and came to power at the centre. They could not survive due to internal conflicts. INC came to power once again. India, post-1989, witnessed alliance formation and coalition form of governments either by United Progressive Alliance (UPA) led by INC or National Democratic Alliance (NDA) led by BJP. General Election of 2014 was the defining moment when NDA led by BJP won the election with a thumping majority. Within the alliance, BJP alone got the majority by winning 282 seats under the leadership of Narendra Modi. They improved their performance in 2019 election by securing 303 seats. Hence, the government led by BJP is stable due to high number of seats they have secured in the general election.

1.3 Social Norms and Restraints

India is a secular country where state and religion are separated from each other. Being a plural society, harmony and fraternity are maintained between different faiths and religions. Different social norms for different faiths of people pose formidable challenges before governments. Demands for uniform civil codes are raised time and again. The matter remains sensitive even for the judiciary.

1.4 Civil Society

India is bestowed with a vibrant civil society which has played an important role in bringing much-needed changes. Within civil society, there is active participation of non-governmental organizations (NGO’s) and other self-help groups who play an important role where and when government fails to perform up to the mark. Some of these NGOs have been recognized and awarded by international organizations, e.g. Kailash Satyarthi, an Indian social activist, won the Nobel Peace Prize in 2014 for waging a peaceful struggle to stop children being exploited as labour instead of attending school. He has also contributed to the development of international conventions on the rights of children (Nobel Prize 2014).⁹

2 Citizens’ Charter

The basic goal of the citizen’s charter (GoI 2021b)¹⁰ is to empower the citizens in relation to public service delivery. The originally framed six standards of the citizens’ charter movement are:

• Quality: improving the quality of services;

• Choice: wherever possible;

• Standards: specify what to expect and how to act if standards are not met;

• Value: for the taxpayers’ money;

• Accountability: individuals and organizations and

• Transparency: rules/procedures/schemes/grievances.

In India, the concept of citizens’ charter was first adopted at a ‘Conference of Chief Ministers of various States and Union Territories’ held in May 1997 in the national capital. Department of Administrative Reforms and Public Grievances (DARPG), Government of India, inducted the assignment of synchronizing, framing and making citizens’ charter operational. Guidelines for framing the charter and a list of do’s and don’ts were conveyed to different government departments/bodies to empower them to bring out focussed and implementable charters. In order to frame the charter, the government organizations at the centre and state levels were advised to formulate a task force with representation from users, senior administration and the cutting-edge staff. The objectives of citizens’ charter are mainly fulfilled by the fundamental rights and directive principles of state policy enshrined in the constitution. Fundamental rights like protection of life and personal liberty, freedom of speech and expression helps the citizen in making informed choices and transparency in the system. The directive principles of state policy focusses on promotion of welfare of people, improve the standard of living and public health. The charter, by itself, is not enshrined in the constitution.

2.1 Basic Economic Indicators

The economy of India is known as a middle-income emerging market economy. At the time of India’s independence the mainstay of the economy was agriculture which contributed more than 50% to the GDP. The economy consistently registered low growth due to extensive centralized state intervention and protectionist economic regulation. Due to alarming economic crises emanated from high fiscal deficit, mounting external trade imbalances, and double-digit inflation, broad economic liberalized policies were adopted in 1991. As a result, India moved from low rate of economic growth to one of the fastest-growing economies in the world. Consequently, the share of agriculture declined significantly due to prominence that service sector acquired with about 55% share in Indian economy.¹¹

The BJP government assumed office in early 2014 and during the period 2014–2019, the average GDP¹² (gross domestic product) growth rate in the country was 6.8% against the world’s annual average of 3.5%. The per capita GDP in India recorded in 2019 was the US$2169.10 which is equivalent to 17% of the world's average. When the figure is adjusted by purchasing power parity (PPP) the per capita GDP in India is estimated at the US$6754.30 which is equivalent to 38% of the world's average.¹³

India was the fifth largest economy in the world till 2019 and has been pushed back to sixth place in 2020 due to relatively larger impact of the pandemic. Till 2019, India was able to improve its rank on the back of liberalization, globalization, digitization, favourable demographics, and reforms. In the fiscal year¹⁴ 2019–2020, the US$ three trillion Indian economy¹⁵ was at its trough and has gone down further due to the incidence of corona virus pandemic in 2020 and beyond. As a result, the GDP in 2020–2021 has registered a negative growth of 6.6% as compared to positive growth of four percent in the previous year.¹⁶ This contraction in GDP is largely attributed to a very significant contraction in trade, hotels, transport and communication. In fact, all sectors declined except agriculture which continued to grow at three percent. The negative economic growth has limited the fiscal space of the government and made them to revise its fiscal deficit target to 9.3% of GDP in the covid year.¹⁷

3 The Structure of Government and Division of Fiscal Powers

This section is drawn upon Alok (2011).

3.1 System of Governance

A Legislature, a Judiciary and an Executive are three separate and independent branches of governance in India. The arrangement is intended to maintain democracy, avoid autocracy and build accountability framework. While the legislature and the executive branches are interwoven, the judiciary is independent and interprets, among others, the provisions of the constitution. There is a council of ministers¹⁸ with prime minister as the head to aid and advice the president. It is notable that advice tendered by the ministers to the president for any executive action cannot be inquired in any court of law. The president has a tenure of five years and is elected by an electoral college made up of members of parliament of both the upper and lower houses and the state legislatures. Similarly, the vice president has a fixed tenure of five years and is elected by an electoral college comprising members of both houses of parliament. The union cabinet is collectively responsible to the Lok Sabha or lower house (house of the people). The members of the Lok Sabha are elected directly on the basis of adult suffrage of a jurisdiction or constituency (comprising on an average 1.5 million voters and 2.5 million people) in a general election held every fifth year or earlier if the Lok Sabha is dissolved. The house may have a limit of 550 members, of which 530 are elected from the states and 20 from the union territories.¹⁹

After every general election, the political party having the majority chooses its leader who stakes his claim to the president to form the government. Under Article 75 of the constitution, the President appoints the prime minister and the remaining ministers in the cabinet. Members of the cabinet must be members of parliament. Other person, who is not a member of either house of parliament, ceases to be a minister after six consecutive months of holding the position.²⁰

As discussed earlier, the legislative power rests with the parliament consisting of the president, the Lok Sabha (House of the People) or lower house and the Rajya Sabha (Council of States) or upper house. The Rajya Sabha may have a limit of 250 members, of which 238 are elected by the members of legislative assemblies of states and union territories through open ballot and 12 members are nominated by the president having exceptional expertise or exposure in literature, arts, science and social service.²¹ Members sit for alternate terms lasting six years with 33% of the 238 retiring every subsequent year and are qualified for re-appointment through elections.

All bills can be introduced in either houses of the parliament. Only money bills (including the union budget) are presented in the Lok Sabha.²² These bills need to be passed by a simple majority in both houses and consented by the president before it becomes a law. The president has the power to return the bill with a request for amendment, but, the president may not withhold assent if the bill is passed again in its original form. The money bill is deemed to have been passed by both houses in the form in which it was passed by the lower house. If the council of states or upper house does not return the bill to the lower house within 14 days, it is considered to be passed by the two houses. In other cases, the suggestions and recommendations of Rajya Sabha cannot be overridden unless and until the entire parliament goes for a joint session to break the deadlock.

On the other hand, an ordinance may be promulgated if the president considers it as a requisite to pass legislation during parliament's recess.²³ The ordinance has the similar power as an act of the parliament. However, it ceases to exist in six weeks after the reassembly of parliament except in case it is passed as law by the two houses.

The constitution has an arrangement for a separation of jurisdiction between the parliament and the legislative assemblies of states and union territories to make laws in their respective areas as stipulated in the central and state lists of the constitution. Like parliamentary elections, there is a provision for election, in every fifth year, of assemblies in states and three union territories, i.e. Delhi, Jammu & Kashmir and Puducherry in India to elect members of legislative assemblies (MLAs). Election Commission of India conducts both the elections. MLAs of the political party having a majority choose their leader who stakes his claim before the governor of the state to form the government. On the basis of this exercise, the governor appoints the chief minister and other ministers, as per the former’s advice. The governor is appointed by the president of India for five years or earlier. In other five territories, the president appoints an administrator at the advice of the central government. At sub-national level, the state government, headed by the chief minister, has all the powers to (a) legislate matters in the state list of the constitution and (b) administer the state through state civil servants.

Sharp interstate variations can be seen across all 28 states and eight UTs (see Table 2). Population of Uttar Pradesh, the biggest state, is about 340 times more than that of Sikkim, the smallest state. The per capita income of Goa, the richest state is about ten times more than that of Bihar, the poorest state. Their pattern of economic developments is also different. A few states register double-digit economic growth whereas a few others cannot achieve even five percent. This affects the quality of governance across states. As a result, institutions deciding allocation among states have to take all these factors into consideration.

Table 2 Indian states—some basic facts

At the third tier, elections are also held in every fifth year to elect representatives of panchayats (rural local governments) and municipalities (urban local governments). Panchayat is constituted, through election, in every state at three rungs, i.e. the district, the intermediate and the village.²⁴ Intermediate panchayat may not be established in a state having a population not surpassing two million. Similarly for urban areas, municipalities are constituted at three levels, i.e. municipal corporation for a large urban area, municipal council for small urban area and nagar panchayat for an area having transition from rural to urban.²⁵ Though these institutions became legal entities through the 74th constitutional amendment act which is a central act but these institutions are defined in the conformity act (state municipal act) based on population, area and activity.

As the local government is a state subject, the state legislature may make their own rules to conduct elections, in every fifth year, through the state election commission. After the election, the group of elected representatives provides leadership to officials in his/her respective local area for delivery of services and preparation of plans for local economic development and social justice as stipulated in the respective state act. There are separate laws in each state for panchayats and municipalities. Similarly, separate schedules, eleventh and twelfth, were inserted, among others, in the constitution in 1993 through the seventy-third and seventy-fourth constitutional amendments for panchayat and municipalities respectively. These eleventh and twelfth schedules enumerate twenty-nine and eighteen subjects, respectively. These subjects are only indicative and not exhaustive. Most subjects in these two lists are state concurrent which lead to overlapping. At any case, it is ultimately the authority of state legislature to make laws on these subjects and devolve functions to local governments. In addition, on these matters, the centre and state governments design vertical programmes in which panchayats and municipalities are assigned roles.²⁶ Both the schedules include core municipal functions including waste management, sanitation, primary health, primary education, drinking water, parks, street lights, roads, etc.

Hence, election is held at three levels, i.e. parliament, state assembly and local governments. In all the cases, there is an in-built feature of accountability of elected representative. Every fifth year, incumbent candidate or party seeks re-election for their people who in turn, approve or disapprove them. Accountability of the governments is also fixed through parliamentary proceedings, media, right to information, autonomous audit, ombudsman, vigilance commissions, etc.

3.2 Division of Fiscal Powers

The fiscal powers shared between union and the constituent units, i.e. states in India are mostly stated in the constitution or are specified by the law, like most federations of the world. As mentioned earlier, the powers and jurisdiction of the respective levels of government are set forth in the seventh schedule of the Indian constitution which contains the union list, the state list and the concurrent list (covering areas of joint authority). The residual powers belong to the centre.²⁷ Therefore, the centre can enter tax fields not classified in the constitution. For example, the central government, under such power, imposed gift tax in the past which was abolished in 1998. Similarly, service tax was also imposed in the beginning of this century under such power. In 2017, the tax has been subsumed under nationwide goods and services tax (GST).

It can be argued that the tax assignment in the Indian constitution is consistent with the theoretical literature on the subject (see Table 3). The special case identified in relation to the power of the states to tax natural resources, like minerals was rectified subsequently by giving dominant power to the Union to levy or regulate the tax on minerals.²⁸

Table 3 Indicative legislative responsibility and actual provision of services by different orders of government

However, the Indian constitutional scheme on tax assignment appears to be acceptable on paper, its real working has identified few limitations including the issue of vertical imbalance, despite the fact that considerable number of taxes have been allotted to the states but the buoyant taxes, viz. corporate income tax and personal income tax and custom duties are with the union (see Table 4). Till 2017, even the central excise duty was also assigned to the centre which has been subsumed under GST. As a result, the union government collects around two-thirds of the combined total revenue. The states along with the local governments²⁹ collect the rest. Since sub-national governments are assigned two-thirds of expenditure responsibilities (see Table 5). This requires enormous amount of fiscal transfers from union to state governments (see Table 6). In any case, vertical imbalance of some degree is viewed as desirable in a federation to guarantee intergovernmental fiscal transfers or redistribution of income to ascertain equity. Such provisions have been designed deliberately by the constitution-makers.

Table 4 Tax assignment to various orders of government

Table 5 Shares of different levels of government in total expenditures

Table 6 Vertical fiscal gaps (in bn INR)

3.3 Sharing of Central Taxes

In spite of the fact that powers have been assigned to both the union and the states, the union cannot appropriate the proceeds of all the taxes collected by them. According to the design of the constitution, revenue from central taxes should be shared with the states to fulfil their necessities.

Since 2000, all union taxes have been brought into a divisible pool and a certain percentage is shared with the states.³⁰ Historically, only personal income tax and the union excise duties were shared with the states.³¹ In addition, the central government used to collect the tax on behalf of the states, under the tax rental arrangements and then allocated the proceeds among the states on the basis of the formula suggested by the successive finance commissions. These were (a) additional excise duties in lieu of sales tax on textiles, tobacco and sugar³² and (b) grant in lieu of tax on railway passenger fares.

The constitution provides for sharing of all central taxes except (a) stamp duty levied by the centre but collected and retained by the states; (b) integrated goods and services tax (IGST) in course of interstate trade and commerce and (c) surcharge on taxes and duties and any cess levied for specific purposes by the centre. Only net proceeds of tax revenue are shared, after deducting cost of collections.

In 2017, a nationwide goods and services tax (GST) was introduced.³³ The GST replaced a host of indirect taxes being levied by the central and state governments. It subsumed central excise duty, services tax, additional excise duties, central sales tax, additional customs duty commonly known as countervailing duty and special additional duty of customs at the central level; and state value added tax/sales tax, entertainment tax (other than the tax levied by the local governments), octroi or entry tax, purchase tax, luxury tax, and taxes on lottery, betting and gambling at the state level. The primary idea for introducing GST was to reap the benefit of the common market that Indian union of states offers. It was envisioned to bring in efficiency gains in the economy through ‘one-nation-one tax’ which could ensure better tax buoyancy and compliance, transparency, ease to production and trade and elimination of cascading effect of taxation. However, the impact of GST in the first three years hints ‘an overall disturbing trend and differentiated impact among states’ (GoI 2020, p. 54).

The basic attribute of GST implemented in India is that it is based on the principle of destination-based consumption taxation contrary to the earlier principle of origin-based taxation. It is a dual GST with the union and the states simultaneously levying tax on a common base. Centre levies and collects the central GST (CGST) and states levy and collect state GST (SGST). Rates of both GSTs are equal. In addition, an integrated goods & services tax (IGST) is imposed by the central government on interstate supplies of goods and services and on imports. The GST accounts for 35% of the gross tax revenue of the centre and around 44% of own tax revenue of the states, as per the analysis of the 15th FC.

3.4 Types of Fiscal Transfers in India

Intergovernmental fiscal transfers (IGFT) from the central government to the states in India go as far back as 1919 and have encountered many changes since the Independence of India in 1947. Like most of the nations, globally, there are two purposes of India’s fiscal transfer system which includes, first, correcting vertical fiscal imbalances between the union and the states and second, correcting horizontal imbalances in fiscal capacity among the states. These two aims are not always independent of each other and have both been integrated into the actual operation of the system (Kelkar 2019). The IGFT from the centre to states/UTs can be broadly categorized as finance commission (FC) transfers and other transfer or non-FC transfers. The FC transfers comprise (a) devolution to states/UTs from the union tax divisible pool; (b) fiscal transfers to local governments —both panchayats and municipalities; (c) revenue deficit grants to states incurring revenue deficit even after the central tax devolution; (d) grants for disaster management and (e) other specific grants. These are made primarily under Article 280 of the constitution, but some of the transfers are mandated under Articles 270 and 275.

Non-FC transfers can be ascribed to article 282 of the constitution which empowers the ‘Union or a State to make any grants for any public purpose’. These transfers include central sector schemes,³⁴ centrally sponsored schemes³⁵ (CSS) and compensation to select states/UTs for GST revenue loss (till 2022). Article 282, inter alia, mandated the institution of planning commission to make ‘plan transfers’ comprising formula-based unconditional transfers and specific purpose transfers some of which were matching grants. The planning commission was abolished in 2015–2016 and distinction of ‘plan’ and ‘non-plan’ in budgets was also discontinued. Consequently, as can be seen in Table 7, non-FC transfers have been reduced from 18.57% of gross revenue receipts in 2014–2015 to 13.24% in 2015–2016 after the recommendation of the 14th FC which increased the share of the states in union divisible pool from 32 to 42%. In addition, one can note, a shift in enlarging the total transfers as a share to GDP from 5.76% during the 13th FC period to 6.30 during the 14th FC award period.

Table 7 Transfers from the union to states as proportion of gross revenue receipts (in percent)

3.5 Union Finance Commission (UFC)

The constitution stipulates the appointment of an independent finance commission by the president of India every five years to make recommendations on the devolution of central taxes and grants to be given to the states.³⁶ The commission has a chairman who is appointed based on his experience and eminence in public affairs. His status is at par with the minister in the union cabinet. There are four other members whose qualifications for appointment are based on their experience and special knowledge in economics, public administration, law and government accounting. The terms of reference (ToRs) of the commission, as per constitutional provisions, are

• (i) the distribution between the Union and States of the net proceeds of Union taxes and the allocation between the States of the respective shares of such proceeds;

• (ii) the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.

• (iii) the measures needed to augment the Consolidated Funds of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commissions of the State; and

• (iv) any other matter referred to the Commission by the President in the interest of sound finance.

Under the last item, a number of tasks had been relegated to the commission in the past like setting the fiscal rules and goals for the union and states, measures to be taken for sustainable development and the security of ecology and environment, rescheduling and writing-off of states’ borrowings, assessment of public expenditure management framework, review disaster management systems, strategic way to deal with public enterprise reform and giving incentives to the states to undertake tax reforms, doing away with the losses of power sector, proposing measurable performance-based incentives for states at appropriate level of government, encouraging ease of doing business, supporting digital economy, etc.

The commission is the agency that suggests the method for allocating the transfers based on revenue sharing. It is not a standing body and is dissolved after it has made the recommendations and submitted the report to the president of India. Till 2021, fifteen UFCs have submitted their reports. The last was the 15th FC which submitted two sets of reports, the first in December 2019 and the second in November 2020 covering the award period 2020–2021 and 2021–2026, respectively.

The recommendations of UFC are traditionally respected and mostly accepted in the parliament and carried out by the executives. The role of the UFC as envisioned in the constitution was waning when the planning commission was appointed through a cabinet resolution in 1950. The planning commission assumed the control to make grants for plan purposes. The extent of the UFC’s review was restricted to evaluating the non-plan (generally the expenditure on the establishment) needs of the states and making tax devolution and grants to meet these expenditure responsibilities. However, the mandate of the 14th FC and the 15th FC did not restrict its scope to assessing only the non-plan side of the states’ budgets and both the UFCs made suggestions to cover the entire revenue account. Consequently, when the planning commission itself has been annulled in 2015, it did not make any discontinuity (Reddy and Reddy 2019).

3.6 Constitutional Status of Local Governments and their finances

Local governments in India, as is the case in many federal countries, are expected to make provisions for essential public services like street lighting, sanitation, roads, drinking water supply, etc. and are authorized to collect some tax and non-tax revenues for the same. However, these resources are inadequate to meet the expenditure responsibilities and are making the local governments to largely depend on their respective state governments for the financial support.

The panchayats and municipalities were recognized as an institution of self-government in the statute book with the enactment of the 73rd and the 74th constitutional amendment acts in 1993. Consequently, two sections, viz. parts IX and IXA were added to the constitution for panchayats and municipalities, respectively. These sections are bigger than American constitution and carbon copies of each other. This accelerated the process of decentralization with greater devolution and delegation of powers to local governments.

With these constitution amendment acts in place, the state legislature is expected to devolve and delegate powers, responsibilities and authorities to the local government so as to empower them to function as institutions of self-government. The state legislature is also expected to devolve some tax and non-tax handles to the panchayats and municipalities and also assign to them the revenues of certain state level taxes.

3.7 Finances of the Local Governments

In general, the functional responsibilities are closely related to the financial powers given to local government. In reality, there is a significant mismatch between the two, resulting in severe budgetary stress at the local and consequent reliance on intergovernmental fiscal transfers. Even in the progressive states, fiscal transfers, viz. revenue sharing and grants are the main sources of finances for the panchayats and municipalities. The state finance commission (SFC), which is an autonomous institution to review the financial position of the panchayats and the municipalities, respectively, defines these fiscal transfers and makes recommendations to the governor of the state on the principles that should govern³⁷:

• i. ‘The distribution between the state and the panchayats and municipalities of the net proceeds of the taxes, duties, tolls and fees leviable by the state, and their allocation between the panchayats and municipalities at all levels for such proceeds;

• ii. The determination of the taxes, duties, tolls and fees which may be assigned to, or appropriated by, the panchayats and municipalities;

• iii. The grants-in-aid to panchayats and municipalities from the consolidated fund of the state;

• iv. The measures needed to improve the financial position of the panchayats and municipalities;

• v. Any other matter in the interest of sound finance of the panchayats and municipalities’.

With few exceptions, the states have verbatim reproduced the constitutional provisions and placed them as the terms of reference for the SFC. However, significant variations are noticed in the approach, methodology and recommendations of the SFCs across states and time. Even though, the following common major heads can be found from these diverse recommendations of about eighty SFC reports attempted at different period of time (Alok 2021). These are: (a) global sharing; (b) assignment of revenue; (c) horizontal distributions; (d) grants-in-aid; (e) devolution of functions and functionaries and (f) other measures. The heads emanate from the constitutional provisions and common pattern found in SFC reports:

Under ‘global sharing’, revenue receipts of the state are shared from the divisible pool following the recommendations of the respective SFC. However, states differ greatly in how they define the divisible pool, such as total revenue, own revenue, own tax revenue and so on. Under the second head, SFC recommends devolving revenue handles to local governments. Moreover, the SFC makes horizontal distribution among different rungs of panchayats and different levels of the municipalities.

In general, the capacity to generate its own revenue is very limited for the local governments. The sources which contribute most to the small kitty of own revenue of local governments are mainly, advertisement tax, professional tax, property tax, taxes on vehicles and animals, theatre tax, developmental charges, fees and fines, rental income from properties, user charges on services, etc.

It may be suggested that the states could enhance the tax base of the panchayats and municipalities by assigning a few buoyant sources of revenue to them. However, the states have not been able to use this option as they themselves face limited fiscal space and also because of the perception that the panchayats and the municipalities have inadequate organizational and administrative capacity. The reliance on fiscal transfers is eroding their autonomy to use resources as per their own priorities. Moreover, these transfers are often conditional and therefore hardly assist in the requirements of their fiscal capacity building.

It is, therefore, the central government’s responsibility to transfer sufficient funds to the local government through (a) UFC mechanism³⁸ and (b) centrally sponsored schemes (CSSs). UFC mechanism is discussed in the subsequent section. CSSs bring about significant conditional grants to local governments. Developmental ministries of central government design and administer these schemes and assign various responsibilities to the local governments for grass root implementation. The budget provisions to such programmes have registered a significant growth and the institutional mechanisms tend to provide key role to the panchayats and municipalities in their planning and implementation.

4 Fiscal Federalism and Macroeconomic Management

The central government, in Indian federation, has a predominant role in macroeconomic management as dependency of a state on centre is high by design. The resource mechanism is small with the states whereas centre has large number of resources. On the other hand, states are responsible for all the basic primary services to the citizens. Hence, the coordination between central and state governments in fiscal arrangements decides the fate of the state and its people. But, the liberalized policies initiated in 1991 provided opportunities for states to control domestic and foreign investment (Singh and Srinivasan 2005; Singh 2007). This has enhanced the autonomy and increased the space of states in designing their own economic policies to compete among themselves and woo corporate investments.

The changing federal fiscal architecture has enhanced the states’ public expenditure. It is the fact that ‘total state expenditures as a percent GDP are greater than that of the Union’ (GoI 2020, p. 11). With such increasing expenditure, decentralization is arguably beneficial for macroeconomic performance (Rodden and Wibbels 2001; Shah 1999). However, the capacity of state governments in spending on infrastructure is constrained due to their inability to take independent decisions to borrow. States have to take the central government’s permission for internal borrowing if they are indebted to the latter.³⁹ As a matter of fact, all states remain in debt to the centre that tends to reschedule the lending. Unlike the centre, the sub-national government can borrow only from internal sources after a prior consent of the parliament. These sources include public sector banks, other state-owned financial institutions and national small savings fund comprising largely household savings deposited in post offices.⁴⁰ In addition, State governments resort to idle pension fund created through the mandatory contributions of government employees. Furthermore, many states keep the liquidity by delaying payments to government-owned agencies including the state electricity boards (Singh 2007).

In view of the on-going pandemic and the financial crunch being faced by the state governments, the market borrowing limit of states has been enhanced by the central government from three percent to four percent of state GDP for the year 2021–2022. This temporary measure for a year was decided with a rider that a portion of the additional limit was meant for capital expenditure. In the year 2021–2022, the states are also allowed to borrow 75% of the limit in the initial nine months of the fiscal. In the previous year they were allowed to borrow only up to 50% of the annual limit. However, the states, can also secure short-term debt up to 90 days, at low interest rate from the Reserve Bank of India (RBI)⁴¹ which manages the public debt of the central and the state governments and acts as a banker to them. An independent statutory body namely public debt management authority is being contemplated to ease RBI out from this role.⁴²

The public debt was 73.8% of GDP in the pre-pandemic year. This was a combined total liabilities of centre and states in which the debt of the states was 26.3% of GDP and external liabilities of the centre was 2.9% of GDP.⁴³ Though combined public debts have been constantly increasing since 2010–2011, the extraordinary situation due to pandemic is turning this constant increase to a giant leap emanated from shrinking GDP and increasing foregone revenue, public spending and liquidity support. However, this increase is at pace with the current global trend.

5 Fiscal Equity and Efficiency Concerns and Intergovernmental Fiscal Transfers

The allocation of resources between the centre and the states and among the states begins with a discussion on vertical fiscal imbalance and horizontal imbalances. The vertical imbalance between the centre and the states was created through the constitutional assignment of expenditure responsibilities and revenue powers. The central government has more resources and state governments carry more responsibilities. In order to correct this vertical imbalance formula-based IGFT from centre to state was envisaged.

In this context, the UFC has been recommending a share from the net proceeds of all central taxes (after deducting cost of collection, cess and surcharges). It started with the recommendation of the 10th FC (award period 1995–2000) which estimated 28% states’ share in the divisible pool. Successive UFCs made incremental increase to this share till 32% that the 13th FC recommended for its award period 2010–2015 (GoI 2009). The year 2015, was the turning point for Indian federal finance when the age-old Planning Commission was abolished. The UFC acquired the status of the only institution for IGFT between the centre and the States. Consequently, the 14th FC (2015–2020) recommended a quantum jump to this share from 32 to 42%. As explained earlier, a portion of this share was to cover up the discontinuation of various grants that the Planning Commission used to provide. The 15th FC (2020–2026) made it 41% after adjusting the central government share that rose due to the additional responsibility for newly carved out union territories of Jammu & Kashmir and Ladakh.

From the states’ aggregate share, the UFC distributes the resources among the states to correct horizontal imbalances. This horizontal devolution by successive UFCs has been based on objective parameters reflecting equity and efficiency considerations. In fact, it has been the endeavour of all UFCs to keep a fine blend of equity and efficiency in their formula for horizontal distribution among states that are heterogeneous in their fiscal capacities. However, no two UFCs adopted identical formula. All of them are of different varieties carrying the flavour of the then UFC. The series of these formulas are divided into two phases and summarized in the box given below:

Box 1: Phases in Horizontal Devolution

Phase 1: From First to Seventh Finance Commission

• Till 7th FC, income tax and union excise duties were shared using different parameters.

• Income tax was broadly shared using population and tax contribution parameters.

• The 3rd FC considered equity parameters like relative backwardness, backward caste/ tribal population, financial weakness, etc. for distribution of union excise duty for the first time.

• In the case of distribution of union excise duty, the 7th FC considerably reduced direct weightage of population and increased weightage of equity parameters, like inverse of per capita income, percentage of poor, etc.

Phase 2: From Eighth to Fourteenth Finance Commission

• 8th FC to 10th FC recommended similar parameters, including equity considerations, for distribution of both income tax and union excise duties.

• After the eightieth amendment to the constitution in 2000, a single sharing formula from the divisible pool of taxes was recommended. Parameters used by earlier finance commissions continued in the formulae.

• Weight for equity parameters increased significantly, with a proportionate decrease in direct weight for population.

• The 10th FC introduced fiscal performance criteria for the first time with 10% weight to tax efforts of states. Later, criteria like fiscal discipline and fiscal capacity were used by finance commissions.

Source: Government of India (2020).

Successive UFCs have been constructing formula comprising parameters and their relative weights. These parameters harmonize the attributes of equity, need and cost disability and performance for horizontal devolution of resources. ‘Income distance’ with high weights (about 50%) has been used for equity consideration.⁴⁴ The criterion is acceptable to all states for redistribution of income among states. It makes the formula more progressive and provides higher IGFT to states with lower per capita income. The UFC uses per capita gross state domestic product (GSDP) as a proxy for state’s tax capacity. Generally, low per capita income represents poor state (mostly more populous state) in need of resources to provide comparable public services. As can be seen from Table 8, it was only the 13th FC which used ‘fiscal capacity’ instead.

Table 8 Criteria and weights assigned for horizontal distribution (for states)

Table 9 Criteria and weights assigned for horizontal distribution (for local)

‘Population’ and ‘area’ of a state represent the ‘need’ factor. All UFCs used population as a criterion which is simple and transparent. The 15th FC has assigned 15% weight to this indicator. ‘Area’ of the state is another indicator which reflects need for simple reason—the larger the area, the higher the resource requirement for public services. The 14th FC and the 15th FC assigned 15% weight to this indicator. ‘Forest cover’ for the first time was used by the 14th FC in the formula. The 15th FC retained it and assigned even higher weight due to the merits of this indicator. It serves two purposes. First, the state needs to be compensated for this ‘cost disability’, and second, it is considered beneficial for environment purpose in the interest of the nation or even the world.

In order to incentivize fiscally prudent states, criteria such as ‘tax efforts’ and ‘fiscal discipline’ were used. These criteria reflect performance and efficiency and intend rewarding states for efficient tax collection. This is important as tax evasion and avoidance are high in states. Likewise, ‘fiscal discipline’ encourages states to adhere to the targets set by the ‘fiscal responsibility and budget management act’ (GoI 2003), under which revenue deficit, fiscal deficit, public debt, etc. need to be contained. In addition, the 15th FC used ‘demographic performance’ as a criterion which reflects performance of states in their efforts to move towards the replacement rate of population growth. Such states also get better outcomes in health, the 15th FC believes.

The IGFT arrangements between the states and their local governments stipulate every state to constitute, at regular interval of five years, a state finance commission (SFC), and assign it the task of IGFT to panchayats and municipalities from state’s kitty. However, state government is not as serious about SFC as the central government is about the UFC. This conclusion can be drawn based on the following general treatments to SFC. First, SFC is not constituted at a regular interval of five years in some states; second, loyal retired civil servants and side-lined politicians are made members of SFC; third, SFC reports sometimes are not placed in the legislative assembly and fourth, if the report is accepted, the money is not released. These practices weaken the institution of SFC (Alok 2021).

A review of the SFCs’ reports suggests that IGFT design by SFCs takes into considerations the following fiscal attributes: equity; fiscal needs and cost disability; fiscal efforts and efficiency. Various indicators reflecting these attributes have been used. These include total population, ratio of backward and tribal population, population below poverty line, population density, population per hospital bed, area, backwardness of the area, remoteness index, distance from state capital, length of road, literacy rate, sex ratio, index of infrastructure, income distance, own income efforts, tax efforts, etc. (Table 9) (Alok 2021).

Local governments receive a large amount of resources from UFC. As mentioned in Table 10, six UFCs, so far, have recommended fiscal transfers to the local governments and attempted to: (a) equalize basic civic services, (b) provide incentives for strengthening accounts and audit and (c) set rules to strengthen SFCs. The recommendations have been subject to considerable criticism mainly on the following grounds:

Table 10 Union Finance Commission Grants to local governments (in bn INR)

• The grants provided are too small to make any difference to the functioning of about quarter million local governments.

• The formula used for the allocation among the states were needlessly complicated and proved to be ineffective in promoting the cause of decentralized governments.

• Contours of decentralization across states have never been very clear and each UFC adopted ad hoc approach that too of different variety breaking the continuity. For instance, the fiscal transfers to local government that the 13th FC recommended was not in the form of lump-sum ad hoc grant but a share in the central tax divisible pool so that the local government could share the revenue buoyancy of central taxes. This practice, based on its inherent merits, could have been followed by the successive UFCs, but the 14th FC discontinued it without assigning convincing reasons.

• UFCs attempted, though half-heartedly, to enhance capacity of local governments by making conditional grants. These conditions had been formed based on practices prevalent in a small southern state. It remained difficult for almost all states to fulfil those conditions and claim conditional grants. The next UFC complicated the issue further by recommending different set of conditions to claim performance grants.

6 Covid-19 Pandemic and Fiscal Federalism

Medical emergency arising out of Covid-19 outbreak calls for the intervention of public health which is the constitutional mandate of state and panchayats in rural areas and municipalities in urban areas. But, in a disaster-like situation, it becomes the liability of the central and state governments to cooperate and iron-out differences in the prevention of decease outbreaks. Article 47 of the constitution ordains the state to raise the level of nutrition, standard of living and to improve public health. Further, local governments mandate to have a key role in public health, sanitation conservancy, solid waste management, hospitals, primary health centres and dispensaries and family welfare.⁴⁵

In order to prevent the contagion, the central government imposed, in a series, national lockdown of different varieties, after a consultation with all states, by invoking provisions of National Disaster Management Act, 2005 (DM Act)⁴⁶which empowers central and state governments to frame rules and issue executive orders. In fact, the subject ‘disaster management’ is not specifically mentioned in the constitution. Therefore, parliament exercised its power to enact a law on the subject.

The public expenditure on public health in India, of the centre and states combined, as percentage of GDP has been around one percent. This is considered paltry if compared to other countries, even BRICS nations’ with sizable population.⁴⁷ Within India, central government shares about thirty percent of total public spending on health. Rest is by states where significant interstate variations can be noted. The per capita expenditure on health in the states of Bihar, Jharkhand and Uttar Pradesh is estimated at about half that of Kerala and Tamil Nadu (NITI Aayog 2019).

The pandemic due to corona virus has exposed the chink and given impetus to health sector. It has highlighted the critical role of local governments and their potential to mobilize the community in arranging quarantine facilities and cooked food for the homecoming migrant workers and supporting the frontline health workers at the level of primary health care.

The 15th FC, in its report written in Covid times, took cognizance of the gap and recommended to augment public health expenditure of centre and states in a progressive manner so as to reach 2.5% of GDP by 2025. The commission recommended gigantic support to the health sector through grants-in-aid to all levels of governments including local governments.

Conventionally, the UFC has a separate window to make recommendation for two types of funds, one for disaster response and the other for mitigation. These two funds are envisaged under the DM Act These funds are to be set up at three levels, i.e. national, state and district. Hence, for disaster response, the DM Act stipulates three funds called National Disaster Response Fund (NDRF) at national level, State Disaster Response Fund (SDRF) at state level and District Disaster Response Fund (SDRF) in each district. Similarly, the DM Act provides National Disaster Mitigation Fund (NDMF) at national level, State Disaster Mitigation Fund (SDMF) at state level and District Disaster Mitigation Fund (DDMF) in each district.

The 15th FC has merged these two funds into one and calls it as National Disaster Risk Management Fund (NDRMF) and State Disaster Risk Management Fund (SDRMF). Two windows of DM Act—‘mitigation’ and ‘response’ are parts of this fund. The 15th FC was of the view ‘that the mitigation fund created should be used for those local level and community based interventions which reduce risks and promote environment friendly settlements and livelihood practices’ it further says ‘the idea of a mitigation fund addressing risks and vulnerabilities at the local level has become imperative’. Through another window, the 15th FC has allocated INR 700 billion over a period of five years to local governments for health services.

In an early stage of the pandemic, when the Indian economy had lost about 50 days of output due to a series of national lockdowns, the central government announced an economic package that was ten percent of India’s national income. The move is to kick-start the economy by (a) wooing investments including foreign through various measures; (b) providing liquidity to small and medium businesses; (c) arranging safety net for an enormous number of poor and migrant workers travelling back to their respective villages; (d) supporting farmers; and (e) holding shadow banking and electricity distributors. However as mentioned earlier, the economy registered a contraction by more than seven percent in 2020–2021.

There was a sign of economic revival but the second wave of more virulent variant of Covid-19, in the second quarter of the year 2021, has affected the momentum of economic recovery. It has also posed an enormous challenge to all levels of governments to vaccinate about 1.36 billion people across states in several locations. This is an extraordinary number by any standard and requires continuous coordination between the centre and states. Under an arrangement, the centre procures the vaccines in bulk at a discount rate and distributes among the states at no cost to the states. One-quarter of the total number is kept for private hospitals to procure at a regulated market price. On the inoculation drive, dialogue between the centre and states takes place at frequent intervals at the political and administrative level. In fact, the coordination between centre and states is at its peak during the current disaster management.

It is observed that the pandemic till date is being controlled through centralized institutional arrangements at centre and states. Public servants and security forces have been enforcing preventive measures. These arrangements need to gradually give way to the decentralized responsibilities of local governments including Panchayats and municipalities. These responsibilities include community health care, basic necessities and livelihoods for reverse migrant workers, maintenance of local psycho-socio helpline, and sensitization for physical distancing (Alok 2020a, b).

7 Fiscal Federalism Dimensions of Public Management Framework

7.1 The Way Forward

Allocation of powers and duties is an important aspect of fiscal federalism. In India, there are three orders of governments: central government, state governments and elected local governments which draw their powers from their respective state legislature. The expenditure responsibilities and tax assignments in the Indian constitution are largely consistent with the theoretical framework and are also evolving over the years to address the changing requirements and circumstances. The central government has more resources and state governments carry more responsibilities. In order to correct this vertical imbalance, formula-based IGFT from centre to state is made.

This system of fiscal federalism induced the performance of public sector governance and the economy at the initial stage for about a decade. Thereafter, the public governance was centralized and the economy was on a slow growth trajectory for two decades. The eighties witnessed some recovery but lately surfaced two chronic imbalances, i.e. fiscal and trade. This forced India to go for structural reforms in 1991. These reforms were initiated at the centre to largely correct central policies, institutions and their workings but the shortcomings of fiscal federalism as practiced in the preceding years which had the bearing on low growth, were not attended. Moreover, constitutional amendment was made on a state subject and local governments were brought into the statute books. Fiscal architecture which identified only two orders of governments is unable to absorb these newly created elected bodies. From the fiscal federal perspective following are the factors that inhibited growth and created political tensions in intergovernmental relations among centre, states and local governments.

Firstly, the assignment of functions and powers to centre and state as envisaged in the centre list, state list and concurrent list should be strictly regarded with exceptional deviation needed to correct the shortcomings and ‘negative externalities that have surfaced’ (Bagchi 2001, p. 32). Most of the functions are in the state domain. However, there is a tendency at the centre to give advice to states with an intention of micromanagement. In addition, stringent guidelines are prescribed in vertical schemes that central government designs. All these practices erode state autonomy. Concurrent list is too long and provide scope for overlap. On entries mentioned in the list, laws are created with overriding powers to the centre. For example, law on disaster management was created in 2005 by invoking an entry on social security.⁴⁸ The law has been used to manage Covid-19 pandemic through a central control due to inherent dominant powers in the law itself. The law hardly empowers the local governments and remains inconsistent to constitutional provision⁴⁹ as far as the powers of local governments are concerned.

Secondly, tax assignment needs a holistic review. Centre collects revenue through (a) buoyant taxes including taxes on income, foreign transactions, consumption (CGST) and cess and surcharges on taxes (non-sharable with states) and (b) natural resources, e.g. major minerals, spectrum auction, etc. On the other hand, state governments have concurrent power to tax consumption (SGST), state excise on alcohol and agriculture income tax. Local governments except some municipal corporation have limited power and capacity to collect taxes and user charges. Ill administered property tax which is the mainstay covers little for the revenue expenditure requirements of local governments. Both state and local governments have high dependency on devolution and grants from the centre. Sub-national governments particularly panchayats and municipalities have limited flexibility to raise resources by levying surcharges on the existing tax handles assigned to them. Similarly, existing mechanism related to sub-national income taxes like profession tax needs to be altered for the resource requirements of state and local governments.

Thirdly, the way IGFT is designed and implemented needs reforms at centre and state. It has been found that vertical imbalance between the centre and states has been rising and many state governments have shown their reliance on devolution and grants from the centre rather than own resource generation to fulfil their expenditure responsibilities.⁵⁰ The inefficiency of the machinery involved in IGFT operation has resulted in sub-optimal provision of public services including public health and education at sub-national level. The imbalances both vertical and horizontal get accentuated during the crisis such as Covid-19 pandemic.

In addition to the tax devolution and grants given to the states based on the recommendations of the UFC, the central government gives specific purpose grants for various purposes through the respective ministries. The objective of specific purpose transfers, as mentioned earlier, is to ensure minimum standards of services in respect of those services that are considered meritorious or those services with significant interstate spillovers. However, in Indian context, this has been used as a patronizing instrument to serve political objectives of the ruling parties at the centre to woo the states and the electorate by expanding its reach to spend on the state subjects. Further, centrally sponsored schemes which carry specific purpose transfers have been compressed in 2015. They need to be rationalized further. These schemes require matching contribution from states and are full of conditionality. Except a rural employment guarantee scheme which is based on a well-drafted law all other schemes have weak legal base and role ambiguity. There is a scope to consolidate these schemes and reduce the number to just about ten to fifteen. This would ensure a focus by the central government to equalize minimum level of essential services across states.

Fourthly, the institutions designing IGFT have to be technical, autonomous and exogenous. The approach of these institutions has to be based on normative assessment of the fiscal need, revenue capacity and cost disabilities of the state. Such an assessment can create incentives for fiscal indiscipline among the states. One main explanation for the inability of the UFC and the SFC to assess the fiscal needs of the states and local governments is inadequacy of data related to the cost of basic services in different geographical terrains, e.g. hilly, plain, coastal, etc. Second explanation is lack of expertise within the government to quantify fiscal capacity of the states and local governments. Finance commissions both union and state need permanent secretariat that can undertake research and generate adequate data on a continuing basis. While the institution of union finance commission is matured and respected, the similar institution at sub-national level is at its nascent stage as evident from the SFC reports and their treatments by respective state governments. This institution needs to be strengthened through joint efforts of the centre and states as well as the SFC themselves (Alok 2021). Centre can incentivize states by allocating funds for the (a) timely constitution of SFC as per the law; (b) timely acceptance of their recommendations and timely transfer of funds to local governments (Alok 2019).

In addition, the recently implemented GST has maximum implications in Indian federal finance and intergovernmental fiscal transfers. The GST entails uniform tax rates across states reaping the benefit of Indian common market. Tax harmonization of this magnitude has helped the trade and industry to grow. But, the GST is at the initial stage of its implementation and will take some time to evolve and stabilize. The way GST is designed has subsumed buoyant source of state revenues like sales tax/VAT. Further, states are disallowed to take independent decision to levy surcharge on State-GST. Though, such an arrangement is considered appropriate (Mclure 2000). The state of Sikkim, facing a revenue gap, demands the GST Council to give consent to levy a cess on fast-growing pharmaceutical and power sectors (Mint 2021). In the past, Kerala state government has set a precedent in 2019 by introducing a flood cess.