By accepting the 14th Finance Commission’s recommendation that the share of tax devolution to the states should increase to 42 per cent of the divisible pool of Central tax revenues — up from the existing 32 per cent — the Narendra Modi government has put its money where its mouth is and given meaning to the phrase “cooperative federalism”. Broadly, monies flow from the Centre to the states under the heads of “tax devolution” and “non-plan grants” (both are untied transfers based on the recommendations of the finance commissions) as well as “Central assistance for state and UT plans”. But over the years, the conditional component of the latter has ballooned enormously in comparison with both the no-strings-attached portion — “normal Central assistance”, which used to be determined by the Planning Commission using the Gadgil formula — as well as the total transfers from the Centre to the states. For instance, in 2003-04, the normal Central assistance was Rs 22,484 crore of the total Central assistance of Rs 47,584 crore, while the corresponding figures for 2014-15 are Rs 28,514 crore and Rs 3,30,743 crore, respectively.
Now, by radically increasing the share of untied transfers (to about 48 per cent of the divisible pool) — at around 60 per cent, the proportion of total transfers is unlikely to change — the commission has effected a paradigm shift and ushered in a new phase of fiscal federalism by enhancing the states’ financial autonomy and independence. The commission has rightly privileged tax devolution as the channel for transfers and jettisoned the artificial and arbitrary distinctions between “plan” and “non-plan” spending. It is an open secret that the Centre would use conditional “plan”-related transfers as a tool to play favourites between states and exert control over foes and allies alike. Further, the one-size-fits-all, top-down approach to development programmes can only go so far in a diverse country like India — for instance, do the road networks of Kerala and Bihar need the same interventions? Indeed, the states should be viewed as equal partners in the national project of development and an important step has now been taken towards this end. For its part, the Centre would be better off focusing on large-scale infrastructure projects, railways, defence, R&D and the like.
The Centre’s footprint in “plan”-related areas is sure to contract — eight Centrally sponsored schemes as well as some part of the normal Central assistance flows stand to face the axe immediately. So the responsibility of the states has increased and their institutional capacity to deliver must be enhanced. Equally, a vigil must be maintained against their increased financial autonomy degenerating into fiscal profligacy.
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