The centre is less than enthusiastic about the Fourteenth Finance Commission's landmark report.
The constitutional body that is the Fourteenth Finance Commission (FFC) has grasped the nettle of the imbalance in centre–state relations in fiscal affairs and has made sound recommendations for the establishment of a new institutional arrangement for “cooperative federalism.” Under the FFC’s award, the states are to receive 42% of the divisible pool of central tax revenue, a substantial step up from the current 32%. The commission has also recommended that central transfers to states must be at least 49% of gross central revenue receipts during 2015–20. The larger recommendation is to revitalise and strengthen another constitutional body, the Inter-State Council, so that it can act as a forum for discussion as well as decision-making to establish this new cooperative federalism.
The FFC makes a carefully argued case for why the states must have access to a larger volume of untied resources, even while the centre retains enough fiscal space to make specific purpose grants in identified areas. Finance commission transfers to states in the form of tax shares and grants of various kinds are currently less than 60% of total transfers. The remaining 40% is largely of various kinds of funds from the old Planning Commission, all of which in the absence of the FFC’s award would have had to continue, if not from NITI Aayog then from the Ministry of Finance. “Normal central assistance” under the plan, which is based on identified formulae and distributed among states, constitutes barely 10% of these other flows. The rest are “special Plan assistance,” “special central assistance” (to the North East and hill states) and “additional Central assistance.” Then there are the transfers under the central plans and also under the gargantuan Centrally-Sponsored Schemes (CSS), which numbered as many as 137 before a fake rationalisation by the previous government reduced the number to 66 even while the volume of CSS transfers remained as before.
The three main problems with the plan transfers (other than the normal central assistance) are, one, they are discretionary and not based on any transparent formulae for allocation to individual states; two, they are often conditional on the states meeting targets; and, three, the schemes for which funds are designed at the centre do not take into account state-specific requirements, i e, they follow a one-size-fits-all approach. These problems afflict in particular the CSSs which the states deeply resent because they often tie their hands to implementing and part-funding programmes that are not always a priority for them.
What the FFC has done is that at one stroke it has given states greater access to untied or free resources that are not encumbered by central government rules. However, while retaining the states’ aggregate share (taxes plus grants) of the divisible pool at around 65%, the FFC has left the centre with enough fiscal space to fund important schemes where a central and all-India intervention may be required. What will happen if the centre implements the FFC’s recommendations in full is that many CSSs will have to be abolished and the central government bureaucracy associated with them will have to find other things to do. And state governments will be able to pay greater attention to their social and economic priorities, assuming they do not waste the new untied funds that they will now receive.
Are the centre and states both ready for such a dramatic switch? A note of dissent to the FFC, while agreeing with the broad thrust of cooperative federalism, argues for a phase-wise increase in states’ share from 32% to 38% in the first year, and then based on the experience to 42%. The argument is that a sudden switch on 1 April 2015 gives little time to either the states to use the additional untied funds to meet their social and economic priorities or to the centre to reorganise some of its activities. In the switchover, many sound CSSs — and there are a few of them — may well be abandoned and there will be nothing immediately available in the states to take their place.
The National Democratic Alliance (NDA) government has accepted the recommendation on immediate devolution of 42% of the divisible pool to the states. In its action-taken report, the centre has suggested that this is consistent with its own idea of “Team India” (yet another peculiar term coined by the Modi government) in which states will have greater fiscal freedom. But is that really so? The initial indications are that the central government is only half-hearted in its embrace of the FFC’s landmark report. First, the centre has only accepted “in principle” the recommendation to provide revenue deficit grants to 11 (mostly backward and poor) states — it has made these grants conditional on the states pursuing fiscal consolidation measures and raising revenue. This violates Article 275(1) of the Constitution under which a finance commission is expected to award revenue deficit grants where required. It also goes against the spirit of the FFC’s report which, unlike those of the Twelfth and Thirteenth Finance Commissions, has shunned making “conditional” recommendations of any kind.
The second and bigger problem with the NDA government’s response is that it is silent about putting in place the larger changes that are necessary to make cooperative federalism a reality. There is no mention of reforming the system of fiscal transfers in a comprehensive manner, there is no mention of putting in place the institutional arrangements necessary and there is no mention of revitalising the constitutional body, the Inter-State Council, to give it the power and importance to oversee fiscal federalism. The NDA government then is only making a token acceptance of the FFC’s substantial recommendations while keeping everything else in place for centre–state relations to continue as before. Clearly, cooperative federalism cannot be brought about by a finance commission’s recommendations; that requires political action by the states and political parties.
