Accepting key recommendations of the 14th Finance Commission
27/02/2015
The Narendra Modi Government has put its money where its mouth is by accepting key recommendations of the 14th Finance Commission which will leave the States with a larger share of the divisible tax pool from 2015-16 to 2019-20. The Government has readily agreed to the commission's suggestion to devolve an unprecedented 42 per cent of the divisible pool to the States. This is way above the 32 per cent that the 13th Finance Commission had recommended. Some would argue that the hike is not as big as is apparent, since the present commission has subsumed the normal central assistance the Planning Commission had been giving based on the Gadgil formula.
It has thus not made a distinction between plan and non-plan needs and has taken into consideration the total requirements. Nonetheless, there has been a substantial increase, and one must look at the spirit of the acceptance as much as one would study the figures.
It is this spirit of federal accommodation that one must view the dissent note economist Abhijit Sen, a part-time member of the 14th Finance Commission, has given. Mr Sen believes that the suggestion on devolution will “disrupt” the existing plan transfers because it will leave a 10 per cent amount shortfall with the Centre. One expects the Government had considered this factor when it announced its acceptance of the hike in the State's share of the divisible pool.
Fears have also been expressed that the enhanced flight of taxes to the States could leave the Centre holding the wrong end of the fiscal deficit stick. Well, the Union Ministry of Finance has said in a statement that the “consequences of this much greater devolution to States is fiscal space for the Centre will reduce in proportion”. These fears have also come up because of the decision to do away with the non-plan and plan distinction in announcing the increase in taxes for the States from the divisible pool.
Given that the ministry has taken into account the consequence and surely also the fact that there are other means to keep the deficit to the recommended 3.6 per cent the next financial year and to three per cent in the following four years, there is no need at this moment for doomsayers to fret and fume. For now, it would be interesting to see how well the States, after the Centre has taken the unprecedented decision, use the windfall to bring above perceptible changes in their economic health.
For the moment, the added devolution of taxes signals a shift to providing larger fiscal space to the States and blunts the misplaced criticism against the Modi Government that it is not making good on its promises to States. State regimes cutting across party lines need to acknowledge this.
The Union Government has been cautious, however, in dealing with certain other important recommendations. For instance, while the Finance Commission wanted the Centre to de-link as many as 30 Centrally-sponsored schemes from the Union Government, the Modi regime has agreed to eight of them. ‘Step-by-step approach', seems to be the Centre's philosophy here. The Government had in any case made its intent on the issue clear on the subject — that, eventually, many Centrally-sponsored projects which work on the flawed ‘one-size-fits-all' concept will be done away with.
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