#dnaEdit: Of true federalism

Prime Minister Narendra Modi can claim to have put his preachings on cooperative federalism into practice by his government’s acceptance of the Fourteenth Finance Commission’s (FFC) recommendation to increase the states’ share of taxes collected by the Centre from 32 to 42 per cent. Recommendations of all Finance Commissions have traditionally been accepted by the Centre, but the consultations with the Centre that preceded the FFC report cannot be discounted as a reason for this big-bang reform. Past increases in tax devolution to the states has been in the range of 1-2 per cent despite the regular refrain from most states that they are entitled to a 50 per cent share in the tax collection. The latest decision will put an additional Rs1.78 lakh crore in the states’ kitty in 2015-16. A former four-time Chief Minister, Modi’s articulation of the federal aspiration of states is a rare admission by a central dispensation that developmental plans and funds are best allocated and utilised by the states, rather than top-down formulations. In not making a distinction between the states’ plan and non-plan expenditure, the YV Reddy-headed FFC and the Modi government, have remarkably converged. It must be recalled that this was one of the guiding principles behind rendering the Planning Commission obsolete and the casting of the Niti Aayog as a federal, consultative body. 

For finance minister Arun Jaitley, the increased tax devolution amounts to a narrowing of fiscal legroom in the next budget. However, the payoff will be that states will have to bear a greater share of centrally sponsored schemes (CSS) and face a decrease in central assistance to state plans. Already, most states are unhappy about CSS provisions that force them into making matching contributions to avail of central funds. Their grouse has been that those conceptualising a CSS—central ministries—should bear the entire financial burden instead of passing it on to the states. The changing dynamics on centre-state fiscal relations could impact schemes like MGNREGA, already hampered by crippling delays in fund disbursals since October last. The devolution might also ease Jaitley’s efforts to get states on board to implement the GST(Goods and Services Tax). Despite the ease of doing business that it accords, many states fear that the GST will eat into their revenues and impinge on their fiscal autonomy. The FFC’s largesse also extends to 11 states perpetually facing a revenue deficit like West Bengal, Kerala, Punjab and Jammu and Kashmir which report a high percentage of non-plan expenditure owing to payments of salaries and pensions. 

Where the increased devolution could run into rough weather is the possible withdrawal of central assistance that was hitherto available to states with backward districts that benefited from the Backward Region Grant Fund (BRGF). In making allocations to individual states, the Commission has considered a state’s population, area, demographic changes, income distance and forest cover. With its fiscal space restricted, it is unlikely that the Centre will be amenable to states’ demands for special packages. The pronounced shift to cooperative federalism is also evident in two other areas. The FFC has given greater discretion to the states in utilising funds for disaster management. By sanctioning grants totalling Rs2.87 lakh crore for local bodies, the Commission has implicitly asked the states to do justice to municipalities and panchayats. For long, state governments have starved local bodies of funds, but the Commission has directed that these funds should flow to local bodies in an “assured, objective and united manner”. With their longstanding demands met and  central intrusion minimised, the states must take up the responsibility of curbing wasteful expenditure in right earnest.