Redefining the spaces between the Centre and the states: Saumitra Chaudhuri

The Fourteenth Finance Commission report is quite path-breaking in many more ways than the very sharp increase that it has recommended for the states' share of the divisible poor from 32 per cent to 42 per cent. Each of the previous finance commissions have recommended small increases (about two percentage points) in the tax share for states, so this is a major departure. The more notable feature of the Commission is the logic that convinced it to take this path. The Commission, starting from its first principles, has sought guidance from the Seventh Schedule of the Constitution which defines what subject areas are reserved for the Union, what for the state and what are in the Concurrent List. The just and efficacious sharing of financial resources should provide adequate resources to the Union and the States to carry out their constitutionally assigned tasks. It found that the Union was far from being stingy with fiscal transfers to the states.

Far from it, the case was actually the other way round. The Eleventh Finance Commission had recommended a ceiling of 37.5 per cent of gross revenue receipts on aggregate transfers of all kinds (including Plan transfers to states); the Twelfth Finance Commission had raised this to 38 per cent and the Thirteenth Finance Commission to 39.5 per cent. But as the Fourteenth Finance Commission observes, "The indicative ceiling on transfers, suggested by the previous Finance Commissions, has, however, not restrained the Union Government from making larger transfers to the States." (para 12.47).

In the Thirteenth Finance Commission's award period, the transfers to states averaged 41.3 per cent of the Union's gross revenue receipts. But this does not include direct transfers made to implementing agencies, a practice discontinued from 2014-15. When these are included, aggregate transfers to states were 49 per cent in 2012-13, the last year for which audited accounts were available.

The Fourteenth Finance Commission observes that the higher level of transfers was effectuated by Plan grants via the centrally sponsored schemes (CSS) that are run by the Union ministries. It has observed that state governments have had many complaints about this arrangement as they are responsible for the implementation of the projects, are on the ground and feel that they know what needs to be done and much better so than New Delhi: A most reasonable inference on comparative competencies.

The Commission has clearly enunciated its preference for tax devolution as a transfer mechanism vis-à-vis transfers on the lines of CSS - which it generically describes as "discretionary" in contrast to "formula-based" as in Finance Commission transfers or in the Gadgil mechanism.

While I see merit in the Commission's critique - stated and implied - of the manner in which the Union ministries have pursued control in areas that are State subjects, the number of school-age children or pregnant mothers and infants or villages that lack roads - who need to be served by way of schools, nutritional and other assistance and metal roads - are surely not a matter of "discretion".

The Fourteenth Finance Commission notes that one interesting consequence of the Union government's expansion into areas normally in the domain of the state was that the resources available for subjects on the Central List actually declined from 66 per cent in 2001-02 to 53 per cent in 2014-15 of its revenue expenditure (para 6.17).

Hence their "assessment of Union finances has taken note of this and provided appropriate fiscal space to the Union to carry out its Constitutionally assigned expenditure responsibilities".

The change in the transfer pattern made by the Commission has to be seen in the light of a sharp critique of the overlap of spaces and recommended re-balancing of fiscal resources and constitutionally mandated responsibilities with some space for constructive cooperation between the Union and the states - what the commission calls "co-operative federalism" within "new institutional mechanisms".

It has boldly increased tax share by basically cutting into what would have been Plan transfers - had the Planning Commission still existed, which it does not.

The author is former member, Planning Commission and former member, Prime Minister's Economic Advisory Council