Accelerating devolution

For states, more power and responsibility

The report of the 14th Finance Commission, which had been submitted to the government last December, was placed before Parliament on Tuesday. In all, it asks the government to transfer 42 per cent of tax collections to states. While this is a rather large increase over the 32 per cent proposed by the previous commission, two factors need to be emphasised. The first is that the actual total transfers proposed five years ago were around 39 per cent, when unconditional and conditional transfers were combined. Under the latter category, funds were given to states for specific purposes, which meant that they had little flexibility in their use. Second, and very importantly, the 14th commission has recommended that the government largely do away with this distinction between unconditional and conditional. This represents a fundamental shift in the federal paradigm. It gives states a high degree of autonomy and flexibility in their use of transfers. This reinforces the ongoing movement towards greater de-centralisation, reflected in, for example, the re-structuring of centrally sponsored schemes and the termination of the role played by the erstwhile Planning Commission in state expenditures. To this extent, it is an entirely welcome step, which places a much greater responsibility on states to design and implement schemes. The central government will have to ensure that states create the institutional capacities to strategise, monitor and control programmes. With more power comes more responsibility.

In deciding on the shares of individual states, the 14th commission has done away with a component that some previous commissions used, namely, fiscal discipline. It has introduced two new considerations in addition to the traditional population, per capita income and area considerations. These are the change in population between 1971 and 2011, and giving credit to success in retaining forest cover. Under this formula, Uttar Pradesh predictably gets the highest share of transfers, over 17 per cent. The 14th commission has also made some specific recommendations for transfer of resources to local governments - municipalities and panchayats - including, importantly, an incentive for better fiscal performance.

Apart from the issue of transfers, the 14th commission has made recommendations on the implementation of the goods and services tax (GST) and also laid out a fiscal reform road map. On the GST, it proposes a somewhat more generous compensation formula for states than is currently being debated. And it would like to see this being delivered through a guaranteed pool of funds. This could induce states to accept a more comprehensive and unified system than has been agreed to now. On the long-term fiscal reform agenda, it is strongly in favour of a rule-based approach, both at the Centre and the states. However, it suggests going beyond mere legislative commitments by way of setting up institutions that will monitor the fiscal condition of states and the Centre, and hold governments to account. Of course, these recommendations, unlike the ones on transfers, are "under consideration", as the Action Taken Report placed by the government before Parliament put it. Nonetheless, the overall approach provides a strong boost to meaningful devolution.