Finance Commission recommends social sector spending revamp

Commission proposes that states use the increased fiscal space for expenses on judiciary, maintenance, forest cover, education and health

Even as the 14th Finance Commission increased the tax devolution to states from the divisible pool from 32 per cent to 42 per cent, it reduced non-tax transfers. Now, for expenditure on maintaining forest cover and equipping the judiciary and police, as well as maintenance of roads and bridges, health care and education, states either have to use the higher tax devolution or raise resources on their own.

In its report, the Y V Reddy-headed commission said, “We urge state governments to use the additional fiscal space provided by us in the tax devolution to meet such requirements.”

The commission recommended total transfers to states from the divisible pool be kept at 47.7 per cent during 2015-16 to 2019-20, against 39.5 per cent recommended by the previous commission, headed by Vijay Kelkar. Of the transfers, 5.7 per cent will be non-tax, against 7.5 per cent recommended by the 13th Finance Commission. (THE CHANGING CENTRE-STATE EQUATION)

As non-tax transfers, the 14th Finance Commission allocated Rs 5.37 lakh-crore to states. These comprise grants to local bodies, aid to states with revenue deficit, and disaster relief. Had the allocation been the same as suggested by the 13th Commission, the transfers would have been Rs 7.05 lakh-crore. As such, there is a squeeze of Rs 1.67 lakh-crore in this regard.

The commission said states had adequate fiscal space to provide for funds for additional expenditure.

To arrive at the tax devolution, the commission included forest area as a metric and assigned it a weight of 7.5 per cent of the total tax allocation to states. This gives more allocation to states with higher forest cover, such as Madhya Pradesh, Arunachal Pradesh, Chhattisgarh, Odisha and Maharashtra.

The previous commission had proposed to allocate Rs 15,000 crore for maintenance of forest cover. For education, the allocation was Rs 24,000 crore, for health care (mortality) Rs 5,000 crore, for the judicial system Rs 5,000 crore and for maintaining roads and bridges about Rs 20,000.

M Govinda Rao, member of the 14th Finance Commission, said, “The recommendation subsumes the normal central assistance given by the Planning Commission (the Gadgil formula for grants), other central assistance for Plan, special Plan assistance, special central assistance and grants such as the backward region grant fund (state and district components) given by the Planning Commission.”

In addition, the commission confined itself to recommending grants for revenue deficit, disaster relief and local bodies and desisted from giving environmental, sectoral and other specific grants, he said.

While the panel recommended the Centre de-link itself from 30 state schemes, termed centrally-sponsored schemes (CSS), the Centre has agreed to de-link from eight. As of now, there are 66 CSS.

It is likely an announcement regarding the eight CSS will be made in Budget 2015-16, scheduled for Saturday.

In terms of implementing CSS, the government is giving more freedom to states, as more funds are going to state treasuries directly. “The commission has reposed faith in state governments to deliver public services required by the people by increasing unconditional transfers. It is for states to live up to the faith reposed in them, by providing the public services they are mandated to under the Constitution,” Rao said.

Officials say for 2015-16, the overall Plan expenditure is expected to be marginally more than the revised estimate for 2014-15; this is likely to be 20-30 per cent less than the Budget estimate. The Budget estimate of the overall Plan expenditure for 2014-15 was Rs 5,25,000 crore; of this,Rs 4,53, 502 crore was the estimated revenue expenditure, while Rs 1,21,497 crore was the expected capital expenditure.

In 2014-15, central support to states’ and Union territories’ plans jumped to Rs 3,38,408.49 crore from Rs 1,19,038.93 crore in 2013-14, an increase of 184 per cent, primarily because of the restructuring of CSS. As a result, the Centre’s Budget support to its ministries fell from Rs 3,56,493 crore in 2013-14 to Rs 2,36,591 crore in 2014-15, down 34 per cent.