The vertical devolution to states, expressed as a share of the Centre’s divisible tax pool has either remained the same or risen from one FC cycle to the next. Earlier, this was an outcome of an understanding that the needs of the States grow faster than those of the Centre. Consequently, the share rose from 29.5 per cent in FC-11 cycle (2000-05) to 30.5 per cent in the 12th (2005-10) and 32 per cent in the 13th (2010-15). However, when FC-14 significantly increased the share to 42 per cent, it was not because the needs of the states had suddenly jumped. The increase was meant to compensate states for the loss of untied resources following the merger of plan and non-plan distinction of expenditure.
FC-15 slightly adjusted the share to 41 per cent to account for J&K becoming a Union Territory. FC-16, now, has retained the same share of 41 per cent. The last three FCs appear to have equated the growth in the needs of the Centre and States.
FC-14 dropped the criteria of fiscal performance from its scheme of horizontal tax distribution among the states, which the three preceding FCs had included. It preferred instead to reward demographic performance to capture states’ progress on family planning, necessary for aiding development. FC-15 retained the demographic performance criterion of its predecessor while assigning a very small weight of 2.5 per cent to tax effort. FC-16 has now continued to keep the fiscal performance criteria omitted while introducing a new performance criterion, Gross State Domestic Product (GSDP) as a share of Gross Domestic Product (GDP).
It believes that this criterion “captures the effect of various forms of efficiencies, including efficient spending and fiscal rectitude”. While not diminishing the need for fiscal performance, FC-16 has made it implicit in the overall governance for development.
Revenue deficit grants (RDG), awarded to some states for addressing their estimated revenue deficits, has been consistently recommended by FCs as an untied grant. The counter-factual of its omission was first examined by FC-14 and then by FC-15 but they chose to continue with it. FC-16 has now done away with RDG as broadly the same set of states were receiving it cycle after cycle, even when they were expected to close their revenue deficit in one cycle. In their view, “revenue deficit grants create an adverse incentive whereby the expectation of such grants encourages states to be profligate rather than address the root causes of the revenue shortage”. The discontinuation of RDG is a signal that fiscal performance is driven by ‘self-effort’ and not ‘central-aid’.
FCs have also been providing tied grants for upgradation and special problems of states. FC-14 discontinued these grants owing to their sectoral overlaps with several schemes run by the Centre, leading to coordination challenges in their conditional releases. FC-15 reverted to providing such grants but now FC-16 has discontinued them again. FC-16 has indicated that when recommending its own statutory grants under Article 275(1) of the Constitution, it needs to take into account discretionary grants provided by the Centre under Article 282, as this also adds to the overall resources available with states. As FC-16 hasn’t provided any tied grants for upgradation and special problems, it expects the Centre’s role to deepen under Article 282. Under this Article, the Centre provides centrally sponsored schemes (CSS) grants to states in pursuit of national goals of development.
FC-10, though not mandated, provided a broad approach to considering grants for LBs. It believed that LBs are primarily the states’ responsibility and the role of the Centre is merely supplementary. Yet, the recommended LBs grants increased from 0.06 per cent of GDP in F-11 cycle to 0.29 per cent in FC-14. Thereafter, it has remained stationary at that level, relative to GDP, in the FC-15 and FC-16 cycles (author’s calculations) emphasizing the supplementary role of the Centre. While making its recommendations, FC-16 has reiterated the approach of FC-10: It “is in keeping with the Constitutional spirit that local bodies are primarily the responsibility of the state governments. Fiscal transfers from the Consolidated Fund of India to LBs are meant to be only supplementary in nature”.
The five messages of FC-16 put together reflect that states need to be more self-reliant in raising resources. They can be so by further improving their fiscal performance. The additional resources so generated will not only meet their state-level needs but also supplement the central grants meant for financing national development goals. Their spending responsibilities also need to be more inclusive by taking in LBs as equal development partners. These five messages anchor Centre-state fiscal relations in a more responsive spirit of cooperative federalism.
The writer is a senior economic advisor in the economic advisory council to the Prime Minister. Views are personal.
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