JOIN USThe Central government’s decision to accept the recommendations of the 14th Finance Commission for greater devolution of funds to the states will take Centre-state fiscal relations to a much better and more federal grounding.
The Commission had recommended transfer of 42 per cent of the divisible pool of taxes to the states as against the existing 32 per cent. The 10 per cent increase is unprecedented because in the past, such increases have rarely exceeded 2 per cent. States have also been given the freedom to design programmes which suit their needs and conditions.
The Centre will no longer have control and discretion over the flow of funds to the states. It has always been the grouse of states that the Centre was denying them their rightful share of revenues and imposing on them projects and spending schemes which are decided without their knowledge and participation. The complaint will lose its edge now.
This imposes greater responsibility on the states to use the resources more efficiently and productively. They should also ensure that devolution goes further down and local self-government bodies get a bigger share of resources than now. The panel has specifically called for this.
The states should now set up the right institutions and mechanisms to formulate and implement their programmes. Till now, a large part of the funds flowing from the Centre to the states were conditional. The greater autonomy given to the states is underlined by the Commission’s recommendation to scrap the distinction between conditional and unconditional funds.
The Centre will now have a smaller fiscal area to operate in and the work of several ministries dealing with states may be reduced. With the government also deciding to reduce the number of Centrally sponsored schemes, states will have a real opportunity to be masters of their own development plans.
The decision to give some weightage in the transfer of funds to states which achieve success in retaining forest cover is welcome both on environmental and economic considerations. The finance body’s recommendation on the goods and services tax (GST) also might led to narrowing of the positions of the Centre and the states on the long contentious plan for a seamless national market.
It wants the states to be compensated better for their likely loss of revenue after the implementation of the GST system. Overall, the new tax sharing system will mean an annual transfer of Rs 1.78 lakh crore of additional funds from the Centre to the states. The Centre will have to ensure that the deficit will be bridged by higher growth and tax reforms.