Fund devolution

The 13th finance commission, chaired by Vijay Kelkar, whose report was tabled in parliament recently, has made important recommendations on the sharing of taxes between the Centre and the states and fiscal consolidation at Central and state levels. It has also provided a scheme for the implementation of the proposed goods and services tax.

The statutory finance commissions evolve the norms for tax sharing which has always been a contentious issue, with the states always feeling that they are not getting their due share. The commission has recommended an increase in the states’ share from 30.5 per cent to 32 per cent. This should please them, though the new criteria for distribution of the taxes among states are certain to make many states unhappy. Some states like Karnataka stand to lose in their share of taxes while some small states will gain.

The new norms for transfer of funds to local bodies are welcome because they are likely to result in greater financial devolution to them. States have been tardy in strengthening the local bodies. The new incentive-based scheme may prompt them to transfer more funds to the local bodies.

The local bodies will also be encouraged to increase their revenue collection, as they will get matching grants from the states. The role of local bodies in the lives of people is going to increase in the coming years and therefore it is important to keep them financially strong.

The importance given to fiscal consolidation can be seen from the recommendation for elimination of central revenue deficit in the next five years and a gradual progress towards that goal by the states. The commission has given a road map for this and has recommended that release of state-specific grants be made conditional to achievement of fiscal consolidation targets.

A combined debt-GDP ratio of 68 per cent for the Centre and the states is a good target but even with an independent review commission to monitor progress, it is anybody’s guess whether it will be adhered to. A grand bargain between the states and the Centre on GST with a Rs 50,000 crore fund to compensate the states for their revenue loss may be attractive but the empowered committee of state finance ministers is yet to take a view on it.

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