States will get more money from the next fiscal year, as the Centre has decided to give them 10 per cent more funding from its divisible resources.

This decision is based on the recommendations of the 14th Finance Commission, which had suggested passing on 42 per cent of net tax receipts to the States.

Prime Minister Narendra Modi informed States about the decision, terming it a fulfilment of co-operative federalism. “We have wholeheartedly accepted the recommendations of the 14th Finance Commission, although it puts a tremendous strain on the Centre’s finances,” he said in a letter to all the Chief Ministers on Tuesday.

Admitting that a higher share for States will leave far less money with the Centre, he said: “We have taken the recommendations of the 14th Finance Commission in a positive spirit as they strengthen your hand in designing and implementing schemes as per your priorities.”

The Commission, headed by former RBI Governor YV Reddy, submitted its report on December 15. The report’s recommendations will guide allocation of resources as well as fiscal policies for five years, from April 1, 2015 to March 31, 2020.

The Government tabled an Action Taken Report on the Commission’s recommendations in Parliament on Tuesday. “As against a total devolution of ₹3.48 lakh crore approximately in 2014-15, the total devolution to the States in 2015-16 will be ₹5.26 lakh crore approximately, year-on-year increase of about ₹1.78 lakh crore,” the report said.

Deficit grant The Centre has accepted ‘in-principle’ the Commission’s suggestion on revenue deficit grants. The Commission assessed the revenue and expenditure of the States for the 2015-20 period and has projected the deficit for each State after taking into account its share in Central taxes. It has recommended a grant of over ₹1.94 lakh crore to meet the deficit of 11 States.

On Central finances, the Commission said, “We expect that an improvement in the macroeconomic conditions and revival of growth as well as tax reforms should enhance the total tax revenues of the Union Government, enabling it to eliminate the revenue deficit completely much earlier than 2019-20.”

Later, addressing a press conference, Finance Minister Arun Jaitley said major schemes, such as the Rural Employment Guarantee Scheme, would continue to be linked to Central support due to their importance, and legal obligations.

The Commission has identified 30 Centrally sponsored schemes for transfer to the States, but Jaitley said that only eight schemes would be delinked from the Centre’s support.

Commenting on the report, DK Srivastava, former Finance Commission member and Chief Policy Advisor of EY India, said that the Commission’s recommendations would lead to a sea change in the architecture of Centre-State financial relations. “Overall, this will increase the efficiency of government resource, and State and local governments will understand their priorities better.”

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