Dual responsibility

By “wholeheartedly” accepting the 14th Finance Commission’s recommendation to transfer a greater share of the divisible pool of Central revenues directly to States, without attaching strings and conditions, Prime Minister Narendra Modi has kept his word on devolving greater financial autonomy and making States equal partners in charting the national development vision. This is a welcome step and the keystone of a new federal polity, where local needs and aspirations will play a greater role in deciding development and welfare goals. The Modi government had already signalled its intention to move away from a Centre-controlled, ‘one size fits all’ approach to development by disbanding the Planning Commission, which used to dictate how much resources States got, and for what purposes. The sharp increase in the share of tax receipts to be transferred — upped from the current 32 per cent to 42 per cent — as well as the higher quantum of untied Central grants, means that States will have the freedom to do as they wish with half the total resources they receive. This will greatly enhance the fiscal elbow room for States to set their own development priorities.

The flip side is that the Centre will have less fiscal room for manoeuvre, which is likely to limit Finance Minister Arun Jaitley’s options in the Budget. This also leaves a question mark over the future of as many as 66 centrally-sponsored schemes that are currently operational. While the Commission has identified 30 such schemes for transfer to States, wholesale abandonment of the rest may impair welfare activities. It is also a matter of concern that the Commission has decided to do away with fiscal discipline as a criterion in the formula which decides the specific share for each State. While the additions, like the 7.5 per cent weightage given to retaining forest cover, as well as the change in population between 1971 and 2011, are welcome, doing away with the fiscal discipline clause may remove a necessary deterrent, particularly for the more profligate States. This is a risk that former Planning Commission member Abhijit Sen has highlighted in his dissent note.

Notably, the Commission has made specific provisions for transfers to local bodies, which will now get ₹2.87 lakh crore, of which ₹2 lakh crore will go to panchayats as grants. This is a positive step towards fiscal pluralism; States have had a tendency to starve local bodies based on political considerations. Going forward, the onus is now on States to ensure the growth of the overall kitty, by speedily implementing the unified Goods and Services Tax. Greater autonomy also dictates more responsible behaviour on the part of the States. They also have to build capabilities in financial and development planning, and exhibit greater fiscal discipline than their track records indicate.