42% and its aftermath
The shift in tax devolution to states, as the chairman of Fourteenth Finance Commission Y.V. Reddy has himself admitted, is qualitative not quantitative
Undoubtedly, the acceptance of the Fourteenth Finance Commission’s truly bold recommendation in relation to the devolution of taxes levied and collected by the Centre to states is the high point of the recent budget. The commission recommended that 42% of all taxes collected by the Centre should be shared with states, up from the existing share of 32%. By convention, since the Finance Commission is a constitutional body set up under Article 280 of our Constitution, central governments invariably accept the “award” relating to sharing of taxes with states. Prime Minister Narendra Modi has taken a huge credit for something that he had to do anyway. Yes, there was a dissent note that suggested not a 42% share but a 38% share, but four other members recommended the higher number and, therefore, the Centre had no option but to go along.
The shift, however, as the distinguished chairman of the commission Y.V. Reddy has himself admitted, is qualitative and not quantitative. In the aggregate, states have not gained and overall resources transferred to them by the Centre have not increased. But as Reddy, a former Reserve Bank of India governor, has pointed out in quite a few interviews, “The seminal shift is in terms of composition of transfer.” This means that states will have more “untied” funds at their disposal and will be free to deploy them in the manner they deem appropriate to their needs and concerns. There is now a more assured flow with significantly greater freedom to states to allocate the increased flow within their expenditure budgets. Planning within states now assumes even greater importance even if the Planning Commission has been abolished because of the Prime Minister’s whims and fancies.
This is indeed as it should be. The commission deserves kudos and it is but natural for the PM to take full mileage from what the commission, set up by the United Progressive Alliance in January 2013, has recommended. Without question, cooperative federalism, a favourite mantra of the PM, which, incidentally was first articulated by the short-lived H.D. Deve Gowda government during 1996-97 (the United Front coalition), has now received a huge boost. Actually, the idea of a single, divisible pool of taxes also emanated from the United Front’s budget of February 1997 (presented by P. Chidambaram), which accepted that recommendation of the Tenth Finance Commission and pegged the share of states at 29%.
States normally compare their shares with previous Finance Commissions to judge whether they have gained or lost. Strictly speaking, this is not right because different Finance Commissions have used different formulae to allocate the share of states to each individual state. The formula used in the Fourteenth Finance Commission is not the same as that used by its predecessor and so the share of individual states cannot really be compared. Reddy’s Commission, for instance, has given 7.5% weightage to forest cover, which had not been done by the Thirteenth Finance Commission. As a result, some large states with low forest cover like Uttar Pradesh and Bihar are complaining that their share in tax devolution has decreased. It has, but the basis for calculations has itself undergone a change.
Nevertheless, the 42% share has extracted a steep price. And this has to do with allocations in the Union budget for certain key developmental programmes and schemes. In certain cases, these allocations have been cut drastically. Some programmes like the Backward Regions Grant Fund (BRGF), 30% of whose expenditure was in Bihar (to compensate for the bifurcation of the state), have vanished completely. Of course, the assumption is that the states will make up the shortfall and at the end of the year perhaps the total national expenditure on that programme or scheme would at least be maintained, if not increased. Programmes which have worked and which have had tangible impacts, like the Rashtriya Krishi Vikas Yojana (RKVY), the Integrated Child Development Services, popularly known as ICDS, and the Mid Day Meal Programme, have been reduced savagely. The central allocation for RKVY, which gives full flexibility to states, has fallen steeply from ₹ 8,444 crore in 2014-15 to ₹ 4,500 crore in 2015-16 and for ICDS from around ₹ 18,000 crore to less than ₹ 8,300 crore, in the same period. Shockingly, the allocation for the ministry of drinking water and sanitation has fallen from over ₹ 15,000 crore in 2014-15 to just ₹ 6,200 crore in 2015-16, making a mockery of the Swachh Bharat commitment.
Whether the Centre’s expectations materialize and whether states will actually increase their own expenditures, as is being hoped by the finance minister, will be known only this time next year. Unfortunately, the budget has not put in place any institutional mechanism to review and monitor expenditures, and take timely, corrective action. The NITI Aayog could be expected to anchor such a mechanism, but its mandate appears to function solely as a “think tank”. This is precisely where the absence of the Planning Commission will be acutely felt by both the Centre and states.
The dissent note in the Fourteenth Finance Commission, submitted by eminent economist Abhijit Sen, had raised such issues concerning the transition that have been brushed aside. There is a certain political economy to public expenditures in most states and what might well happen is that contractor-driven programmes will now receive an added impetus to the detriment of social sector spending. Let there be no mistake—barring Kerala and Tamil Nadu, which have been pioneers, social sector spending in most other states, especially the poorer ones, has increased because of central spending itself to which the states make their designated contributions. Education is a prime example of this phenomenon—the Centre’s funding since the mid-1980s has been transformative and this was beginning to be seen in health as well, but now the allocations for the ministry of health and family welfare have dropped, which will have a ripple effect. Cooperative federalism is all very well, but its immediate impact in 2015-16 is, in all probability, going to result in a Plan holiday of sorts for a number of small and poorer states.
The author is a former Union minister and Rajya Sabha MP.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
MoreLess
First Published:31 Mar 2015, 12:08 AM IST
- Top Gainers
- Top Losers
- 52 Week High