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Business News/ Opinion / Devolution of funds to states should decrease

Devolution of funds to states should decrease

State bureaucrats and politicians are narrower, more parochial and myopic in their vision when compared to those at the centre

The 15th Finance Commission has been asked to take a call on the continuation of revenue deficit grants. Photo: AFPPremium
The 15th Finance Commission has been asked to take a call on the continuation of revenue deficit grants. Photo: AFP

One of the striking changes in the terms of reference for the 15th Finance Commission (FC) is that population is to be taken according to the 2011 rather than the 1971 census. The latter has been the basis of the last 10 FCs, and had the support of the national development council. The arguments in its favour are well known. But I have always held, and continue to hold, that if population is to be the basis for working out the fiscal need of the states, then it is a no-brainer that current population is the best basis for it.

A fear has been expressed that this change will lead to losses for states that have delivered well in terms of population control and, further, that this will lead to a north-south divide. There are ways in which the sudden jerky changes in state shares can be avoided—reduction of weight to this criterion is an obvious one.

As far as the vertical distribution (share between centre and states) is concerned, the decision of the 14th FC to increase states’ share to 42% was wrong. This was primarily a consequence of misreading the concept of cooperative federalism as well as assuming a certain amount of maturity among state polities. In my judgement, the state bureaucrats as well as the politicians, both in terms of capacity and vision, are narrower, more parochial and myopic when compared to the central bureaucracy and politicians. This means that in terms of dealing with environmental and inter-generational concerns, the centre is better suited than the states.

The fact that funds that were earlier given to centrally-sponsored schemes were directly transferred to states was not adequately appreciated. In fact, the illusion of more flows led state governments to reduce efforts to raise revenue, especially when it was perceived to be politically inconvenient.

Without overestimating the capacity and vision at the centre, I hold that the time is not yet ripe to completely give up a paternal attitude in the interest of the Indian union. I would thus recommend that the 15th FC bring down the percentage to be devolved to the states from 42% to 36%, allowing for the inertial momentum intrinsic in historical experience of 2% increase per FC.

The 15th FC has been asked to take a call on the continuation of revenue deficit grants. Given the adoption of fiscal responsibility laws, there ought to be no revenue deficits to contend with. Now, we are privy to the history of states finding clever ways of bypassing fiscal rules. This is further compounded by the difficulty in estimating the revenue deficits of states. The 15th FC should stop financing the states’ revenue deficit per se, and find some ingenious solution to do this if it’s a constitutional requirement. Special issues of states should be addressed on a case-by-case basis to provide grants as relief to states, but not confined to, or indeed ignoring, revenue deficit considerations.

Another issue that is important in its own right is the matter of measurement of per-capita income-distance criterion. The richer a state is in terms of per capita income, the less it gets. And the poorer a state is, the more it will receive. While the criterion is logically impeccable, there are a couple things I would mention. One, the weight of over 50% should be significantly reduced and two, distance should be measured from a disaggregated unit. This means that rather than using state-level per-capita income, district-level income should be used. This is because while some of the richer states get next to nothing on account of this criterion, they have major issues arising out of huge inter-district inequality. Intra-state regional inequality is a matter that surely warrants consideration.

Again, linked to this is the matter of regional imbalance in states. Given that this is a politically sensitive subject, and one which has been dealt with by the centre via Parliament by providing Section 371(2) in our Constitution, it cannot be seen to be the state’s responsibility alone. Indeed, the centre should put its money where its mouth is. This may indirectly satisfy those asking for “special" status. Further, since in the current scenario there is no other conduit to pass resources from the centre to states, I would argue that for the time being the FC should be used as an instrumentality for this purpose.

As we know, “the story of India" has been considered to be “the story of her states" for some time now, with intra-state issues incrementally assuming importance. Perhaps the time has come to add an addendum by saying that the story of India, now and more so in the future, would be the story of her cities. The lack of empowerment and governance of cities, as well as the role of states in this, is well known. The last few FCs have taken cognizance of this and have started a quasi-direct dialogue with local governments.

Whilst remaining within the constitutional provisions, the 13th FC had provided a medium of a buoyant fund flow from the FC to the local government of 2.5% of the total fund to be devolved. This should continue with added strength, say doubling off in percentage terms, forgetting the aberration of the 14th FC, which went back to absolute magnitudes.

Finally, I would like the overall local bodies devolution to be divided in the proportion of 40:60 (urban:rural), which would be forward-looking and would not penalize the urbanized states.

A.M. Pethe is a distinguished fellow at the Observer Research Foundation and senior resident fellow at the Mumbai School of Economics and Public Policy

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Published: 06 May 2018, 09:51 PM IST
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