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The finance commission’s report pointed out that the grants provided by the earlier commissions constituted a very small part of the total expenditure by states on the concerned sectors. Photo: Mint
The finance commission’s report pointed out that the grants provided by the earlier commissions constituted a very small part of the total expenditure by states on the concerned sectors. Photo: Mint

Finance Commission proposes revamp of grant allocation to states

Finance Commission recommends grants-in-aid to states for revenue deficit, suggests institutional arrangement to look into the transfer of grants

New Delhi: The 14th Finance Commission has proposed a major overhaul of grant allocation to states under various heads as it seeks to make the usage of such funds more efficient.

While the commission has recommended grants-in-aid to states for revenue deficit, local bodies and disaster management, it has suggested an institutional arrangement that will look into the transfer of grants from the centre to the states for funding requirements of specific sectors. “In our view, such an institutional arrangement could comprehensively, on a continuing basis, address the issues of fiscal transfers from the Union to the states to supplement the periodic awards of the Finance Commission, in pursuit of cooperative federalism," the commission said in a report.

Consequently, it has not recommended any sector-specific grants for crucial sectors such as health, education, drinking water and sanitation. It pointed out that the schemes in such sectors should be carefully designed and implemented and an effective monitoring mechanism put in place with the involvement of the centre, states and sector experts.

“There is a case for transfers from the Union government to the states to augment expenditure in specific sectors with a high degree of externalities in order to ensure desired minimum level of expenditures in every state. However, past experience shows that achieving this through the mechanism of Finance Commission grants may not be appropriate," the report said, adding that the commission has received feedback that the grants often overlap with other transfers made by the centre to the states.

The report pointed out that the grants provided by the earlier commissions constituted a very small part of the total expenditure by states on the concerned sectors. Also, the effectiveness of these sector-specific grants is not unknown because there is no continuity in the sectoral priorities from one Finance Commission to another.

The commission’s recommendations are in line with the theme of decentralization, said Yamini Aiyar, senior research fellow at the Centre for Policy Research and director of the Accountability Initiative.

“The sector-specific grants have not proved to be very effective. The flow of funds has not been efficient as the funds sometimes get routed to some schemes. There was also not much flexibility available to states," she said.

The commission has recommended a total revenue deficit grant of 1.94 trillion for the time period 2015-20 for 11 states, including West Bengal, Kerala and Andhra Pradesh.

Accepting most of the recommendations of the commission with respect to grants, finance minister Arun Jaitley said the government has, in principle, agreed to the proposal of the commission for giving revenue deficit grant to the states but the release of the grant will be subject to revenue raising and fiscal consolidation measures undertaken by these states.

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