Home / Politics / Policy /  States to wield more fiscal powers

New Delhi: The Union government is likely to fund fewer programmes in the future, and its allocation to states on marquee social sector programmes, such as the rural job guarantee and food security schemes, will be based on a formula and customized to the special needs of states.

In addition, the 66 schemes funded by the Union government from its budget may be whittled down to 20 and will include the existing Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the Pradhan Mantri Gram Sadak Yojana and the National Food Security Mission.

These recommendations, made by the panel of state chief ministers headed by Madhya Pradesh chief minister Shivraj Singh Chouhan, may be adopted at a meeting between the Union government and states later this month in Delhi.

If the recommendations are accepted, it will be yet another step towards evolving a cooperative federalism structure, which at its the core recognizes that “one size does not fit all" and that states are equal stakeholders.

The fiscal polity of India has already been reset with the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) accepting the recommendations of the Fourteenth Finance Commission. Not only did the commission increase the share of devolution to states to 42%—previously it was pegged at 32%—but it also did away with the concept of tied aid from the centre to the states in the form of grants. In short, the commission recognized the states as equal fiscal partners that no longer required any hand holding or guidance from the centre ordaining spending on key social sector programmes. Besides the funds transferred by the Finance Commission, states also received non-statutory transfers effected through the Planning Commission (which has ceased after the Commission was abolished by the NDA) and central ministries that fund centrally sponsored schemes (CSS) such as the MGNREGS. Currently, CSS has a corpus of 2 trillion.

The NITI Aayog, the body which replaced the Planning Commission, set up a panel of a few chief ministers with Chouhan as the convenor to create a blueprint for dealing with CSS in the new federal polity.

Now this group, after deliberations, has concluded that the list of CSS be reduced to 20. It has proposed that this be broken up into core and optional schemes and the states be permitted to choose the activities within a programme—instead of the current practice of it being defined by the Union government.

“It is a very positive step. States should be able to choose which centrally sponsored schemes they want to participate in and how they want to utilize the funds," said Rathin Roy, director, National Institute of Public Finance and Policy.

More importantly, the allocations to states will be based on a formula, which is yet to be worked out. A person familiar with the developments said that it is likely to be something similar to the previous Gadgil formula for resource sharing among states. Currently, most of the CSS spending is targeted at a few states and hence the sharing is regressive in nature, the same person said.

The panel has also recommended flexible funding of CSS initiatives, including creating a flexi-fund of a part of the total corpus to be spent on guidelines to be evolved by the finance ministry. For all core sector initiatives, the share of spending by the centre will be 90% and the balance will accrue from states; for optional schemes the proportion is 80:20.

Economists have pointed out that the fiscal health of states has been much better than that of the central government in the past few years and that it is important that transfer of more funds from the centre to the states should be accompanied by more autonomy to the states.

“This is in line with the basic design of the constitution. States understand their needs and priorities better. Now that a much larger transfer is going to states in the form of tax devolution following the recommendations of the Fourteenth Finance Commission, they should have greater autonomy to select those schemes that will suit their needs better," said D.K. Srivastava, chief policy advisor at consulting firm EY.

“When resources are allocated according to the needs of the states, it helps improve welfare and efficiency. Since now the need for designing and monitoring of schemes at the central level will not be there, the Union government should look at downsizing its ministries that deal with state and concurrent subjects," said Srivastava, who was a member of the 12th Finance Commission.


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