Higher devolution to give states more autonomy
Extra ₹2 trillion from the centre in 2015-16 to give states more fiscal autonomy
New Delhi: The recommendations of the 14th Finance Commission (FFC) will confer more fiscal autonomy to states both on the revenue and the expenditure fronts, with states expected to get an additional ₹ 2 trillion in transfers from the centre in 2015-16, the economic survey said on Friday.
add_main_imageThe estimated higher transfer of ₹ 2 trillion to states—both from tax devolution and grants—is expected to give states more fiscal autonomy and further the concept of fiscal federalism championed by Prime Minister Narendra Modi.
The 14th Finance Commission, headed by former Reserve Bank of India governor Y.V. Reddy, recommended the biggest-ever increase in share of states in the central divisible pool of taxes from 32% to 42% for the period 2015-16 to 2020-21, a recommendation the central government has accepted. NextMAds
The consequent higher devolution will benefit states like Uttar Pradesh, West Bengal and Madhya Pradesh the most, according to the survey.
“In sum, the far-reaching recommendations of the 14th Finance Commission, along with the creation of the NITI Aayog, will further the government’s vision of cooperative and competitive federalism,” the report said.
The higher devolution to states will also limit the fiscal space for the centre, but is expected to add substantial spending capacity to states’ budgets. This will reduce the central assistance to states for schemes.
“The numbers also suggest that this renewed impulse toward fiscal federalism need not be to the detriment of the centre’s fiscal capacity. Implementing the FFC recommendations would increase progressivity because progressive tax transfers would increase and discretionary and less progressive plan transfers would decline,” the survey said.
The survey has arrived at the higher payout for states in the next fiscal based on assumptions about nominal gross domestic product growth and tax buoyancy and the policy measures that are contemplated for 2015-16. sixthMAds
While states like Uttar Pradesh, Bihar, Madhya Pradesh and West Bengal have gained mainly on account of an increase in the total divisible pool, states like Arunachal Pradesh, Chhattisgarh, Madhya Pradesh, Karnataka and Jharkhand have benefited significantly due to a change in the devolution formula which now gives greater weight to a state’s forest cover, the report pointed out.
On a per capita basis, the major gainers are Kerala, Chhattisgarh and Madhya Pradesh, according to the report.
As per the survey’s estimates, while Uttar Pradesh will get ₹ 24,608 crore more in 2015-16, West Bengal will get an additional ₹ 16,714 crore and Madhya Pradesh ₹ 15,072 crore.
Other significant gainers include Andhra Pradesh (united), Bihar, Jammu and Kashmir and Maharashtra.
The survey has based its estimates on the revenue implications based on 2014-15 data and taken into account gross domestic product growth, tax buoyancy and other fiscal parameters.
Following the recommendations of the 14th Finance Commission released earlier this week, the shares of states like Uttar Pradesh, Tamil Nadu and Bihar had gone down in the divisible pool compared with the share they received after the report of the preceding commission.
After the additional payout by the centre to states, the centre’s expenditure spending will be limited, according to Indranil Sen Gupta, India economist at DSP Merrill Lynch India.
“Centre’s net tax revenues are estimated at ₹ 9.27 trillion, which, in turn, will limit growth in the centre’s expenditure to 4.5% if finance minister Arun Jaitley targets the pre-committed fiscal deficit of 3.6% of GDP,” he said in a note. “Alternatively, if he targets a higher fiscal deficit of 4%, Centre’s expenditure growth could then be higher at 8.1% to allow for higher infrastructure spending.”
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First Published:28 Feb 2015, 12:36 AM IST
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