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Home >News >India >Centre likely to reject FFC suggestion on 1.8 tn grants

The central government is likely to reject the 15th Finance Commission’s (FFC) recommendation to transfer 1.8 trillion to states in state-specific and sector-specific grants because of the heavy burden it would put on the Centre’s finances.

The finance ministry’s action-taken report on the FFC report submitted to the Parliament says the government will consider these grants at a later stage.

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Tax devolution and grants are the two constitutional instruments in the hands of the commission for transferring funds from the Centre to states. The Centre has accepted the recommendations for 41% devolution to states from the net proceeds of Union taxes as well as the revenue deficit grants, local body grants and disaster-related grants. Out of the total 10.33 trillion grants recommended, the finance ministry has agreed to transfer 8.53 trillion, or 83% of the suggested amount. The remaining amount will be withheld for now.

The nearly year-long pandemic has hit the revenues of states even harder as their share of the tax revenue collected by the Centre dropped because of the lockdown and subsequent subdued economic activity, forcing many states to slash spending. The decision to withhold a part of the grants recommended may further crimp their spending power, hurting health and education projects.

Of the 1.8 trillion worth of grants the commission had recommended, 50,000 crore was to be given for state-specific grants in six areas, including social needs, high-cost capital expenditure and tourism. The rest was sector-specific, including health, school education, higher education, farm, judiciary and statistics for the five-year period beginning FY22.

“Keeping in view the untied resources with the states and the fiscal commitments of the Centre, due consideration will be given to the above recommendation," the finance ministry’s action taken report said.

A query sent to the finance ministry spokesperson remained unanswered till press time.

A finance ministry official said the 14th Finance Commission had made a compositional shift from grants to increased tax devolution of 42% because it won’t put an additional fiscal burden on the Centre while raising the share of unconditional transfers to states. “Now you can’t keep untied transfers constant and bring back the sectoral and state-specific grants. We have reached the natural limits of increased devolution to states. Thereafter, the Centre will not be able to increase unless some responsibilities of the Centre are taken over by the states, which is not likely to happen. It will be fiscally unsustainable for us to accept a 96% jump in grants," he added.

The FFC has adjusted tax devolution downward by a percentage point to 41% because the state of Jammu and Kashmir was divided into two Union territories, thus shifting their financial responsibility to the Centre.

D.K. Srivastava, chief policy adviser at EY India, said if FFC had kept the revenue-deficit grants lower, it might have been possible for the government to accept all the recommendations regarding grants.

“The grants are welfare-improving and desirable as they cover areas that are otherwise missed in the broad-based fiscal transfers. The magnitude involved is limited," he added.

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