Post implementation of suggestions made by the Y.V. Reddy-led 14th Finance Commission, higher tax devolution has had limited gains for states, which have in turn reduced social sector spending. (Photo: Kumar/Mint)
Post implementation of suggestions made by the Y.V. Reddy-led 14th Finance Commission, higher tax devolution has had limited gains for states, which have in turn reduced social sector spending. (Photo: Kumar/Mint)

Has increased financial autonomy helped states?

  • An important question hinging on the commission’s recommendation is how much autonomy will the states in using Union government funds
  • The authors find that in some states the additional burden from CSS spending has actually exceeded any gains from increased tax revenue sharing

MUMBAI : The 15th Finance Commission headed by Nand Kishore Singh is expected to submit its recommendations on distribution of funds between the Union government and state governments by the end of 2019.

An important question hinging on the commission’s recommendation is how much autonomy will the states in using Union government funds?

In 2015, the 14th Finance Commission led by Y.V. Reddy, which increased the share of the Union government’s tax devolution by 10 percentage points to 42%, enhanced financial autonomy of the states which, in theory, allowed them to prioritize their own social sector spending. A new paper by Amarnath H.K. and Alka Singh of National Institute of Public Finance and Policy, however, suggests that this may not have happened.

The authors contest that higher transfers through devolution and more autonomy to states are merely an ‘illusion’. Examining state government finances between 2015 and 2017, they find that any increased funding out of the Union government’s tax revenues has almost entirely been offset by the decline in share of grants and increases in the states’ contribution towards expenditures on Centrally Sponsored Schemes (CSS).

The authors find that in some states, such as Chhattisgarh, Madhya Pradesh, Tamil Nadu and West Bengal, the additional burden from CSS spending has actually exceeded any gains from increased tax revenue sharing.

In addition, other reforms like the loans to state electricity distribution companies (discoms) under the Ujwal discom Assurance Yojana scheme and goods and services tax have further strained state finances, the authors argue. And though there has been an increase in total transfers and total expenditures by states, the authors highlight that spending on social sectors, including child health related programmes, such as the International Child Development Services, has declined.

Also Read: Impact of Changes in Fiscal Federalism and Fourteenth Finance Commission Recommendations

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