Half-hearted Embrace

The constitutional body that is the Fourteenth Finance Commission (FFC) has grasped the nettle of the imbalance in centre–state relations in fiscal affairs and has made sound recommendations for the establishment of a new institutional arrangement for “cooperative federalism.” Under the FFC’s award, the states are to receive 42% of the divisible pool of central tax revenue, a substantial step up from the current 32%. The commission has also recommended that central transfers to states must be at least 49% of gross central revenue receipts during 2015–20. The larger recommendation is to revitalise and strengthen another constitutional body, the Inter-State Council, so that it can act as a forum for discussion as well as decision-making to establish this new cooperative federalism.

The FFC makes a carefully argued case for why the states must have access to a larger volume of untied resources, even while the centre retains enough fiscal space to make specific purpose grants in identified areas. Finance commission transfers to states in the form of tax shares and grants of various kinds are currently less than 60% of total transfers. The remaining 40% is largely of various kinds of funds from the old Planning Commission, all of which in the absence of the FFC’s award would have had to continue, if not from NITI Aayog then from the Ministry of Finance. “Normal central assistance” under the plan, which is based on identified formulae and distributed among states, constitutes barely 10% of these other flows. The rest are “special Plan assistance,” “special central assistance” (to the North East and hill states) and “additional Central assistance.” Then there are the transfers under the central plans and also under the gargantuan Centrally-Sponsored Schemes (CSS), which numbered as many as 137 before a fake rationalisation by the previous government reduced the number to 66 even while the volume of CSS transfers remained as before.