More Revenue to States

In deciding to accept the recommendations of the 14th Fince Commission in respect of the States’ share of the divisible pool of federal taxes, the Centre has evinced commendable respect for the federal principle of our democratic structure besides making available more funds to the States to pursue their development plans according to their requirements and with greater autonomy than has hitherto been possible. It will be recalled that the 14th Fince Commission, headed by former RBI Governor  Y.V.Reddy had submitted its report to the President in December 2014 in which it had raised the States’ share of the divisible pool of federal taxes to 42 per cent from the existing 32 per cent. This will mean a 51.1 per cent increase in fund flow to all States from Rs 3.48 lakh crore in 2014-15 to Rs 5.26 lakh crore in 2015-16. “The higher tax devolution will allow States greater autonomy in fincing and designing schemes as per their needs and requirements,” said the report that was tabled in Parliament by Fince Minister Arun Jaitley. The new formula will become operative from April 1 this year and will be valid for five years. It should be evident from the 14th Fince Commission’s report that one of its principal objectives was to restrict the Centre’s discretion in the way it doles money to the States. The report says inter alia: “We believe that there is a need to alter the existing composition of transfers by increasing the share of ‘untied’ transfers. This should provide enhanced fiscal flexibility to the States to meet their expenditure needs and make expenditure decisions in line with their own priorities.”

It is significant that rendra Modi, who had demanded a share of 50 per cent when he had met the commission officials in September 2013 as Chief Minister of Gujarat, should now be heading a government that has been able to give the States 10 per cent more than what they were getting as their share of the divisible pool of federal taxes even though he has not been able to give them 50 per cent of it. In a letter to all chief ministers sent on Tuesday, Prime Minister Modi said that the increased money would give the States greater freedom to tailor development schemes to suit their needs. “When you (the States) are flush with resources, I would like you to have a fresh look at some of the erstwhile schemes and programmes supported by the Centre. States are free to continue or change these schemes and programmes as per their discretion and requirement,” he said. “We are moving away from rigid centralized planning which forced a one-size-fits-all approach on States. States have always been voicing their opposition to this philosophy for years,” he added.

This increased availability of funds and the greater autonomy to the States resulting from it have been noteworthy gestures to the federal structure of our republic and to the kind of fiscal autonomy that the States have been denied for a long time. However, given our experience of how State governments function, it may be too much to expect major strides towards development merely because of the enhanced funding. Like the Centre, most State governments have deficit budgets mainly because of the colossal waste of public money and unmonitored expenses. After all, very often, much of the so-called planning is really on paper and is not strictly adhered to. There are also unjustifiable subsidies continued year after year. And in States like Assam there is also rampant siphoning out of Central funds. One of the expected policy decisions after the enhancement of the States’ share of the divisible pool of federal taxes is that requests from the States to the Centre to write off past debts should be firmly turned down. The present windfall of a larger share of the taxes should take care of a State’s needs. In the case of Assam, the media should persist in asking the government why there has been no appreciable increase in sales tax revenues despite the fact that the value of the goods imported other States of India is about 10,000 times what it was in 1971. That being the case, why has there been no corresponding increase in the tax revenue?