Financial devolution

With increased funds and Centrally Sponsored Schemes, India's states now urgently need the institutional mechanism to manage this responsibility
Financial devolution

Is it too abrupt, and too less for states?

For long, states have been demanding more funds from the Central tax pool. In addition, there have been demands for devolving most of the Centrally Sponsored Schemes to the states. Just a few days before the Union Budget, the government had accepted the recommendations of the 14th Finance Commission that had increased the states’ share in the central tax pool. In the Budget, the government also brought in many changes in management of Centrally Sponsored Schemes (CSS). This is one of the key reforms that the Modi government can claim to have got right. But a deeper analysis reveals a different picture. A look at key developments:

  • States will get an additional Rs 1.8 lakh crore in the next five years to spend on priorities of their choice.
  • But an immediate ramification of this decision was that the Centre massively slashed Budget allocation for many Central schemes and Central assistance; 24 schemes will not get assistance anymore. But the Union government says this is necessary as states have more funds and the freedom to spend them.
  • Consequently, Central tied grants, which in 2010-11 accounted for 46 per cent of total transfers to states, now account for 25 per cent. As a result, states have received reduced funds for CSS in the Union Budget 2015-16.
  • A new fund sharing pattern between the Centre and states has been put in place, as shown in table below:

Will the states get more funds?

After the first few weeks of celebration of the increase in states’ share in central tax pool, details started emerging. It seems that states may not get much financial benefit as tax collection is coming down. But why would that happen?

  • According to Abhijit Sen, member of the 14th Finance Commission, the basic concern is the low tax to GDP ratio. This means how much tax is collected and what percentage it is to the GDP. This will decide the total fund that has to be shared with states. Till 2009, the Central government could collect enough tax to keep this ratio at 12 per cent. This has come down to 10 per cent in 2014-15. It means Centre's share to states may be left as more or less the same. 
  • Moreover, the total expenditure of the Union government on states has declined from Rs 17,94,892 crore in 2014-15 Budget Estimates to Rs 17,77,477 crore in 2015-16 Budget Estimates. The government justifies this reduction by citing the enhanced share of states in the tax pool.

Can states manage this flush in funds?

There are rising concerns over this increase in state funds and the abrupt drop in Central assistance to various social sector programmes. They are:

  1. There is no new guideline on sharing mechanism. Many state governments had passed their budgets before the revision came into existence. So, this year is going to be a year with lots of confusion over resource sharing. Many feel this will impact the Centrally Sponsored Schemes already in implementation.
  2. States are now left with no choice but to reconsider their spending on development programmes with their own resources. Despite the increased allocation from the tax pool, the confusion may derail many programmes.
  3. A big obstacle in implementation of many CSS is that states are not able to spend the allocated budget.
  4. The average unspent budget ranges from 30 to 40 per cent. This raises a question: what will happen in the new scenario when states will have the additional money but not the capacity?

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