The broad contours of a cooperative federal polity where the Centre and States engage as equal partners in development is now emerging after the government on Tuesday accepted the recommendations of the Fourteenth Finance Commission. The FFC, headed by former RBI Governor Y.V. Reddy, has broken new ground by recommending a move away from scheme and grants-based support to States to a greater devolution of funds from the Centre’s divisible pool of tax revenues. Thus, it has recommended that the Centre share 42 per cent of the divisible pool with the States, which is 10 percentage points higher than what is the case now. By accepting the recommendation despite the fact that it would lead to a sharp drop in its own share of revenues at a time of fiscal pressures, the Centre has sent out an unequivocal signal of its commitment to the principle of ‘cooperative federalism’. The phrase was first mentioned by Prime Minister Narendra Modi in the context of his decision to replace the Planning Commission with the NITI Aayog. Indeed, the FFC’s report, along with the setting up of the NITI Aayog and the consensus on the implementation of the Goods and Services Tax, are important components of the emerging federal landscape where the Centre confers greater freedom and responsibility on the latter by devolving greater resources to them.
Consequent to the higher devolution of funds, the Centre is likely to re-evaluate several schemes that it sponsors for the States. This is a natural consequence as the Centre needs to offset its loss of revenue even as States devise their own spending programmes tailored to their needs. It is a fact that some States have been weighed down by the need to cough up their share of funds for Centrally sponsored schemes even if such schemes are not relevant to their needs. For example, for a State such as Kerala with its high literacy levels, a scheme to promote primary education is not relevant, just as one promoting power generation is not relevant to a power-surplus State such as Gujarat. The key to the success of this experiment in cooperative federalism lies in how well the States use the higher revenues and the accompanying freedom to frame their development priorities. Some of the better-developed States such as Tamil Nadu might feel aggrieved at a reduction in their share of devolved funds, ironically because of their better development metrics relative to other States. But this is federalism at work, because the resources freed up thus go to support another State that might be lagging behind on development parameters and per capita income. What is important is whether the FFC has adopted logical and fair measures while designing the allocations — which it indeed has done.