The Fourteenth Finance Commission’s recommendation to increase tax devolution to 42 per cent of the shareable pool of taxes has increased the flow of untied resources (or resources transferred without condition) to States. Estimates show that post the 14th commission award, the untied statutory transfers would be more than 70 per cent of the aggregate resource transfers from the Union to the States. Although this increase in the share of untied funds is a marked improvement in the structure of a transfer away from a conditional to an unconditional one, it is time that attention is paid to reform the transfer system by focussing on non-Finance Commission transfer to enable States to effectively utilise the enhanced untied fiscal space. This can only be done by reforming the coverage, content and architecture of the non-Finance Commission transfers and a further consolidation of schemes. This article discusses this important issue and provides a possible way forward keeping in view the recommendations made by the 14th commission in this regard.
Budget and non-FC transfers A major issue, post Budget 2015-16, is the sharp decline in allocations to the social sector in the form of various conditional grants to the States. This decline has happened to accommodate a large increase in tax devolution. As per the Budget estimates, enhanced tax devolution should result in an increase in the flow of untied funds to the tune of Rs.1,86,150 crore and a reduced flow of grants to the tune of Rs.87,730 crore.
This decline in grants has happened in two categories: in a specified list of schemes where the Centre’s contribution has been reduced, implying a corresponding increase in contribution by the States and for a set of schemes where Central support has been withdrawn. Important schemes in the first category are the
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
Restructuring is not only important from the perspective of State finances. It is also about getting the expenditure priorities right for both the Union and the State governments. As articulated in the 14th commission’s report, “between 2002-05 and 2005-11, revenue expenditure by the Union Government on State List subjects increased from an average of 14 per cent to 20 per cent, and on Concurrent List subjects from an average of 13 per cent to 17 per cent. This implies a reduction in expenditure, in percentage terms, on Union List subjects. Expenditure functions under the Union List fall predominantly under General and Economic Services. The share of expenditure on these has progressively declined from 66.3 per cent in 2001-02 to 53.2 per cent in 2014-15(BE).” One of the primary reasons for this is the proliferation of CSS, especially in the social sector and on right-based spending. For better service delivery outcome, these need to change as most of these functions are primarily in the functional domain of the States. The Union government should move its focus from spending on overlapping functional domain to subjects that squarely fall in the functional domain of the Union, as in the Union List, and limit its intervention on the ‘State List’ and ‘Concurrent List’ on subjects of national priority having a consideration of externality.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
Principles of restructuring Also, with a significantly higher tax devolution to the States, much of the expenditure priorities would have to align in a manner as envisaged in the Constitution. Sectors where significant State spending rather than a “one-size fits all” Union government scheme would be more appropriate are health, education, agriculture and rural development. Now, the larger question crops up. When States are the major spending entities in these sectors, as these functions fall primarily in the functional domain of States, should they not be given the fiscal autonomy to carry out their own programme to address differential needs? In this context, should one be too worried about the decline in spending in the Union Budget for some of these sectors? Instead, the focus should be to reform the non-finance commission transfers to make the transfer system transparent, efficient and fiscally non-intrusive unless required. It is also time we take a comprehensive view of spending by taking the Union and State interventions in sectors where States are the primary provider of services rather than focussing on what is allocated by the Union Government.
Finally, this is not to argue that Central intervention does not have a role to play in development spending. Rather, such interventions should be limited to a few national priorities. As articulated in the 14th Commission report, the Union government is currently transferring around 63 per cent of the shareable pool of taxes to States in the various forms of transfers. The commission’s recommendations have left a fiscal space to the tune of around 15 per cent of the shareable pool for the Union government’s intervention on subjects of a national priority in the social and economic services. This fiscal space, as argued in the report, should be used in the framework of “cooperative federalism” with the active involvement of States on the design, architecture and implementation framework of such schemes to avoid the proliferation of a ‘one size fits all’ CSS, as was the practice in the past.
(Pinaki Chakraborty is Professor, National Institute of Public Finance and Policy, New Delhi. He was Economic Adviser to the Fourteenth Finance Commission. The views expressed are personal. E-mail: pinaki.chakraborty@nipfp.org.in)