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States: Funds for Growth, Not Freebies


In his hour-long budget speech in Parliament, Union Finance Minister Arun Jaitley took a justifiable pride in proclaiming that in keeping with the genuine spirit of cooperative federalism, the NDA government devolved a hefty 42 per cent share of the divisible pool of taxes to States as suggested by the Fourteenth Finance Commission (FFC) recommendations.

In his explanatory memorandum as to the action set off on the recommendations, Jaitley contended that in line with the Modi government’s avowed motto of ‘Team India’ to achieve national goals by letting States greater leeway to tailor the schemes as per their priority and financing, a 10 per cent “significant enhancement over the 32 per cent during the award period of the 13th FC has been accepted.” This meant approximately a year-on-year increase of Rs 1.78 lakh crore annually to the States in the next fiscal starting April 1, 2015, against Rs 3.48 lakh crore in 2014-15, the last year of the 13th FC period. This is a laudable gesture in terms of the largesse extended to States by the Union, given the toll it will exact on the national exchequer in keeping its inescapably larger responsibility of governance pan-India that entails no inconsiderable expenditure to spare no resource to keep the unity of India intact. Interestingly, this higher tax devolution bonanza has a flip side. Under Article 275 of the Constitution, grants-in-aid of revenues to States which used to be omnibus provisions that covered their non-plan schemes are now limited only to meet States revenue deficit (after accounting for the enhanced share in central taxes for States), disaster relief and local bodies.

In assessing the revenues and expenditure of the States for the span 2015-20, the YVK Reddy-headed 14th FC has projected the revenue deficit of the order of Rs 1,94,821 crore of eleven States. These include among others Andhra Pradesh, Himachal Pradesh, Jammu & Kashmir, Manipur, Mizoram, Nagaland and Tripura estimated to be ending up with revenue deficit for all the years of the award span and Assam, Kerala, Meghalaya and West Bengal for at least one of the years of the quinquennium. Even while accepting this gap-filling approach of weaker States “in principle,” Jaitley made it categorical that even this amount is subject to “revenue-raising and fiscal consolidation measures” to be made by the States concerned. The message is loud and clear even to these fiscally-challenged states that they have to fend for themselves if they are serious enough to move up in the development ladder. Grants to fill up revenue deficit reek of policy-based and performance-related criteria and not a free lunch from the Union Cafeteria! This is undoubtedly preferable to the past practice when such grants were swayed by partisan approach with State after State losing faith in Federation’s bipartisan devolution of funds particularly in coalition era when predilections of the Union is alleged to have resulted in dereliction of its fair duty!

On local bodies, the third and crucial pillar of service delivery after the Union and the States to the denizens, the Commission plumped for spending the grants only on the basic services within the functions assigned to them under relevant legislations. For Gram Panchayats, it has recommended the basic grant of Rs 1, 80,262.96 crore and performance grant of Rs 20,029.22 crore for all the States. For municipalities the Commission has recommended the basic grant of Rs 69,715.03 crore and performance grant of Rs 17, 428.76 crore for all the States. While the Union government has accepted the recommendations in keeping with the spirit of making over “funds, functions and functionaries” at the grassroots level, a slew of suggestions by the FFC to the State governments to strengthen State Finance Commissions (SFCs) will herald a new beginning in development journey if implemented by the States with finesse and foresight.

At a time when property tax has been abolished in States like Haryana, Punjab and Rajasthan, the FFC has opted for a review and amplification of the extant rules to enable the levy of property tax and minimising the grant of exemptions in a serious move to explore additional avenues for revenue. It has also favoured the levy of vacant land tax by peri-urban panchayats, besides sharing a part of land conversion charges by State governments with municipalities and panchayats. For local governments, the FFC has suggested raising the ceiling of professions tax from Rs 2,500 per annum to Rs 12,000 per annum, besides amending the Article 276 (2) of the Constitution to increase the limits on the imposition of professions tax by States. Rightly does the FFC favour rationalising service charges by the urban local bodies in a way that “they are able to at least recover the operation and maintenance costs (OMCs) from the beneficiaries.” In framing its recommendations for grants to local bodies, the FFC has justifiably weighed such factors as enhancement of grants, minimal conditionalities, strengthening the role of SFCs and placing trust in local bodies. The time has now come to embrace these imperatives if the ordinary people are to get the value for the money they pay by way of multiplicity of taxes ranging from income to the plethora of services they get in their routine existence.

On disaster relief the Commission has recommended Rs 61,219 crore as aggregate corpus of State Disaster Relief Fund (SDRF) for all States for the award period with the States contributing 10 per cent (Rs 6,122 crore) to SDRF and the remaining 90 per cent coming from the Union government. In response, Jaitley accepted this recommendation with a modification and that once GST is in place, recommendation of the FFC on disaster relief would be fully implemented. With the Union government accepting by far a majority of the recommendations, the ball is in the court of the States to draw up a judicious blend of revenue and expenditure plan to make the best use of higher devolution of funds fortuitously made available by the FFC that an understanding Union complied with in full faith. If the States believe in populism and vote bank politics to persist with the policy folly of short term gains, the best of time ahead would be lost to them irretrievably.

For the Union government, the FFC has suggested an institutional mechanism to oversee the implementation of fiscal rules at the Union government level even as Jaitley has deferred adhering to fiscal deficit reduction target by a year. Rightly it has upbraided the Union, stating that the large revenues foregone or tax expenditures and expanding cesses and surcharges during the review period (2007-08 to 2012-13) signified significant exclusions of States from the divisible pool. The FFC said that while these are entirely in the Centre’s jurisdiction, in reality they are eroding transferrable resources to States. Under the circumstances it will be necessary to keep in view these developments while determining the share of the States in the divisible pool during the award period (2015-2020). Viewed from this perspective perspicaciously put by the FFC, the NDA government’s bid to devolve higher resources of 10 per cent in the next five years is politically prudent and economically ineluctable. The focus now is on States as to how they avail of this award in the coming years to shore up the revenue base by spending on development works of durable asset creation and employment generation or in freebies and subsidies that will keep them both awkward and backward for aeon to dawn.

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