Half-hearted embrace of FinCom report

The constitutional body that is the Fourteenth Finance Commission (FFC) has grasped the nettle of the imbalance in Centre–State relations in fiscal affairs and has made sound recommendations for the establishment of a new institutional arrangement for “cooperative federalism.” Under the FFC’s award, the States are to receive 42% of the divisible pool of central tax revenue, a substantial step up from the current 32%. The commission has also recommended that central transfers to States must be at least 49% of gross central revenue receipts during 2015–20. The larger recommendation is to revitalise and strengthen another constitutional body, the Inter-State Council, so that it can act as a forum for discussion as well as decision-making to establish this new cooperative federalism.

What will happen if the Centre implements the FFC’s recommendations in full is that many Centre-sponsored schemes will have to be abolished and the central government bureaucracy associated with them will have to find other things to do. And state governments will be able to pay greater attention to their social and economic priorities, assuming they do not waste the new untied funds.

However, a note of dissent to the FFC, while agreeing with the broad thrust of cooperative federalism, argues for a phase-wise increase in States’ share. A sudden switch on 1 April 2015 gives little time to either the States to use the additional untied funds to meet their social and economic priorities or to the Centre to reorganise some of its activities. .

Initial indications are that the central government is only half-hearted in its embrace of the FFC’s landmark report. First, the Centre has only accepted “in principle” the recommendation to provide revenue deficit grants to 11 (mostly backward and poor) states — it has made these grants conditional on the states pursuing fiscal consolidation measures and raising revenue. This violates Article 275(1) of the Constitution under which a Finance Commission is expected to award revenue deficit grants where required. It also goes against the spirit of the FFC’s report which has shunned making “conditional” recommendations of any kind.

The second and bigger problem with the NDA government’s response is that it is silent about putting in place the larger changes that are necessary to make cooperative federalism a reality.

There is no mention of reforming the system of fiscal transfers in a comprehensive manner, there is no mention of putting in place the institutional arrangements necessary and there is no mention of revitalising the constitutional body, the Inter-State Council, to give it the power and importance to oversee fiscal federalism. Clearly, cooperative federalism cannot be brought about by a Finance Commission’s recommendations; that requires political action by the States and political parties.