Centre-State Financial Relations in Bangaru Telangana

New Developments in Centre-State Financial Relations

In recent times, two important developments are seen in Centre – State financial relations, which have implications for State Governments viz.,

(i) Higher tax devolutions under the 14th Finance Commission, and

(ii) Restructuring of Centrally Sponsored Schemes, based on the recommendations of Sub-Group of Chief Ministers. A brief analysis of these two developments and its implications for State's finances is presented below.

14th Finance Commission

As per the Article 280 of the Constitution of India, the 14th Finance Commission (FFC) has made recommendations for distribution of the net proceeds of taxes of the Central Government between the Center and the States (vertical devolution) and the allocation among the States (horizontal devolution). These recommendations will guide the tax distributions during the period 2015 to 2020.

As per the recommendations of the 14th FC, the States’ share in the net proceeds of the Union tax revenues would be 42% when compared to 32% as recommended by the 13th Finance Commission. Thus, there is a huge increase when compared to previous Finance Commissions' recommendations. The philosophy of the FFC is to reduce Central assistance to State Plans as a whole and be replaced by greater devolution of taxes. In recommending horizontal distribution, the FFC has used broad parameters of the population (1971) and changes in the population since then, income distance, forest cover, and area. The details of this criteria and the weight assigned to them are as shown in Table 2.7.

Table 2.7: Criteria and Weights Assigned for determination of States' share

Criteria	Weight (percent)
Population	17.5
Demographic Change	10
Income Distance	50
Area	15
Forest Cover	7.5
Total	100

Following the horizontal distribution criteria, the share of Telangana is worked out to be 2.44 percent of total tax devolutions. The State-wise share of the divisible pool of Central taxes, in percentage terms, is as shown in Table 2.8.

Table 2.8: State-specific share in Central taxes

Sl.No	State	State Share
1	Uttar Pradesh	17.96
2	Bihar	9.67
3	Madhya Pradesh	7.55
4	West Bengal	7.32
5	Maharashtra	5.52
6	Rajasthan	5.50
7	Karnataka	4.71
8	Odisha	4.64
9	Andhra Pradesh	4.31
10	Tamilnadu	4.02
11	Assam	3.31
12	Jharkhand	3.14
13	Gujarat	3.08
14	Chhattisgarh	3.08
15	Kerala	2.50
16	Telangana	2.44
17	Jammu & Kashmir	1.85
18	Punjab	1.58
19	Arunachal Pradesh	1.37
20	Haryana	1.08
21	Uttarakhand	1.05
22	Himachal Pradesh	0.71
23	Meghalaya	0.64
24	Tripura	0.64
25	Manipur	0.62
26	Nagaland	0.50
27	Mizoram	0.46
28	Goa	0.38
29	Sikkim	0.37
	All States	100.00

The benefit increase in tax devolution to States from 32 to 42 percent of the divisible pool of Central tax revenue recommended by the Fourteenth Finance Commission has largely bypassed the State of Telangana. The State of Telangana has suffered revenue loss on account of the reduction of its inter se share tax devolution from 2.893 percent in 2014-15 to 2.44 percent in the award period of the Fourteenth Finance Commission (2015-2020) and more so on account of reduction in plan transfers from 2015-16 onwards. The reduction in the inter se share of the State by 0.456 percent has reduced the tax devolution to the State by Rs.2,389 crore in 2015-16 (Tax devolution to States is budgeted at Rs.5,23,958 crore in the Central Budget for 2015-16). The increase in transfers to the State as a result of an increase in tax devolution to States from 32 to 42 percent is much below the average for all States. On a per capita basis, the increase in tax-devolution in 2015-16 is Rs.858, as compared with an all-India average of Rs.1564.

Decreased tax devolution to Telangana is mainly due to the fact that

(i) Per Capita Income occupies 50% weight in deciding the State's share

(ii) Telangana's per capita income is much higher than the national average. Reduced allocation has increased the resource crunch for the State.

Restructuring of Centrally Sponsored Schemes

Centrally Sponsored Schemes (CSS) are floated by the Central Government falling either in the State or in Concurrent Lists of the Constitution while implemented through the State Governments. Funding pattern of CSS is shared between the Centre and States in the range of 50:50 to 90:10. The main objective of floating CSS is to poverty alleviation, ensure equal development on critical parameters such as education, health, agriculture, rural infrastructure, food security etc. across the country.

However, there is growing concern among the States on implementation of CSS:

(i) Over a period of time, CSS are proliferated to many sectors leading thin spread of financial resources on the field,

(ii) opting for CSS requires matching grants from the States,

(iii) Spending on CSS components are guided by guidelines issued by central Government

(iv) It is argued by the State that expectation of people are not the same and they have acquired capabilities of designing their own strategies for development.

Considering the concerns, the Planning Commission has set up a Committee on 'Restructuring of Centrally Sponsored Scheme' under the Chairmanship of Sri B.K Chaturvedi, Member, Planning Commission. The Committee has recommended restructuring of CSS to enhance flexibility to suit the requirement of States in utilizing the schemes. Further, 14th Finance Commission has recommended to reduce funding through CSS and to increase formula based devolution to States for strengthening Co-operative Federalism led to relook at CSS.

In the light of 14th Finance Commission recommendations, NITI Ayog has constituted a Sub-Group of Chief Ministers on 'Rationalization of Centrally Sponsored Schemes' in March 2015, which submitted its report in October 2015.

The important recommendations of the Sub-Committee are:

(i) CSS to be implemented in sectors such as poverty elimination, drinking water, Swachh Bharat Mission, rural connectivity, agriculture, irrigation, river conservation etc.,

(ii) Schemes should be classified as "Core" and "Optional". Core Schemes comprising of MGNREGA, National Social Assistance Programme, Scheme for development and welfare of SCs, STs, OBCs and Minorities etc., and it is compulsory for States to opt for 'Core Scheme'. Whereas amongst the Optional Schemes, States could choose some or all of them.

(iii) Number of CSS should be reduced to a maximum of 30 Schemes. All optional schemes would be 'Umbrella Schemes', with every Scheme having a large number of components with a uniform funding pattern.

(iv) NITI Aayog, in consultation with State and Central Ministries, should evolve a transparent criteria based on the development needs, population, potential of the State in that sector for inter-State allocation of CSS funds,

(v) Central share should at least be 50% in case of option schemes and core schemes to continue to have same funding pattern,

(vi) Flexi-Funds in each Scheme should be 25% of allocation in each financial year,

(vii) Streamlining of procedure for release of CSS funds,

(viii) All works that have begun in existing projects in 2014-15 in which work has been awarded until 31st March 2015 should be funded on the existing pattern for the next 2 years.

G.Rajendera Kumar