Why I am a dissenter

Written by Abhijit Sen

March 3, 2015

Despite a sizeable Finance Commission award, panchayats will receive less from Centre.

Most commentators have noted the impact of the 14th Finance Commission (FC) on the budget. While many have hailed it as a historic shift towards greater federalism, others have focused critically on the budgeted reduction in Plan expenditures of the Central government (particularly in social sectors). The Centre’s acceptance of the FC recommendation to raise the states’ share of divisible Central taxes from 32 to 42 per cent has increased the projected receipts of the states by Rs 1.41 lakh crore — that is, by 37 per cent. But this has been matched by a reduction of Rs 1.34 lakh crore in the budgeted Central assistance to state plans (CASP). Even taking into account the grants-in-aid recommended by the FC, the total transfers from the Centre to the states go up from Rs 7.62 lakh crore in 2014-15 (budget estimate) to Rs 7.93 lakh crore in 2015-16, a nominal increase of only 4 per cent. The Central government, which, in its memorandum to the FC, had argued against any increase in tax devolution to the states, has not only accepted an award that veers unprecedentedly towards the demands of states but also managed to deftly shift responsibilities.

As a member of the 14th FC, I see this as a positive outcome. In our meetings with the states, I had repeatedly pointed out that any increase in the share of the states was bound to be met by cut-backs on Centrally funded schemes. To this, almost every state had responded by saying that although they wanted more money from the Centre, they were even more interested in being able to spend whatever they got in a manner of their choice rather than being tied to Centrally designed schemes. This strong preference for untied transfers, its constitutional legitimacy and the fact that the Centre was already transferring to the states about 60 per cent of the divisible pool of taxes is why we all agreed that there was sufficient reason to award a more sizeable share as tax devolution than previous FCs had thought fit. We also agreed to depart from past practice by not awarding specific-purpose grants since, wherever necessary, these are best determined by the Centre and the states acting cooperatively and because small additional grants where large Plan schemes already exist may create confusion rather than add value. The only grants we awarded were those required by our terms of reference and, in doing this, we agreed to steer clear of both the Plan/non-Plan distinction and that between special-category and other states, neither of which were required by our terms of reference.

Nonetheless, I did submit a note of dissent to the main report. This was despite being in agreement with our collective thrust to award a sizeable increase in tax devolution, take into account Plan revenue expenditures while assessing revenue deficit grants, discontinue the distinction between special-category and other states, desist from awarding sector/ state-specific grants or to subject grants to conditionality, and suggest institutional mechanisms for better monitoring of fiscal rules and to achieve “cooperative federalism”. My main concern was that 42 per cent tax devolution would shrink the Centre’s net tax resources by nearly 1 per cent of the GDP and this could be disruptive if cuts were made unilaterally by the Centre across the various Plan schemes and block grants, giving the states very short notice. I had, therefore, suggested a somewhat lower initial tax devolution of 38 per cent and also indicated some existing Plan transfers that could be retained till a clearer collective view emerged in the NITI Aayog. Apart from health, education, drinking water and sanitation, which are public services with significant interstate externalities, and legal entitlements such as MGNREGA, I had made specific mention of Normal Central Assistance (NCA), the Backward Regions Grant Fund (BRGF) and the Rashtriya Krishi Vikas Yojana (RKVY). These are all formula-driven, relatively untied and had emerged through intensive discussions at the National Development Council.

As it turns out, health, education, drinking water and sanitation as well as MGNREGA are among the 31 Plan schemes that the budget lists as “fully supported by the Union government” and for which the 2015-16 allocation is virtually the same as the 2014-15 budget estimates. The RKVY is among the schemes to be “run with changed sharing pattern”, with a 2015-16 allocation that is slightly less than half of the 2014-15 budget estimates. But no allocation has been made for the NCA and BRGF in 2015-16.

What is the consequence of this? As far as the BRGF is concerned, it mainly concerns Bihar and, to a lesser extent, West Bengal, as well as the KBK region of Odisha and the Bundelkhand districts of UP and MP. This may not be a major concern since the finance minister has promised Bihar and West Bengal the same package as Andhra Pradesh. It does, however, keep alive the controversial issue of special category, with Odisha already expressing dissatisfaction. On the other hand, the end of the BRGF district component may make the ministry of panchayati raj almost redundant since its Plan budget has been reduced from Rs 7,000 crore in 2014-15 to Rs 94 crore in 2015-16. Moreover, this means that, despite a sizeable FC award, panchayats across the country will collectively receive less from the Centre in 2015-16 than in 2014-15, with the burden falling on the poorest districts. Of course, most states could fill the BRGF gap with their higher general FC awards. But our experience is that there is little inclination to do so and now less incentive as well.

The NCA, which is completely untied, had a substantial 2014-15 allocation of Rs 28,500 crore. This, along with other block grants such as Special Central Assistance (Rs 11,000 crore) and Special Plan Assistance (Rs 6,800 crore), went overwhelmingly to the special-category states. The Northeastern states together received nearly Rs 19,000 crore under these grants in 2014-15 and with them ending, their loss will be slightly more than the total increase that they have received in tax devolution. Although states such as Arunachal Pradesh will still gain substantially as a result, most others will lose. For example, Tripura, arguably the region’s best performer, will get at least Rs 1,000 crore less than last year in terms of untied funds from the Centre, constraining further its ability to access other Central schemes whose sharing pattern may change. The loss will be in capital expenditure, which in the past few years has averaged about 6 per cent of GSDP in this region — double what the states are allowed to borrow and much higher than in the rest of the country.

As far as agriculture and the RKVY are concerned, the cut is much less and should be absorbable by the states. But the rationale of the RKVY was to reverse a trend decline in the states’ own public expenditure in the sector — a goal in which it was successful. As in the case of the BRGF, more untied funds will not necessarily go to agriculture, unless properly incentivised.

Therefore, while I think the 14th FC has delivered a strong push towards true federalism, I do not regret my dissent either. There will certainly be major benefits from federalism in years to come, especially if the NITI Aayog can play a mentoring and incentivising role. And even this year, the budget has provided Rs 20,000 crore as special assistance for interventions through the NITI Aayog that could be used to rectify at least some of the evident problems, even if this means behaving like the old Planning Commission.

The writer was member (part time), 14th Finance Commission.

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