Remove central discretion over funds for states
Given how state governments are used to asking for more funds from each successive Finance Commission, it is easy to dismiss the demands of several states—the BJP-ruled ones primarily as FE reported last week—for reducing the share of the central government in funds transferred to them. Right now, states get 32% of all central taxes, though the amount gets reduced by the fact that the Centre imposes surcharges like the education one which don’t get shared with states. This is projected to add up to around R3.8 lakh crore in FY15. Another R3.9 lakh crore or so is transferred by way of grants or loans for the Plans of the states as well as for centrally-sponsored schemes. Which means, by and large, apart from the share of central taxes, most of the other money transferred to the states is controlled by the central government—the money has to either be spent on areas chosen by the central government or spent based on certain norms laid down by the Centre. Were the central schemes very well run, or designed, it would be one thing; but since this is clearly not the case, there is a solid case to be made out to give more money to states to spend as they see fit. Based on the current budget numbers, total central transfers to states, by way of automatic devolutions as well as through the Planning Commission route, add up to around 57% of gross central tax collections, a number not too different from what the states are asking for.
Which is why the Finance Commission will do well to take into account the submissions made by various state governments. Each Finance Commission, it is true, increases the amount transferred to states automatically by way of their share of central taxes; presumably the 14th Finance Commission will also do the same; it may also tinker with the formula for dividing transfers within states—by and large, the way the formulas tend to work, the poorer states get a higher share of money, with the idea being they need more funds in order to be able to develop. What the states are asking for, however, is a significantly different approach. They are asking for almost complete autonomy in using their funds and unless the Finance Commission can explain why central discretion over funds transfer has a positive effect, there is no reason why this should not be done. Also, while more funds for poorer states is desirable in terms of giving them greater funds to catch up, there is a lot to be said for encouraging states who have consistently delivered greater results in terms of both using funds as well as growing their GDP and reducing poverty levels—that is, a greater emphasis on such parameters, as demanded by Gujarat during its consultations with the Finance Commission, is probably a good idea. While greater autonomy for states is a Modi campaign promise, it will be difficult to fulfil this unless the Finance Commission plays ball.