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More money in states' hands will strengthen India's federal system

Gyanendra Keshri, Executive Editor, INCLUSION

Prime Minister Narendra Modi with chief ministers of North-Eastern states at the first meeting of NITI Aayog governing council in New Delhi.

The government has accepted the recommendations of the 14th Finance Commission that seeks to enhance transfer of money to the states from the central taxes by an unprecedented 10 per cent.

Under the new arrangement 42 per cent money from the ‘divisible pool’ will be transferred to the states. This is 10 percentage point increase when compared with the previous 32 per cent.

In a letter to Chief Ministers, Prime Minister Narendra Modi said his government has“wholeheartedly accepted” the recommendations of the 14th Finance Commission, even though it puts “tremendous strain” on the Centre’s finances.

The 14th Finance Commission headed by former Reserve Bank of India (RBI) governor Y V Reddy has recommended a record increase of 10 per cent in the devolution of the divisible pool of resources to states. This compares with the marginal increases made by previous Finance Commissions.

The total transfer of money to state is estimated to jump to Rs 5.26 lakh crore in the financial year 2015-16 from Rs 3.48 lakh crore in the fiscal ending March 2015. In absolute term the states’ share will go up in the subsequent years with the increase in revenue to the exchequer. Each Finance Commission recommendations are implemented for five years.  

More money in the hands of the states will help strengthen the country’s federal structure. Most of the social welfare and development works

come under the purview of the states, while lion’s share of revenue from the taxes go to the Central government.

This also makes revenue to the states predictable. Now the states can plan and prioritise development and welfare works as per the local needs and requirement.

Modi government has already replaced 65-year old Planning Commission with NITI Aayog. Allocation of funds to the states used to be dominated by the whims and fancies of the Planning Commission. The NITI Aayog does not have any fund allocation power. Under the new structure there is a shift from scheme and grant-based support from the Central government to a devolution-based support.

“This is our strategy to take the country to a faster and yet inclusive growth trajectory through cooperative federalism which is real and true federalism,” Modi said. “We are happy with our decision and that resources are going to the right place. Resources are going to states to ensure that poverty is eliminated, jobs are created; houses, drinking water, roads, schools, hospitals and electricity are provided. This has never happened in this country before,” he added.

Higher transfer to states will obviously have implications on the Central government’s finances. The revenue available with the Centre will go down in the same proportion as the increase to the states.

However, what is positive here is that the states will now have greater autonomy in financing and designing the schemes as per their needs and requirements. Local government understands their requirements better than the people sitting in the national capital.

(Gyanendra Keshri can be reached at gyanendra@skoch.in)

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