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Across The Aisle – Fourteenth FC: Generous to a fault?

Dissent is the soul of debate.

Justice Felix Frankfurter of the United States Supreme Court and Justice K Subba Rao of the Supreme Court of India wrote many famous dissenting judgements. The most celebrated dissenting judgement in the history of Indian courts was authored by Justice H R Khanna in the case of ADM Jabalpur. According to Chief Justice Hughes of the US Supreme Court, “a dissent in the court of last resort is an appeal to the brooding spirit of the law, to the intelligence of a future day when a later decision may possibly correct the error….”

Mr Abhijit Sen can take heart that he may not be alone when he wrote his four-page dissent to the Report of the Fourteenth Finance Commission (FFC). It deserved a more reasoned response than the rather dismissive one-paragraph reply appended by the Chairman and the other members of the FFC.

Be that as it may, let us examine the issue objectively.

Transfer of funds to States

Should the Central government transfer more resources to the State Governments? My view is yes, a resounding yes. Resource transfers fall under four heads. They are:

1. States’ share of taxes and duties (mandatory under Article 270 of the Constitution);

2. Non-Plan grants and loans (discretionary, based on the discretion of line Ministries and Departments);

3. Central Assistance to States’ Plans (hitherto based on agreement between the Planning Commission and the State concerned); and

4. Central Assistance for Central government schemes (discretionary, but governed by principles of burden-sharing).

I have long held the view that States’ share of taxes and duties collected by the Centre must be significantly increased. I have also long held the view that Central government schemes must be very few and must be fully funded by the Centre. If matters had stopped there, there would be no dispute. The States would have to do with their share of taxes and duties transferred to them and their own resource mobilisation.

Matters did not stop there. The Centre wanted States to implement its Plan; it also wanted States to draw up State Plans. States asked for money, Gross Budgetary Support(GBS) came into being, and the Planning Commission became the arbiter. Besides, justas the Centre had its non-Plan schemes, so did the States have their non-Plan schemes, and wanted money for those schemes too. Article 275 of the Constitution came in handy. Instead of co-operative federalism, the Centre and the States began to quarrel over transfer of funds under Article 275.

UPA set the ball rolling

On January 2, 2013, the UPA government constituted the FFC as required under Article280 of the Constitution. One of the terms of reference was to recommend “the principles which should govern the grants-in-aid of the revenues of the States.” Further, on February 17, 2014, while presenting the Interim Budget for 2014-15, I announced that the Centrally Sponsored Schemes (CSS) had been restructured into 66 progammes and funds for the schemes would be released as Central assistance to State plans. Consequently, Central assistance to State plans rose dramatically from

Rs 136,254 crore in 2013-14 to Rs 338,562 crore in 2014-15.

The UPA government had set the ball rolling. Mr Jaitley maintained the same numbers when he presented the regular Budget in July 2014.

The FFC has kicked the ball further. In major shifts from the past, it has increased the States’ share of taxes and duties from 32 per cent to 42 per cent. It has also recommended only grants for revenue deficit, disaster relief and local bodies. All other grants have been axed. Instead, the FFC has recommended a separate institutional arrangement for grants to sectors such as health, education, drinking water and sanitation. The result: more untied funds to the States. The expectation: more financial responsibility on the part of the States.

Sen’s agreement and dissent

Mr Abhijit Sen does not disagree with the core recommendations of the FFC. His main concern is that major shifts from past practice will “disrupt existing plan transfers with likely very serious effects in the first year of the award period.” He has, therefore, recommended that the States’ share of taxes be kept at 38 per cent in the first year and maintained at that level until there is agreement on the separate institutional arrangement. Post agreement, he supports States’ share being raised to 42 per cent.

The Chairman and other members have responded that it is “for the authorities to determine the transition path and make arrangements as are appropriate.” The Government, characteristically, has played safe. It has accepted that the States’ share of taxes and duties will be 42 per cent but, in respect of grants-in-aid of revenue and Revenue Deficit grant, it has accepted the recommendations only “in principle”. Government has also promised to put in place an appropriate institutional arrangement.

All this may seem arcane. Not if you believe that Normal Central Assistance (to the Plan), Rashtriya Krishi Vikas Yojana and Backward Region Grant Fund, specifically referred to by Mr Sen, are important interventions. Mr Sen has appealed to the “intelligence of a future day”. That day was yesterday, and when you read this column on Sunday you will know if the Government has found a satisfactory solution.