Finance Commission recommends for higher devolution

Dated 24th September, 2014

With an eye on its fiscal deficit target of three per cent of gross domestic product by 2016-17, the finance ministry has recommended against higher devolution to states, in a communication to the 14th Finance Commission (FC).

The FC recommends the percentage of central taxes to be shared with states and the criteria. The present panel, headed by former Reserve Bank of India governor Y V Reddy, has met all the states.

In their consultation with it, the states have asked for raising the devolution to 50 per cent from 32 per cent at present. However, the Centre has said it can’t spare more money, as it has to take care of its own liabilities.

“Considering our long-term payment obligations such as higher salary burden after recommendations of the seventh pay commission and compensation to the states if they make any losses after switching to a Goods & Services Tax (GST), we have recommended keeping it at last year’s level,” a finance ministry official, who did not wish to be identified, told Business Standard.

The demand for an increase in devolution has been strongly raised by Bharatiya Janata Party-ruled Gujarat, Rajasthan, Madhya Pradesh and Chhattisgarh, as well as Bihar, Mizoram, Kerala, Tamil Nadu, Odisha and Assam.

“We told the FC that higher devolution is not possible because states’ financial position is better than the Centre’s. Too much financial autonomy is also not good, as if they borrow from abroad tomorrow and are not able to repay, it will be a problem,” said another ministry official, requesting anonymity. This was not the time for raising the share, he said.

The fixed devolution to the states is 30.5 per cent currently. A variable component takes it to 32 per cent. The 12th FC had raised it from 29.5 per cent to 30.5 per cent for 2005-10. Then, the 13th FC raised it to 32 per cent.

Some states have also argued in favour of a phased increase in devolution every year.

“The Union government doesn’t want it to go up and the states want more. This happens every year,” said a person from the FC. Their report, to be given to the Centre next month for the five years from April 2015, would also suggest a mechanism for compensation in the event of revenue loss to states in the GST regime.

Earlier during a Budget meeting with the states, Finance Minister Arun Jaitley had emphasised the need to address regional disparities through evenness of growth across states. Union Territories’ administrations had suggested they be made a part of the FC award. States expressed concern on the impact of the central pay commission award on their finances. They suggested a consultative process for implementation of the award must include them.