Notwithstanding the growing demands from the States, for all these decades, India's fiscal space had been like a constant pendulum, making very slow and predictable movement. Such movement persuaded Vijay Kelkar, former Chairman of the Thirteenth Finance Commission (TFC), to famously remark, "A nation measuring the share of revenue expenditure by the States in total revenue expenditure by the Centre and the states together has been almost like a gravitational constant and has been about 57-58 per cent for the last 60 years while the share of the revenues collected by the states in the total revenues has been around 40 per cent."
This speaks a lot about the cautious manner in which the people at the helm of affairs thought about the Centre-State fiscal architecture. Even the TFC chose to keep the devolution to maximum 32 per cent in 2010 and this was then viewed by many analysts as "too high" and may contribute to deterioration of public finance of the Union government.
Thus, for all these decades, country's fiscal federalism had remained lopsided with a heavy pro-Union bias. With the creation of extra-constitutional entities like the Planning Commission that monopolised transfers to states at a later stage, the fiscal space meant for states were considerably eroded. So much so that the first thing that most chief ministers used to do after they arrived in national capital was to make pilgrimage to Yojana Bhavan for funds.
India's fiscal story is in complete contrast to dramatic political federalisation (rise of regional parties and emergence of competitive multi-party system) that the country has witnessed in the last three decades. And this has been the case despite regional parties being the seat anchors of every government since 1989 and simultaneously being the key voice for greater fiscal devolution.
Even powerful regional parties such as DMK, which were on the forefront of greater financial devolution, remained in nearly every government formation at the Centre but played the role of a silent recipient of Central largesse. In short, fiscal architecture was never in sync with the overall evolution of federalism. The Centre's decision, therefore, was long overdue and one that would address many paradoxes afflicting the federalism in India.
Yet, the new devolution scheme has many implications both for the Centre and the states. First, a sudden rush of huge quantum of resources gushing through the throats of states may act as disruptive elements. This was what persuaded Abhijit Sen, a critical member of the Fourteenth Finance Commission (FFC), to write a dissenting note.
It is well known that States in India are in different levels of development and have huge gaps in their capabilities and resources (human resources). Thus, scrapping of Centrally Sponsored Schemes (CSS) and greater devolution of untied fund is likely to aid states that are relativity advanced and better governed/prepared. The net unintended consequence could be that it may lead to new forms of inequality among states.
Second, one does not know whether States are going to spend such devolved resources effectively. Let us not forget that nearly half of additional devolution is going to the badly governed states such as Uttar Pradesh, Bihar, West Bengal and the north eastern states. Will the spending gets prioritised and spent effectively? Or, are such devolved resources going to be a boon for vote bank politics in the form of populist schemes and handouts?
Adverse effects
Third, while the Centre's plans to rationalise and gradually disband 63 CSSs and pass the resources allocated in such schemes to states is a genuine step to deepen devolution, in the short run, such shut down of CSSs is going to affect some States adversely. For instance, abolition of flagship Backward Regions Grant Fund (BRGF) would adversely affect poorer states like Odisha and Bihar. The Union Budget which announced its closure, has no alternative roadmap to support country's most backward districts (250 of them including infamous KBK districts from Odisha), although states are expected to fulfill such obligations from the enhanced devolution.
If past evidence is any barometer, poorer districts would be the net losers in this transition game. Yet, what is more serious is that the new devolution would impact a number of Central ministries that routinely used to oversee implementation of CSS. For instance, a key ministry like panchayat raj that was earlier managing a substantial Rs 5,000 crore for the implementation of BGRF will suddenly be left with just Rs 78 crore to perform many functions. This calls for serious institutional fine tuning.
Finally, there is a big question mark whether states are going to keep their commitment to devolve a sizeable percentage of devolved resources to local bodies (rural and urban). Lack of funds has remained the key barrier to the function and legitimacy of these institutions.
To sum up, the FFC-recommended devolution comes at a critical juncture of Centre-State fiscal relations that was looking increasingly unsustainable. Yet, with it, there lies a different set of challenges and the Centre is expected to play an even greater role to aid States to spend money effectively while managing newer forms of inequality that are bound to emerge out of the new direction. More importantly, the Centre has to bring in new institutional forms and instruments to oversee the transition.
(The writer is a Senior Fellow at Observer Research Foundation, Delhi)
Courtesy: Deccan Herald
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