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Fourteenth Finance Commission
Preliminary evidence on the impact of the recommendations of the Fourteenth Finance Commission suggests that there has been an increase in central transfers and social sector expenditures in a number of states in 2015–16. This evidence is biased upwards due to two factors. First, much of the gains have been measured with respect to a low base year. Second, the inferences are affected by systematic differences between actuals, revised estimates, and budget estimates. Using a modified base and comparable estimates for 15 major states, it is seen that these are much smaller. Besides, in most states, social services have received a lower priority over economic services in 2015–16.
The authors are thankful to Diwan Chand for providing excellent support with data and understanding of the related issues. They are also grateful to Rathin Roy and Tapas Sen for selected insights.
The recommendations of the Fourteenth Finance Commission (FFC) have important implications for revenues and expenditures of state governments. The share of states in divisible pool of taxes has increased from 32% to 42% following the FFC recommendations: an increase much higher than the levels recommended by the previous finance commissions.1 To accommodate this increase, the union government was expected to reduce conditional transfers to states in the form of grants, as the available fiscal space was inadequate to absorb the increase in tax devolution.2 The reduction in grants, however, has been an issue of concern as much of the grants relate to centrally sponsored schemes (CSS), initiated to support expenditures in the social sector and the development of infrastructure. Although increased tax devolution has provided the states with untied resources to compensate the loss in grants, questions on what has been the net gain in resources at the state-level, and how have individual states used the increased untied resources to meet their fiscal priorities have remained matters of empirical investigation.
The FFC recommendation for increasing tax devolution to states was primarily intended to bring about a shift in the composition of central transfers to states. With increased tax devolution, it was expected that the states would receive a larger volume of untied funds relative to tied funds. This will enhance the states’ autonomy in deciding their expenditure priorities. Much of the tied transfers to states were towards CSS, which were initiated by the central government, but required a “matching contribution” of funds from the states. It has been pointed out by various state governments that the requirement of matching contribution in most CSS schemes had squeezed the fiscal space of states (Finance Commission 2015). Many of the CSS schemes were also on subjects in the state and concurrent lists of the Indian Constitution, and an expansion of these schemes have led to an increase in the union government’s expenditure on subjects other than those on the union list (Chakraborty 2015). The increased tax devolution, therefore, was not only expected to provide states with a greater degree of expenditure autonomy, but also allow the union government to focus more on areas that are constitutionally enlisted in the union list.
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