Arun Jaitley puts states at centre stage

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Published: March 1, 2015 4:06:33 AM

Aggregate transfer to states up just a tad, but greater say in various schemes means they can shape their financial destiny

Advocating the idea that “India grows when states grow”, the Centre will devolve R5,23,958 crore to states as their share of taxes in 2015-16, 55% higher than a year ago, marking the start of the award period (2015-20) of the recent recommendations of the 14th finance commission.

The Budget has also announced that as part of the migration towards the goods and services tax (GST) regime, education cess will be subsumed and the general rate of central excise of 12.36%, including cesses, will be rounded off to 12.5%. Since cess and surcharges are not part of the divisible pool, subsuming them in central excise and service tax will only help states as the entire tax mop-up will be part of the divisible pool.

The aggregate transfers to states, however, have gone up just a tad to 62.8% of the divisible pool in 2015-16, compared with 61.9% in the Budget estimate for the fiscal, suggesting a broader change in the composition of resource transfers rather than squeezing the centre’s fiscal space drastically. The finance commission has recommended that the share of states in central taxes be kept at 42%, making no distinction between Plan and non-Plan expenditure. In contrast, the earlier finance commission, which limited its transfer proposals to only non-Plan expenditure, had pegged states’ share at 32% of the divisible pool.

The centre’s total transfers were to the tune of 63.9 % in 2012-13 and have, on an average, been around 60% of the divisible pool in recent years, as recorded by the finance commission.

Jaitley said that apart from the R5.24 lakh crore in taxes, another R3.04 lakh crore would be transferred by way of grants and plan transfers. “In spite of the consequential reduced fiscal space for the Centre, the government has decided to continue supporting important national priorities such as agriculture, education, health, MGNREGA and rural infrastructure including roads. Programmes targeted at the poor and the underprivileged, will be continued by us,” Jaitley said.

A major change is the pruning of the Centre’s discretionary powers in transferring funds to states under various modes, and states have now been given greater say. Accordingly, Budget 2015-16 announced delinking eight CSS, including National e-Governance Plan, Backward Regions Grant Funds, Modernization of Police Forces and Rajiv Gandhi Panchayat Sashaktikaran Abhiyaan (RGPSA), from its support. As many as 24 CSS will run with the changed sharing pattern and 31 programmes will get the Centre’s full support in the coming fiscal.

In FY13, the latest year for which hard data were available, Finance Commission transfers comprised 58.5% of the aggregate transfers from the Union to the states, with ‘other’ transfers accounting for 41.5%. Currently, ‘other’ transfer flows mainly comprise Plan grant, which consists of normal central assistance, additional central assistance for specific-purpose schemes, special central assistance and special Plan assistance. In addition, there are central Plan schemes and CSS.

Up to fy14, funds for css were routed through states’ consolidated funds and also directly to state implementing agencies. From fy15 onwards, direct transfers to state implementing agencies have been scrapped, and all transfers to states for csS are now being routed through the consolidated funds of the states. The non-Plan grants constitute a very small part of the ‘other transfers’. Plan grants are utilised both for capital and revenue expenditures, though the the latter’s share has been rising in recent years.

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