The 14th Finance Commission has drawn a roadmap for co-operative federalism. From this fiscal , the share of tax devolution from the Centre to the states will be 42% of the divisible pool, as compared with 31.5% earlier. This is the single-largest increase ever recommended by a Finance Commission. The government, however, has offset this higher tax allocation by lowering grants to the states.
The net resource transfer to the states will rise from 5.4% of GDP in FY15 to 6% in FY16. The higher tax devolution will allow states greater autonomy in designing and financing schemes, in keeping with their needs. Higher devolution will also reassure the states that they will be adequately compensated if GST is introduced next year.
States must ensure that a part of the additional resources transferred by the Centre is used for capital expenditure as most states spend more than 80% of their resources on revenue expenditure items like interest payment, subsidy and pension. Moreover, more optimal utilisation of extra resources will require necessary infrastructure and institutional capabilities at the state level.