Towards a more responsive federalism

The five messages of FC-16 put together reflect that states need to be more self-reliant in raising resources

- RAJIV MISHRA

The recommendations of the 16th Finance Commission (FC-16) are seen to convey five messages in respect of Centre-state fiscal relations.

First, the Centre's expenditure needs are as necessary as that of the states. Second, fiscal performance is important but within the overall context of states’ development. Third, untied grants do not encourage fiscal performance in the states. Fourth, tied grants to the states are best aligned with the national development goals of the Centre. And fifth, grants to local bodies (LBs) by the Centre are only supplementary to the primary support provided by the states.

The vertical devolution to states, expressed as a share of the Centre’s divisible tax pool has either remained the same or risen from one FC cycle to the next. Earlier, this was an outcome of an understanding that the needs of the States grow faster than those of the Centre. Consequently, the share rose from 29.5 per cent in FC-11 cycle (2000-05) to 30.5 per cent in the 12th (2005-10) and 32 per cent in the 13th (2010-15). However, when FC-14 significantly increased the share to 42 per cent, it was not because the needs of the states had suddenly jumped. The increase was meant to compensate states for the loss of untied resources following the merger of plan and non-plan distinction of expenditure.

FC-15 slightly adjusted the share to 41 percent to account for J&K becoming a Union Territory. FC-16, now, has retained the same share of 41 per cent. The last three FCs appear to have equated the growth in the needs of the Centre and States.