There were great expectations from the 14th
Finance Commission to transform the fiscal ecology of the country given that a
new government had been elected and it was talking of transforming governance
under the slogan of “minimum government maximum governance” and strengthening
transparency and accountability. Further the implementation of the 14th
FC coincides with the 2015-16 budget which is the first full budget of the new
regime in power at the Centre. The Finance Minister in his budget speech said
that this budget will make India fly, with acceleration of economic growth to
7.4% the fastest in the World, and set in process an unprecedented
transformation of India’s economic and social development.
The big news emanating from the 14th FC is the 10
percent point increase from 32% to 42% share of states in the divisible pool of
taxes. There is euphoria all around that states will get a much larger share
from the tax kitty. What does this really mean? Yes the states are getting a
much larger share of taxes as unconditional transfers, to be precise 31.25%
more as a share compared to the 13th FC period, which means that
they have more funds to plan their development strategies autonomous of the
Centre, meaning delinked from Centre’s planned programs and schemes. So the
positive aspect is that the fiscal space of the states to do their own thing
has expanded substantially.
But has the total fiscal envelope of the states really
expanded as much? The answer is no. While the proportion of unconditional
transfers have increased substantially the total transfers have not increased
as much – just about 2 or 3 percent points. The “magic” that has happened is
that with the “shut-down” of the Planning Commission a large part of the funds
that the Centre transferred through various plan schemes have now been assigned
directly to the states. Thus we see that there is a huge jump of 37% from the
previous year in tax transfer (unconditional revenues) to states in 2015-16
budget in accordance with the 14th FC mandate but on the other hand
for grants and loans from Centre to states we see a huge decline of 19% for the
same period, mostly in the financing related to Central Assistance for State
plans. In 2014-15 the total transfer of resources from the Centre to states was
51% and this has increased to 53% in 2015-16, a gain of mere 2 percent in the
overall fiscal envelope which amounts to just 0.58% of GDP. Infact the 2014-15
budget had already begun that process of shifting many of the plan schemes into
the state pool. In contrast the fiscal space of the Centre has shrunk consequently
and this would impact budgets of a number of its line departments, especially
social sector and anti-poverty programs. The big challenge emerging from this
is would the states use their larger fiscal space to fill the gap that would be
created with compression in the allocations of Centre’s line departments?
So given this reality the euphoria is unwarranted. The
states have serious thinking and strategizing to do if they have to take
advantage of this new opportunity and trajectory. At one level they have a
larger fiscal space but at another level their challenge is to use this
additional fiscal space effectively to fill the gaps and deficits in
development and service delivery in their states. Thus defining appropriate
priorities as per the needs and demands of their citizens becomes critical to
achieving their development goals. This also opens up the space for civil
society groups to engage with the states in determining these priorities.
At the level of the Centre their fiscal space may appear to
be reduced but with the Planning Commission fading out they have simply slashed
a whole lot of plan schemes which the Centre used to give as grants to the
states from its own resources as assistance for state plans. But as mentioned
above the loss in the Centre’s total fiscal envelope is only 0.58% of GDP but
against this small deficit the burden on the states in terms of responsibility
to continue and strengthen various ongoing programs that the Centre has now
seconded to the states is perhaps much larger.
Further the 14th FC has also done away with
sector specific grants that earlier FCs had included arguing that such
priorities are best decided by the states and often such specific grants were
an imposition from above and many states did not like it. Hence this became the
logic for raising the unconditional ratio from the divisible tax pool so that
states had a greater autonomy or freedom to plan as per its own needs and
priorities. The 14th FC in the light of this recommendation has
suggested a new institutional mechanism through which the Centre can engage
with states in a transparent manner to facilitate additional resource transfers
from the Centre’s fiscal envelope now that the Planning Commission has ceased
to exist.
The 14th FC has also continued with making
provisions for local governments, both panchayat and municipal bodies. It is at
this local level where transparency and accountability is the weakest and hence
the grant has been bifurcated into two parts, one as their dedicated share for basic
services (90% for panchayats and 80% for municipalities) and the other part (10
and 20 percent respectively) based on performance wherein two critical
transparency indicators have been indicated – timely publication of accounts
and publishing service delivery benchmarks and also efforts at raising their
own revenues (see box below). Further the state is being held to account to
disburse grants to the local bodies within 15 days of receiving the grant from
the Centre and the latter has also been mandated to release the grant in 2
instalments, one in June and the other in October.
“We are of the opinion that proper accounts are the
starting point for financial accountability. Non-maintenance or delayed
compilation of annual accounts means compromised accountability. It also
implies that reliable financial data for determining the need for resources for
local bodies is not available. We observe that it has been more than twenty
years that municipalities and panchayats were sought to be empowered, through a
Constitutional amendment, to act as institutions of local self-governance and
also to provide certain basic services to citizens. It is inconceivable, and
certainly not desirable, that local bodies seek an ever increasing share of public
moneys and yet continue to keep themselves beyond the ambit of accountability
and responsibility for the public money placed with them.” – 14th
Finance Commission
The above again is a great opportunity for civil society
groups, who work mostly at the local level to use this FC recommendation to
strengthen access to budget information at the local level as well as use this
information to make service delivery accountable to citizens.
Finally the 14th FC has also recognised that a
substantial increase is needed in the tax:gdp ratio but it has been able to
project an increase of only about 2% additional (0.67 at the Centre level) by
the end of the 14th FC period. This would continue to remain a major
constraint for increasing the share of social sectors in the budget and hence would
require concerted efforts by civil society groups to engage the Finance
Ministry on taxation and tax expenditure issues wherein with elimination of
upto two-thirds of tax expenditures and stronger tax compliance nearly 5% of
the GDP can be reined in taking the tax:gdp ratio at the national level to 21%
from the present 17%. However the 2015-16 budget has taken a regressive step on
taxes by reducing corporate tax rates
from the present 30% to 25%, a decline of nearly 17%. This along with the 2%
increase in service tax rates and removal of the wealth tax has pushed back the
little progressive growth we had seen in taxation policy in the last few years.
And ironically the budget estimates for tax revenues of the Centre in absolute
numbers show a decline of Rs. 57000 crores from the previous year or 0.4% of
GDP. This is some kind of history that this years budget has achieved.
