A welcome policy change that has come about through the national budget in 2015-16 and continued in this year's budget (2016-17) has been greater fiscal decentralisation from Centre to state governments. Fiscal decentralisation refers to shifting of decision-making on finances from the Centre to the state governments. This is a good thing as it checks undue centralisation of financial powers at the Centre and allows the states to decide their spending priorities.
To give some backdrop on this policy change, the Union Budget 2015-16 accepted the recommendation made by a Constitutional body called the Finance Commission (FC). The FC is appointed every five years with a mandate to define the centre-state fiscal relations. It also recommends the division of tax revenues collected by the Centre (excluding certain items such as cess) called the "divisible pool" between the Centre and states and the share to be allocated to each state.
But it also made recommendations on other tax related issues as per the terms of references. The Fourteenth Finance Commission (14th FC) recommendations covering a period of five years beginning 2015-16 to 2020-21 sought to devolve a significantly higher share of 42% of the divisible pool to states compared to the 32% share recommended by the 13th FC.
Accordingly, the total devolution to the states in 2015-16 came to Rs. 5.26 lakh crores, which is Rs. 1.78 lakh crores more than in 2014-15. The increased transfers were also in response to the demand by states for increased flow of untied fiscal resources in place of tied resources that come with Centrally Sponsored Schemes. The devolution formula recommended by the 14th FC incorporates two new variables: the 2011 population and forest cover. At the same time, it does not take into account fiscal discipline, a criterion included by the 13th FC in its formula.
Another area of concern has been the focus on local bodies and the 14th FC has recommended that grants to local bodies should only be for basic services and functions assigned to them under relevant legislation. The Commission has recommended grants to the tune of Rs. 2.87 lakh crore over five years.
What remains to be seen is whether the states are spending more on basic essential services such as healthcare, education and nutrition, now that that they have increased resources available to them for these purposes. So far, this has remained more state-specific and it is difficult to comment on a general trend with some states spending more as compared to others.
Written by Pooja Parvati