Answer:

Finance Commission is the balancing wheel of the fiscal federalism in India. Most commissions have allocated the resources between the states on more or less the following criteria: Population, Area, Fiscal Capacity Distance (Difference in the per capita income etc.), Fiscal Discipline and Tax Effort. The first three can be categorized as equity criteria (82.5 percent weight) while the last two as efficiency criteria (17.5 percent weight).

States performing well feel that they are being punished for showing higher growth and fiscal discipline and their revenue is being diverted to poorer states lacking fiscal discipline and policy vision for development. While poorer states demand more as they are not able to get private sector investment because of backwardness and are stuck in a vicious. States also complain about lesser share to states from the central tax pool and devolution of funds by states to local bodies.

14th FC has recommended some major changes having centre-state and interstate fiscal ramifications, which have been accepted by the government. Prominent amongst them are:

♤ Change in the criteria for horizontal resource allocation. 7.5%: Forest cover, 17.5%: Population, 15%: Area, 10%: Demographic change, 50%: Income distance. Thus, financial efficiency has been omitted. Because of forest cover criteria poor states in plains having minimal forest cover are going to lose their percent share. Meanwhile, 19 states stand to gain from the new arrangement, which include north-eastern states and tribal states. Thus, it has positively benefited underdeveloped hilly and tribal states but negatively impacted poor states in the plains.

♤ 42% share to states in the divisible tax pool. With greater devolution all the states will have greater fiscal resources at their disposal that can be used in their development programme. Moreover, it will ease the implementation of tax reform of GST Bill where the states fear a loss of revenue.

♤ The Commission has recommended devolution of higher resources to the local bodies directly by the center. Separate allocation of funds to local bodies will unburden state governments which can use its resources elsewhere.

♤ It has identified 30 centrally sponsored schemes (CCS) for transfer to the states. However, due to importance of the schemes and legal obligations, only 8 CCS would be delinked from support from the centre. With CSS being transferred to the states, states will have greater flexibility in operating these schemes and grudge of states regarding unilateral action by centre is going to be resolved.

These recommendations have lot of positives regarding hilly and tribal states, local bodies and autonomy of states. However, the developmental disparity and fiscal discipline issues still remain unresolved. With greater dependence on central taxes, fluctuation in tax revenue of centre will impact the fiscal health of states. With fiscal discipline becoming unimportant in funds allocation, the better performing states will tend to lose while poor performers will not be penalized. The criterion of forest cover should be implemented with greater flexibility for populous and poor states of the plains have little chance to improve upon these criteria and will continue to lose. Such improvisation needs to be made in the implementation of recommendations to create a balance between the fiscal discipline and developmental disparity.