INTER-STATE F.C. ALLOCATIONS

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 INTER-STATE F.C. ALLOCATIONS

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• A tough job: The 15th Finance Commission (FFC), like earlier ones, had to keep everyone happy! Its report, tabled in Parliament on 1 February 2021, laid out a recovery roadmap for states, focusing on grants-based transfers from the Centre more than predecessors. Some, such as grants for education and health, came in for praise, but have not been explicitly accepted by the Centre. Tax transfers, on their part, may have left some states wanting more. 
• The core job: At the heart of the finance commission’s mandate is to decide how the Centre shares revenues with the states, which have diverse sizes and needs. For 2021-26, it has set a 41% share for states in the divisible pool of central taxes, or the total tax receipts minus cesses and surcharges. 
• Not too different: This share is similar to the 14th Finance Commission period— the 1 percentage point drop is only because Jammu and Kashmir is no longer a state. So, it is  the horizontal devolution formula, or how this 41% is distributed among states, that can leave some wanting more (see charts 1a & 1b). 
• Details:

1. Out of an estimated ?42 trillion worth of taxes to be devolved over five years, the highly populous states of Uttar Pradesh and Bihar will command around a  28% share due to greater needs. On average, these states will get much more per capita transfers than richer states in the south and west, but less than northeastern states that have different needs. 
2. The FC’s per capita devolution pattern has a range of ?16,000 to ?4.7 lakh for various states. 
3. This range matters because the makers of the Constitution wanted FCs to address fiscal imbalances among states. But the latest formula gives less weight to income gaps, a measure of interstate disparity, than its predecessors. This could be a worry for poorer states, whose per capita income gap with the richest states has tripled in the past two decades.
4. The revised weightage could mark a trade-off between need-based equity and performance. While reducing the weight for income distance to 45%, the lowest since the 11th Finance Commission, the FFC also awarded states’ efforts to generate own revenues (2.5%). 
5. Significant weightage (12.5%) now goes to states’ demographic performance, or how well they have checked population growth. This was necessary to ensure states which did well did not lose out simply because the commission was, for the first time, entirely using the 2011 Census instead of the 1971 Census to measure their requirements. 
6. Yet, some southern states, which were most concerned about the shift, faced big cuts in their shares, Karnataka faring the worst of all. Their per capita devolution transfers rank towards the bottom (see chart 3). Haseeb Drabu, former finance minister of Jammu and Kashmir, said that given the reduced weight of equity-based criteria, the commission’s devolution formula was “potentially the least progressive” so far. 

• Bridging the gap: The FFC tried to bridge this gap by recommending state-specific grants in addition to the devolved taxes. But the Centre hasn’t accepted this recommendation yet, instead promising due consideration. These grants, along with other nondevolution transfers recommended by the FFC, amount to 19.65% of the total transfers, the highest since the Sixth Finance Commission.
• Vertically imbalanced: In addition to the interstate imbalances, sources of vertical imbalance— between the Centre and states—are also creeping in. The Centre is increasingly expanding its pool of revenues through cesses and surcharges, which states are not entitled to. Even budgeted figures for cesses and surcharges in 2020-21 were close to 20% of gross tax receipts, a sharp jump from 10.4% in FY12. This means the states’ chunk in total tax receipts is in effect declining.
• Singh speak: FFC chairperson N.K. Singh said the increased share of grants was also a way to address this, since checking cesses and surcharges was not in the finance commission’s hands and needed a constitutional amendment. Part of the grants are for specific sectors, such as education and health, which have not yet been accepted by the Centre. Instead, it said it will consider them while implementing centrally-sponsored schemes for these sectors.  As the implementation is at the Centre’s discretion, it could burden states with lower fiscal and administrative capacity, given that the states foot some share of funding for such schemes.  
• Earlier study: A 2017 study by M. Govinda Rao, a member of the 14th Finance Commission, found that while general FC transfers tend to have strong equalizing effects between states, the same is not true of funds channelled through centrally-sponsored schemes. Rao termed these grants a “patronizing tool to serve political objectives”. 
• Summary: The FFC did well with the roadmap for fiscal recovery for the next five years. But given its limited powers, rising fiscal imbalances—both vertical and horizontal— remain unaddressed.

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