The 14th Finance Commission has hiked the states’ share of central taxes by an unprecedented 10 percentage points from 32% to 42%. The move will financially benefit states greatly, possibly at the Centre’s cost. It gives states greater freedom to choose how they spend the money while reducing the discretionary fiscal space available to the Union finance minister.
This is being seen as a move in the direction of greater federalism in financial matters as Prime Minister Narendra Modi himself has in the past declared that he is in favour or “cooperative federalism” with a much larger role for states. Modi appealed to states to make the most of this opportunity.
The extra amount that the Centre will have to shell out for tax transfers means that the resources available to the finance minister for helping specific states with ‘special needs’ or for centrally sponsored schemes may need to be squeezed in order to maintain the Centre’s own spending at current levels.
The Finance Commission also made some interesting departures from the past in devising the formula for sharing tax revenues between states. Environmental factors have been given a place in the formula for the first time, with states that have large areas under forest being rewarded, on the other hand the fiscal discipline being observed by states was not taken into consideration, unlike in the past couple of FCs.