Finance minister Arun Jaitley tabled the 14th Finance Commission report in Lok Sabha today
Laying the ground work for fresh fiscal relations between the Centre and the states, the 14th Finance Commission report, headed by Y V Reddy and tabled by finance minister Arun Jaitley in Lok Sabha today, recommended devolution of 42 percent of central taxes to states.
This will mean devolution of Rs 5.26 lakh crore in FY16 on a year-on-year basis, which is an increase of Rs 1.78 lakh crore. Samiran Chakraborty, Head of Research, Standard Chartered says they were working with net number of 35 percent (that will go to states vis-à-vis 32 percent earlier) since it was expected that about 7 percent will be cut from Centrally Sponsored Schemes (CSS) schemes.
Interestingly, the committee’s part-time member Abhijeet Sen has attached a dissent note. He had suggested a 38 percent devolution instead of 42 percent.
The commission has also recommended Rs 1.94 lakh crore central grant to 11 states to meet their respective revenue deficits. According to the note which the Finance Minister himself has written, the government has accepted in-principle the recommendation on grants and it will be subject to revenue raising and fiscal consolidation measures undertaken by the states.
There are recommendations on how grants will be given to local bodies as well. There is a mechanism that has also been suggested for grants to local bodies in a period between 2015 and 2020. The commission has worked out the total grant to be around Rs 2.87 lakh crore.
In the 13th Finance Commission, the total ceiling on the revenues transferred from Centre to states was set at 39.5 percent. So clearly 2.5 percentage points more is being transferred to the states and the entire grant portion has been baked into non discretionary compulsory transfers to make it 42 percent.
Chakraborty wonders how will the state spend this money and what kind of readiness they have in getting this additional money and spending it at least for the next fiscal year. Asked if this could put pressure on the Centre’s finances and therefore the fiscal deficit because it has to be incorporated in the Union Budget as well, Chakraborty said the tax revenue buoyancy this time is going to be very high because of the excise duty on petrol products will earn about Rs 70,000 crore extra. “If you add to it the customs duty it is another Rs 20,000 crore extra,” he said.