India Needs Greater Devolution Of Funds And Authority To Thrive

Context: Decoding the underlying opportunities and limitations in recommendations of 15^th Finance Commission.

About Finance Commission (FC):

• Constitutionally mandated (Article 280) to balance revenue power between Central and State governments.
• Constituted every five years.
• Scope is set out each time in the Terms of Reference (ToR) (determined by President and the Constitution)
• It is a political tradition for government to accept FC’s recommendations.

Key Features of the 15^th FC:

• Delivered in two parts:
  • One referring to pandemic period 2020-21
  • Other to further five-year span from 2021 to 2026.
• Devolution recommended: at 41% (similar to the previous FC after discounting in for Jammu and Kashmir).
• Increased allocation to health:
  • Proposed creation of an All India Health Service.
  • Suggested to states to increase their spending on health services to 8% by 2022.
• Strengthen local bodies: by placing conditions on them for receiving funds, incentivizing the creation of primary health centres, new cities and shared municipal services. It requires that –
  • States set up State Finance Commissions (SFCs);
  • Local bodies make their annual accounts public; and
  • They should reform the structure and collection of property taxes.
• Other recommendations:
  • Proposed spending on technology in higher education and disaster management.
  • For administrative reforms in the judiciary.

Issues with 15^th FC recommendations:

• Material shrinkage in the relative size of the divisible pool: because surcharges and cesses (not counted in that pool) have increased from about 10% of the total pool in 2010 to about 20%.
  • This has impacted cooperative federalism – E.g. the Centre today shares only about 5% (Rs 1.80) of the excise and cess it receives from the approximately Rs 32 per litre of diesel.
  • Imputing all these costs would reduce the actual devolution to 29%.
• Power equation tilted to Centre: Incentive-based devolution to local bodies, while good in theory, will likely exacerbate the problem before delivering on its promise.
  • This will increase the inequality between the Centre and the states and between states and local bodies, and thus, has the seeds of deep political discontent sown within it.

Way Forward:

• Bold reforms in decentralization: Any FC has the tough job of balancing inclusiveness for poorer states and incentives for states that perform.
  • This will be achieved by promoting devolution and decentralization (required by the 73rd and 74th constitutional amendments).
  • “Decentralized systems are the quintessential patrons of simplicity. They allow complexity to rise to a level at which it is sustainable, and no higher” - LK. Samuels.