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In a positive step, the Government of India has accepted the recommendations of the 14th Finance Commission for a massive increase in the share of central tax collections to states. This move is in consonance with Prime Minister Narendra Modi’s efforts to enhance cooperative federalism. The commission, headed by former Reserve Bank of India Governor YV Reddy, proposed an increase in the state’s share of central taxes from the current 32 per cent to 42 per cent.

This massive jump will reportedly add an additional Rs 1.78 lakh crore to the states’ kitty this fiscal year. One recommendation that has caught the eye of most financial experts, however, was the proposal to do away with distinction between conditional and unconditional funds to the states. Experts believe that such a proposal will give states much more leeway to spend according to their needs, although it will leave the Union Finance Minister with lower sums to work with. Finally, it seems as if the central government will walk the talk on greater decentralisation, after it terminated the role played by the erstwhile Planning Commission in determining state expenditures. These recommendations will place greater responsibility on states to ensure that they create the requisite institutional capacity to implement schemes and programmes. As popular culture has reminded us time and again, with greater power comes greater responsibility.

The 14th commission has also brought more nuance to the grounds on which shares of individual states are determined. It has also dispensed with an element that previous Planning Commissions used to determine the share of each state, namely, fiscal discipline.  Two new considerations have been introduced in addition to population, which are per capita income and are considerations. “These are the change in population between 1971 and 2011, and giving credit to success in retaining forest cover,” as per an editorial by a leading financial newspaper.

In addition, the commission has also made specific recommendations on how states could allocate resources to local government bodies, namely urban municipalities and panchayats, which includes an important incentive for better fiscal performance. Without the requisite institutions, however, all these recommendations will not have the desired effect. In this context, institutions include government agencies, bureaucracies and corporations, among other elements, which are involved with gathering and organising resources, in addition to executing those schemes and programmes.

However, when the central dispensation itself is unable to absorb the requisite funds for health care, one does fear for how state governments may fare. According to a Lok Sabha document, only 25 per cent of the allocation on health had been spent till October 2014. The reason behind such a poor intake of funds was that the central government and its requisite partners in the states do not possess the requisite capacity and structures to utilise them, contrary to earlier reports that the health budget was slashed by 20 per cent. It is, therefore, time we looked at the finer details of building adequate institutions before we allocate more funds to the states. Mere incentive may not be enough.
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