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7th February 2024 (12 Topics)

Union government’s reins on financial transfers to States

Context

Despite the Fourteenth Finance Commission's recommendation of devolving 42% of Union tax revenues to States, there has been a reduction in financial transfers, along with an increase in the Union government's total revenue and discretionary expenditure.

Reduction in Financial Transfers:

  • FC recommendation’s implementation: Despite the Fourteenth Finance Commission's recommendation to increase the devolution of Union tax revenues to States to 42%, actual transfers have decreased.
  • Declining grants: Decline in grants-in-aid to States, an essential component of statutory financial transfers, has been observed over the years.
  • Impact of cess: The increasing reliance on revenue collection through cess and surcharge has impacted the States' share negatively, with a significant rise in these collections over time.

Centralization of Public Expenditure:

  • Surplus funds with union: The decline in financial transfers has led to a surplus of discretionary funds for the Union government, potentially affecting the equitable distribution of financial resources among States.
  • Influence of CSS: Centrally Sponsored Schemes (CSS) wield significant influence over State expenditure, with the Union government dictating priorities and requiring States to commit their financial resources for implementation.
  • Burden on states: The burden of CSS implementation falls disproportionately on less wealthy States, as they may have to resort to borrowing to match the required financial commitments.

Scope for Anti-Federal Fiscal Policies:

  • Constraints on autonomy: Non-statutory grants provided through CSS and Central Sector Schemes (CSec) further reduce States' autonomy in expenditure decisions.
  • Fund utilization: Tied grants associated with these schemes restrict the flexibility of States in utilizing funds, compelling them to spend on specific schemes outlined by the Union government.
  • Fiscal Management: Despite the significant financial powers wielded by the Union government, there exists a fiscal deficit, raising questions about the rationale behind limiting financial transfers to States and undermining cooperative federalism principles.
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