States are now free to decide how to spend: Centre's view

When government tabled the report of the 14th Finance Commission (FFC) on February 26, there was cheer as the Modi government announced an unprecedented increase in transfer of taxes to states — from 32 per cent to 42 per cent — besides unveiling measures to allow flexibility, for states to decide on schemes they would want to implement.

But just two days on, as Budget documents became public, ministries and states started to complain about a lack of funds. Naturally, a higher share in central taxes reduces the Centre's fiscal headroom to allocate funds as it is left with a lower share of the kitty.

The increase in tax transfers had to necessarily result in reduction in areas such as grants, given the Centre's commitment to paying salaries and interest payments. As a result, despite the 10 percentage point increase in devolution, the overall increase in transfers (including grants) has not gone up significantly.

A look at Budget papers of some prominent states show that none have yet budgeted for the increase in tax flows from the Centre or reworked schemes to factor in the new reality of grants. Similarly, it is early days for devising state-focused schemes, that will replace the one-size-fits-all centrally sponsored schemes (CSS) approach, something that almost every CM has pitched for over the years.

States argue they are worse off in the new dispensation. Some, such as Tamil Nadu's finance minister, did make a mention of the FFC in their Budget speech but spoke about its adverse impact. More recently, Congress leaders complained that states they govern were ignored by the Centre — a charge that FM countered by releasing a state-wise list of who gets how much (graphic).

The House is still divided, though finance ministry officials insist almost all states are better off. What about Modi's ministerial colleagues, some of whom have complained about lower resources, especially to the social sector?

North Block mandarins counter that saying with a number of CSS done away with, funds would no longer be routed through central ministries. That states would decide whether to spend on building roads, schools or dispensaries.

"The first tranche of funds have been released, but states don't have plans in place to spend the money," said a finance official. Sources said the final situation will depend on whether government manages to meet its Budget target for collecting taxes. "If the economy does well and there is sufficient tax buoyancy, then at year-end, no one will be complaining," said a senior official.