Boost for Modi's federalism: 42% of taxes collected will go to states

The NDA government today (24 February) tabled the report of the Fourteenth Finance Commission headed by YV Reddy, former Governor of the Reserve Bank. The main highlights of the report, laid out in the Lok Sabha, are a greater devolution of financial resources to the states. The Union Budget for 2015-16, to be presented in parliament on 28 February, is expected to incorporate many of the details of the Commission’s recommendations. The following are the main highlights of the Commission’s report. # 42 percent of gross tax revenue will be devolved to states. # Grants to local bodies and municipalities to be increased. # Union government asked to maintain prevailing level of transfers to states of 49 percent of gross revenue receipts from 2015-16 to 2019-20. [caption id=“attachment_1122797” align=“alignleft” width=“380”]  Agencies[/caption] # The government has to evolve a new institutional arrangement to strengthen cooperative federalism by expanding the role of the Inter-State Council. # Discretionary transfer of resources from the union to the states has to be minimised. This means states will be freer to use devolved resources in areas they think fit. # Role of the Inter-State Council to be expanded, especially with the Planning Commission being abolished. The role of the council will be to identify sectors in states that will be eligible for central grants; it should indicate criteria for inter-state distribution and help design schemes with appropriate flexibility to states for implementation. The council also has to identify and provide area-specific grants. The Commission also suggested its roadmap for fiscal consolidation. It recommendations include: # Bringing the fiscal deficit of the union to 3 percent of GDP between 2016-17 - the same as in the Chidambaram roadmap. The revenue deficit is to be eliminated by 2019-20. # Replacing the existing FRBM Act with a Debt Ceiling and Fiscal Responsibility law, invoking Article 292 of the Constitution. This law will cap the borrowings of the Union government. States should do the same invoking Article 293. # Amending the FRBM Act to remove the concept of effective revenue deficit - this idea was brought in by Pranab Mukherjee. # Setting up an independent fiscal council to vet the fiscal implications of budget proposals before they are finalised. # Laying down a statutory cap on new capital works based on a certain multiple of the annual budget provision. # Giving states additional borrowing headroom for developmental spending if they meet certain conditions on debt-GSDP ratio and interest payments-revenue receipts ratio. The Commission also had suggestions for the handling of public sector enterprises, including the following: # Categorise public sector enterprises as high priority, priority, low priority and non-priority and base investment levels and disinvestment strategy on this. # Use transparent auctions to relinquish unlisted sick enterprises in the non-priority category. # Purchase shares in companies that are in the high priority and priority category if government holding goes below decided investment levels. # Wind up the National Investment Fund and put disinvestment receipts in the Consolidated Fund # Share a portion of disinvestment proceeds with the states in which a public sector enterprise is located. # Appoint a Financial Sector Public Enterprises Committee to examine and recommend parameters for future fiscal support to financial sector public enterprises. The other recommendations of the commission include pricing policies for public utilities. It called for… # Amending the Electricity Act to penalise state governments for delay in payment of subsidies to discoms. # Constituting an SERC Fund to give financial autonomy to State Electricity Regulatory Commissions, as provided for in the Electricity Act. # Setting up an autonomous Rail Tariff Authority at the earliest. # Setting up independent regulators for the passenger road sector to undertake tariff setting and regulation of service quality, among other things. # Setting up statutory Water Regulatory Authorities to look into pricing of water for domestic, irrigation and other uses. # Moving towards 100 percent metering of water and power connections.