With the period of the Fourteenth Finance Commission (FFC) coming to an end, debates around India’s federal fiscal architecture are gathering momentum.
There are several conjectures around whether the recommendations of the FFC on devolution of taxes to states would be protected, would the purview of the Fifteenth FC be expanded, how the effects of the GST regime will be factored in, among others.
These debates are further being expanded to include subjects which have never been under the purview of the FC traditionally. Increasingly, the FC is seen as the one body which will also take up subjects earlier decided upon by the erstwhile Planning Commission.
A recent article by well-known economist Bibek Debroy, who also serves as chairman of the economic advisory council to the prime minister, is one such attempt.
First, he says that “the present CSS (centrally-sponsored schemes) basket has an expiry date of March 31, 2020, which is co-terminus with recommendations of the 14th Finance Commission.”
The second point he suggests is even more questionable – a re-look at the Seventh Schedule in context of restructuring and rationalisation of CSS.
First, the mandate of the Finance Commission never included giving recommendations on resource transfers under the CSS. Presenting the CSS as being co-terminus with the Finance Commission is a flawed understanding of the transfers from Union to states. There are two kinds of transfers by the Union government – general purpose and specific purpose. The transfers made on the recommendations of the FC (which is formed every five years) are general-purpose transfers, which have mostly been untied.
Apart from these, the Union government through various ministries gives specific purpose grants, which include CSSs and central sector (CS) schemes. These transfers are tied, i.e. they are for specific schemes designed by ministries at the Centre. This implies that these schemes by design are outside the ambit of FC, unless specifically mandated by the Union government to the FC.
Thus, there can’t be an automatic expiry date for these schemes, unless desired by the Union government.
Secondly, the author advocates for a re-look at “the Constitution’s Seventh Schedule, which differentiates between spending by the Centre and states.” His argument is that “if the Union government should contribute to health because it is nationally important, why should states not contribute for defence?”
The argument is problematic, not only because of the comparisons it makes, but also because it overlooks the roles of different tiers of government in a federal structure. Here there are two things. Firstly, Article 246 adopts a threefold distribution of legislative power between the Union and the states. The subject-wise distribution of this power is given in the three lists of the Seventh Schedule of the constitution – Union (List I), state (List II) and concurrent (List III). This implies that the states too have a large expenditure function.
However, the revenue mobilisation power of the Union is more compared to the states. To correct this vertical imbalance, resource transfer is necessary. At the same time, there are differences in the level of development across states. The quality of life (in terms of access to education, health, employment) is relatively poor in low-income states and their revenue raising abilities are also limited. To ensure equity and certain minimum standards of public service, specific purpose transfers (such as for health and education) by the Union become necessary.
Thus, by spending on these essential services, the Union government is trying to enable state governments to undertake expenditure on these services, which might otherwise not be prioritised either due to a resource crunch in poor states or other concerns taking precedence. Debroy himself mentions the lack of funds with state governments to undertake expenditure on CSS and CS.
Thus, in some states with poor resource mobilisation, expenditure on these services would be even less in the absence of Central funds.
Another issue is that the power to legislate on a subject matter is closely linked to the power to spend on those matters. Since the Union government has exclusive power to legislate on defence matters (List I), with no interference from the state governments, it is mandated to spend on it.
Similarly, the Union government has exclusive power on issues related to foreign affairs, railways, atomic energy, income tax, customs duties, etc. At the same time, items in the state list are mostly related to socio-economic services, such as public health, sanitation, agriculture, etc. These items are better handled by the state government due to its proximity to the people.
Re-looking at the Seventh Schedule would then involve renegotiating legislative power on all the matters enlisted, which has the potential to shake the balance of power that now exists between the Union and states.
The underlying belief behind this suggestion seems to be that the Union government is transferring much of its resources to states (both in terms of tied and untied grants) and hence has little to spend on matters such as defence. There is little doubt that this needs to be examined in greater detail, not just keeping in mind the higher devolution post the FFC recommendations, but also the changes in the resource pool of the Union government and different states after the introduction of the GST regime.
However, changing the Seventh Schedule for deciding expenditure priorities of the Union government wouldn’t be a prudent idea and certainly encroaches on the state’s autonomy.
Although the Seventh Schedule is not “cast in stone”, as Debroy puts it, it cannot be overly malleable either if a meaningful federal system is to be retained in India.