Finance Commission on Cooperative Federalism in India

FFC recommended for a complete review and comprehensive reform of the existing
system of fiscal transfers from the Union to States with following objectives:

i. Minimize discretion in transfers other than Finance commission transfers

ii. Improving design of such transfers
iii. Avoiding duplication in such transfers
iv. Promoting co-operative federalism

A new institutional arrangement under the Inter –State Council is recommended for
strengthening cooperative federalism to :

i. Identify the eligible sectors in the state for the grants from the Union
ii. Indicate criteria for inter-state distribution
iii.To provide flexibility to the States in the implementation of the central schemes
iv. Identify and provide area specific grants
v. Identify and recommend resources for inter-state infrastructure projects in North
East states.
vi. Integrate economic and environmental concerns in decision making
Finance Commission on Cooperative Federalism in India

❖In the State and Concurrent Lists there are certain functions which are best carried
out by the Union and the States in the spirit of cooperative federalism.

❖For example, specified minimum standards of certain public services should ideally
be available to people, irrespective of where they reside.

❖Thus, both the Union and State Governments have an overlapping responsibility to
ensure such specified minimum standards.

❖We recognize that the primary responsibility for funding and providing most of these
services rests with the State governments.

❖The Union Government has to play a supportive role in supplementing their efforts.
Finance Commission on Cooperative Federalism in India

Union – State transfer arrangements existing in the beginning of the current decade:
A. Finance commission transfers
i. Tax devolution to cover vertical and horizontal fiscal imbalances
ii. Grants in aid (including NPRD grants)
iii. Grants to local bodies
iv. Grants for disaster relief
v. Sector specific and state specific grants
B. Planning Commission Transfers:
i. Plan transfers to states based on Gadgi Mukherjee formula
ii. Supplementary plan assistance
iii. Special plan assistance to North Eastern states

C. Other Central Transfers

i. Central sector schemes and centrally sponsored schemes
Finance Commission on Cooperative Federalism in India

❑In the recent years aggregate transfers from the Union to the States (including direct
transfers), have been between 44 per cent and 54 per cent of the gross revenue
receipts of the Union government out of which 59 percent were FC transfers while 41
percent were ‘other transfers’.

❑Out of other transfers about 90 percent were discretionary or non formula based
transfers.

❑A bulk of such transfers (discretionary or non formula based transfers) went through
CSS.

❑Bulk of the transfers under CSS were directly given to the implementing agencies in
the states.
Finance Commission on Cooperative Federalism in India

States’ Grievances:
1. Non formula based transfers are rising over the years at the expense of statutory
transfers.
2. Question of decentralized autonomy in the implementation of CSS.
3. Design of CSS without consulting states does not cater to the state specific needs
and priorities.
4. CSS not only ties the hands of the State govts but also reduces the fiscal space and
compel them to modify their expenditure pattern in a direction different from their
priorities.
5. Large number of CSS
6. States demanded that the funds under CSS should be subsumed under the vertical
devolution.
7. They demand more fiscal autonomy.
8. Discretionary transfers should be reduced.
Finance Commission on Cooperative Federalism in India

View of the Union Government:

1. Financial constraints of the Union government in coming years while States are in a
better fiscal health.
2. So states should bear larger burden of development and welfare schemes and
programs.
3. Union government’s prominent role to ensure equalisation, promoting inter-state
projects, specified minimum public services across all states in sectors of national
priority.
4. States have already been given flexibility in CSS to use up to 10 percents of the CSS
transfers to accommodate state specific needs and to take up innovative projects.
5. Union ministries requires larger resources to fulfill national priorities as given in the
Directive Principle of State Policy (DPSP) for a welfare state.
6. To fulfill international commitments in social sectors and obligations under
parliamentary legislations.
Finance Commission on Cooperative Federalism in India
Important issues:
1. Non Finance Commission transfers wanted need to be reviewed in the background
of the demand by the states
2. Union grants should supplement FC transfers and overlapping and duplication in
transfers should be avoided.
3. Purposes and conditionalities of non FC transfers have expanded considerably in
recent years.
4. Union government has been unilaterally deciding about the scope, nature and
design of the centrally sponsored schemes.
5. Union Government is stretching the interpretation of the Concurrent List in its
favour and in fact, treading into areas in the State list of the Constitution.
6. Union Government exercises excessive discretion in distributing the resources
among them especially in regard to Centrally sponsored schemes ('non-formula-
based' and 'discretionary‘).
7. Share of formula based distribution in the aggregate transfers has been decreasing.
8. Many centrally sponsored schemes are based on a 'one size fits all' approach and
that often the design of schemes is inappropriate for several States. There is a
consensus that the design should be improved and flexibility to the States should
be increased.
9. The previous Finance Commissions suggestions include transferring of all these
schemes to the States along with funds and restoring the pre-dominance of
formula-based Plan transfers.
Finance Commission on Cooperative Federalism in India
FFC’s Approach:
1. It is compelling to reform existing system of fiscal transfers from Union to States in a
comprehensive manner to “
i. Minimize discretion,
ii. Improving the design of transfers,
iii. Avoiding duplication, and
iv. Promoting cooperative federalism.

2. Institutional Change is needed.

3. Not to entrust Finance commission all the transfers from Union to States as
demanded by many states. Finance Commission can analyze all the transfers in a
comprehensive manner but limit its own recommendations to only tax devolution,
grants in aid any other referred matter.

4. For overlapping functions and area specific interventions Union government to

should continue to provide grants to states.

5. A new institution may be created to strengthen cooperative federalism in India.

Finance Commission on Cooperative Federalism in India

Institution for cooperative federalism:

An institutional mechanism may be developed under the Inter-State Council to suggest

allocation of financial resources to the states so as to supplement the transfers of the
Finance Commissions with the following objectives:

(i)Identifying the sectors in the States that should be eligible for grants from the
Union,

(ii) Indicating criteria for inter-state distribution,

(iii) Helping design schemes with appropriate flexibility being given to the States
regarding implementation and

(iv) identifying and providing area-specific grants.