Daily Answer Writing
01 April 2021

Q) The slogan of cooperative and competitive federalism would be empty if states are not empowered with adequate finances. Critically analyse the provisions in Fifteenth Finance Commission in this regard.

Source: The Hindu Editorial: Still no recognition of the third tier

GS 3: Indian Economy

Approach Answer:


Introduction: The NITI Aayog, in 2017, had called for 'Competitive-Cooperative Federalism' to define the relationship between the Centre and the States. This concept puts the burden of transforming India into the hands of the State governments. In recent times, this concept has gained prominence following the participation of the Chief Secretaries of all States and Union Territories in the presentation of the best practices in each of their jurisdictions.

However, financial dependence upon the centre has been one of the major challenge in this regard.

The positive impact of Fifteenth finance commission in this regard:

               1. Highest ever devolution of funds: The vertical devolution recommended to local governments is raised remarkably high at around ?4.36 Lakh Crore, which makes it all time high.

               2. Devolution to handle current population burden: It grants monies to the state government based on 2011 census population instead of 1971.

               3. Greater portion of divisible pool for local bodies: It proposes 4.31% for the local bodies instead of 3.51%.

               4. Performance criteria for grants to local bodies:  the condition is online submission of annual accounts for the previous year and audited accounts for the year before

               5. Tax efficient states rewarded: This criterion has been used to reward states with higher tax collection efficiency.   It has been computed as the ratio of the average per capita own tax revenue and the average per capita state GDP


Few challenges still stand in the 15th Finance commission

               1. Tied funds: The 15th Finance Commission has raised the share of tied funds to 60% and linked them to drinking water, rainwater harvesting, sanitation and other national priorities in the spirit of cooperative federalism.

               2. Reduction in Performance based grants: It reduced the performance-based grant to just ?8,000 crore — and that too for building new cities, leaving out the Panchayati Raj Institutions (PRIs) altogether.

               3. Doesn't auger well with Heterogeneity of India: Articles 243G, 243W and 243ZD read along with the functional decentralisation of basic services like drinking water, public health care, etc., mandated in the Eleventh and Twelfth schedules demand better public services and delivery of ‘economic development and social justice’ at the local level.

               4. The GST challenge: The COVID-19 has significantly impacted the resources available to states. The introduction of GST has  taken away the manoeuvrability of States to address their revenue deficits. Further, there is a revenue buoyancy due to changes in the tax slabs.

               5. Jungle of Centrally Sponsored Scheme(CSS): Process of rationalization of schemes slowed down. In 2018, MoF have issued a notification making CSS have a sunset clause co-terminus with the Cycle of the Finance commission. This a rationalization taken over the Open ended schemes. All schemes now have a sunset clause, unless specifically so indicated; They were then rationalized into 'core of the core', 'core' & 'optional' schemes.

               6. Uncertainty in terms of obligations and responsibilities the Central Government have for the vertical distribution formula;  When the greater devolution in the central pool of taxes was announced(from 32% to 42%), the assumption was that there would be a significant rationalization of CSS. But most of the schemes that had existed before have resurfaced as 'umbrella schemes'. This amounts to huge establishment costs.


Conclusion: The shortfall in state's own revenue and greater dependence on the funds from center, as well as, greater proportion of tied funds, has taken away the power of state to maneuver revenues. This significantly impacts the competitiveness of the states. In this context, the NK Singh Committee's recommendation to  allow greater devolution of funds must be adopted.

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