FFC and Cooperative Federalism

FFC stands for Fourteenth Finance Commission. Finance Commission is a constitutional body  constituted under Article 280 with the main task of division of resources among centre and state government through tax devolution and grants in aid. Besides this, it also give recommendations to problems as requested/directed by the government of India.

FFC was constituted under the leadership of Y V Reddy (erstwhile RBI governor, IAS officer renowned for sailing India out of BoP crisis and appreciated by Nobel Laureate Stiglitz for his work as RBI governor during global financial crisis) . FFC was further given the task of:

1. Effect of GST on finances of state and Union governments
2. Amendments to FRBM Act
3. Pricing of Natural resources
4. Subsidies level for inclusive growth

The recommendations of FFC is aiming towards achieving cooperative federalism (equal say to states and centre on developmental activities). Also, this is in line with recent trend of growing decentralization in decision making which was started with 73rd and 74th amendment in early 1990s.

Funds and Grants in Aid

FFC major recommendation is regarding fund given to states through tax devolution to 42% from current 32% ( recommended by 13th FC) and change in weightage of factors like per capita income distance, forest cover, population, demography and area. To be precise, tax devolution will now on the basis of distance from highest per capita income district (50%), Population (1971 census, 17.5%), demography (2011 census, 10%), area (15%) and forest cover (7.5%). This changed formula has given more funds to special category states (states like Arunachal Pradesh, HP, Mizoram, Nagaland, Sikkim with difficult terrain and near border and strategically located). It will also benefit states with high forest cover like Jharkhand, MP and Chhattisgarh, but definitely a loss to UP and Bihar with population as low weightage.

Regarding the grants in aid which are more discretionary in nature; FFC  recommended a specific institutional arrangement be introduced for this purpose. And Inter State Council has been suggested to expand its role into this area. If implemented with true intention, this can be a milestone in achieving fiscal federalism among states and union.

Local Bodies

Local bodies often complain of less fund available, to take care of amenities. FFC has gone further towards decentralization in this with more fund to local bodies to tune of 2.8 lacs crore over five year period. And recommended states to pass advertisement tax to local bodies. FFC has kept check on working of local bodies by incorporating performance grant to funds being granted.

FRBM

As usual, FC commented on reducing fiscal deficit of centre to 35 ceiling level by 2016-17 and zero revenue deficit by 2019-20. And reduce the debt of centre to  36.3% by 2020 (from 45%). All these measures are suggested to be part of amendment to FRBM act. Or alternative to that, FRBM should rather be replaced Debt ceiling and fiscal responsibility legislation (as per Article 293). 

GST

Even FFC unable to estimate the loss of revenues to states amidst absence of clarity and design of GST. However, it recommended the same system as was used in VAT compensation (for three years, 100%, 75% and 50% respectively) but for five years (first three years as 100% then 75 and 50%). Also, Y V Reddy has given the suggestion of autonomous independent GST compensation fund to decrease the discretionary power of centre in such issues (seems his experience at RBI with centre government interference implicitly)

Pricing of Public Utilities

The only major recommendation is regarding the amendment to Railways Act through Railway Tariff Authority as statutory body rather than advisory body. This will rationalize the tariff in India. Currently, India has lowest passenger tariff and there is cross subsidization through freight revenues. But at same time, needs of poor need to be taken in account through use of technology in subsidizing rail travel.

In nutshell it can be said that FFC has given ample room to states to act on its own and share a higher fiscal responsibility for implementing the various central schemes. This will take care of diversity and inequality among states. GST matter is still left uncleared with lack of clarity and may take more time to come into existence. And as usual being a democratic nation, every recommendation's success depends upon the political will power of the party in the government. Although, this government has shown the right mood by accepting greater funds devolution to states.