More money for states

For the first time in independent India's history the Centre has surrendered 10 per cent more of its tax revenue to states, an outcome of perhaps having a former Chief Minister as Prime Minister. Mr Modi has walked the talk on cooperative federalism, though he may have created problems for his Finance Minister on the eve of his second budget by leaving him with Rs 50,000 crore or so less to spend. As a follow-up, the Centre may go in for belt-tightening and axe some its schemes for states. There is a bailout for cash-starved panchayats and municipal bodies. According to media reports, panchayats will get Rs 2 lakh crore between 2015 and 2020. One wonders whether Mr Jaitley has factored in all this in his budget. It is not yet clear whether NITI Aayog will have lower amounts to share with states. The 14th Finance Commission has suggested that the states suffering revenue losses due to the GST (goods and service tax) should be compensated for three years after its rollout. It is thus a major shift in resource allocations. A strong Centre has nudged India towards greater federalism.

Punjab is a major gainer in the new devolution of Central funds. With its tax share going up, the state will become revenue surplus in 2015-16. Managing the huge debt, however, will be a problem. The fate of the Chief Minister's demand for a special package for the state remains uncertain though Mr Badal, a vocal advocate of more powers for states, has reasons to be happy.   

For the economy the additional cash transfers will not make much difference. Instead of the Centre, states will now spend the money. Only the quality of spending will vary. Loose auditing and lax monitoring may drive politicians/ bureaucrats to buy greater comforts for themselves or/and benefit cronies. Responsible governance will remain an issue. There is a proposal to rank states on the ease of doing business. Poorly governed states would scare away industry, lose jobs or fail to generate fresh employment and sink deeper in poverty, higher fund allocations notwithstanding.