In February 2015, the Union Government accepted the recommendations of the 14^th Finance Commission (FFC) and set the stage for a radical overhaul of India’s fiscal architecture. The recommendations were designed to enhance the fiscal autonomy of states by increasing the proportion of funds transferred to states from the divisible pool[1] of taxes from 32% to 42%. Other major changes included: a change in the formula for determining inter-state tax shares and a decrease in state-specific Finance Commission (FC) grants from those with conditionalities towards more untied block grants for certain areas.

The acceptance of the FFC had two major consequences. On the one hand, it led to the Ministry of Finance (MoF) allocating Rs 5.06 lakh crore as tax devolution in the FY 2015-16 (Revised Estimate (RE)), significantly higher than the Rs. 3.38 lakh crore in FY 2014-15 Actuals.[2] On the other, it led to a decrease in the funding through Centrally Sponsored Schemes (CSSs) – the Union Government’s primary vehicle for financing social sector investments in the country. Specifically, Budget 2015 saw a discontinuation of some CSSs, reduction in allocations for others and the change in the fund-sharing ratios for CSSs putting greater onus on state governments. These changes led many to believe that the increase in tax devolution was offset by cuts in CSSs. For instance, the state of Andhra Pradesh noted,

“The reduction of the Central share for key schemes such as SSA, National Health Mission, ICDS etc, will have adverse effect on the State development indicators.”[3]

It is important to note that this was a period of transition leading to a significant amount of chaos and confusion. Many state governments had passed their budgets prior to the announcement of acceptance of FFC recommendations in February 2015. Their budgets thus, did not reflect the changed union assistance. The changed fund sharing ratios of CSSs was also announced only in October 2015.

In order to shed some light into the implications of these changes on state budgets, my colleagues and I set out to collect state budget data for 19 states. A complete analysis of the impact of the FFC would require Actuals for FY 2014-15 and FY 2015-16. However, Actuals have a two-year lag period and are thus currently available only for FY 2014-15. We have thus used REs for FY 2015-16 as the most realistic current estimate of government expenditure.

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So have states received more resources from the Union post the FFC?

The answer is Yes. All the 19 states studied received at least 20% more funds from the Union government in FY 2015-16 RE compared to FY 2014-15 Actuals. There is however some state variation in the quantum of increases. Haryana, Telangana, Himachal Pradesh, Jharkhand and Chhattisgarh received the highest increase at over 60%. In contrast, Tamil Nadu and Punjab received less than 25% more from the Union.