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State of Social Sector Expenditure in 2015-16

Avani Kapur, Vikram Srinivas, Priyanka Roychoudary

The 14th Finance Commission’s (FFC) recommendations, accepted by the Union Government in February 2015, set the stage for a radical overhaul of India’s fiscal architecture. The recommendations were designed to enhance fiscal autonomy of states by increasing the vertical tax devolution of the divisible pool of taxes from 32 per cent to 42 per cent. Consequently, the Ministry of Finance (MoF) allocated Rs. 5.24 lakh crore as tax devolution. This was significantly higher than the 2014-15 allocation of Rs.3.38 lakh crore (RE). This increase in devolution was accompanied by several changes in the mode of state transfers, including cuts in centrally sponsored schemes (CSS), the Union Government’s primary vehicle for financing social sector investments in the country.

What are the implications of these changes? Did increased tax devolution result in enhancing the fiscal space available to states? Or was this offset by cuts in CSS and other grants? How have states responded to these changes? Have we seen any changes in the investment patterns of the states? Crucially, has the changed fiscal structure resulted in any visible shifts in social sector investments at the state level?

Based on an analysis of 19 state budgets, this brief presents a preliminary evaluation of the impact of the FFC recommendations on state finances and social sector expenditure.

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