india

Updated: Mar 09, 2018 07:37 IST

Parties from Andhra Pradesh have staged a virtual political revolt against the Bharatiya Janata Party (BJP)-led NDA government, seeking a special status category for the southern state.

Amid the ongoing political upheaval, here’s a primer on how the Centre-state financial relations have changed with the 14th Finance Commission and extending special favours is no longer a sound arrangement.

What are Finance Commissions and why are they important to India’s federal scheme?

Sharing of financial resources between the Centre and states is important for any successful federation-based democracy. Any country that has more than one level of government meets the essential condition of being a federation. Some Indian states are richer than others.

The Constitution, through Article 280 to 281, provides for a unique mechanism in Finance Commissions for division of taxes and revenues vertically — between the Centre and states, and horizontally— among all states, based on their levels of development, prosperity and regional needs.

How has the 14th Finance Commission made the demands of special status redundant?

Finance minister Arun Jaitley has said that the demand for special status by some states is no longer tenable after the 14th Finance Commission, which was a watershed, as it recommended that the states’ share in net proceeds of Union tax revenues should increase from 32% to 42%.

It also suggested that sharing of taxes should be the primary route for transfer of resources to states. With this, it virtually made concessions such as additional funds through ‘special status’ administratively redundant.

What else makes special concessions on ground of backwardness superfluous?

Besides granting states a much larger share of the financial pie, the 14th Finance Commission set aside the distinction between plan and non-plan expenditure. It instead stressed higher devolution from the ‘divisible pool’, which is where all government income is first collected before being divided.

In other words, the 14th Finance Commission devised a new mechanism for the flow of resources between the Centre and the states and also across states without any scope for political mediation or bargaining. The era of favouring one state over another is deemed to have ended with the dismantling of the Planning Commission, which used to allocate funds to states.