Federalism and social policy
The last five years have heralded a new phase in India’s fiscal federalism reflected in several changes in the planning and design of Inter-Governmental Fiscal Transfers (IGFTs). In August 2014, the Planning Commission – an apex body responsible for formulating central plans for national development – was disbanded. It was replaced by the NITI Aayog, which unlike its predecessor moved away from a centralized planning approach to one focused on fostering ‘cooperative federalism’ by bringing states together.
In February 2015, Government of India (GoI) accepted the 14th Finance Commission (FFC) recommendations aimed at strengthening fiscal decentralization. Specifically, in accordance with its constitutional mandate to share the proceeds of centrally levied taxes with states, the FFC enhanced state’s share in the divisible pool taxes by 10 percentage points. Moreover, the FFC provided unconditional transfers including an unprecedented Rs 2.87 crore over five years directly to local bodies, a departure from previous practice of giving sector specific grants. Further, by taking a comprehensive view of all transfers and concerned about the intrusion by GoI in states’ domain, it recommended reforms in the design and implementation of Centrally Sponsored Schemes (CSSs) a primary vehicle through which GoI financed and controlled social policy spending in India.