Junk move to slash the divisible pool

Junk move to slash the divisible pool

Centre should fund defence, its responsibility.

The reported move to curtail the divisible pool from which taxes collected by the Centre are devolved to the states should be abandoned. The plan is to persuade the 15th Finance Commission to set aside monies for a non-lapsable defence fund from the Centre’s gross collections and devolve funds to the states from what remains. This goes against the spirit of fiscal federalism and the constitutional mandate, marking a step towards a unitary state. The FC is mandated to determine the distribution of tax proceeds between the Centre and the states, but can recommend additional matters in the interest of sound finance. Defence is in the Centre’s remit in the Seventh Schedule of the Constitution, which sets out the Union List, the State List and the Concurrent List, setting out the responsibilities respectively, of the Centre, the states and jointly of both.

As it is, the actual devolution of the revenues of the Centre to the states is a good deal — in excess of ten percentage points, by some estimates — below the 42% recommended by the 14th FC, thanks to a sizeable chunk of the Centre’s collections, including large dollops from petroleum, being in the form of cesses and surcharges that are not shareable with the states. Reduced transfers defeat the goal to raise the states’ spending power, give them the fiscal capacity to discharge their constitutional responsibilities and enhance the overall efficacy of public spending. The right thing to do is to enlarge the divisible pool, rather than curtail it, withdraw central largesse from state responsibilities such as healthcare and pensions, and focus on boosting efficiency of expenditure at each level of the federal polity.

The finance ministry had earlier rejected the idea of a non-lapsable defence fund on two grounds: unspent monies represent opportunities forgone in other vital areas and once started for defence, such funds would proliferate. Reform is a must to reduce the outgo on defence salaries and pensions. Greater focus on indigenous defence R&D and manufacture would help as well.