24/02/2015 7:17 PM IST | Updated 15/07/2016 8:25 AM IST

Modi Accepts Rise In States' Share Of Central Taxes

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NEW DELHI, INDIA - FEBRUARY 23: Prime Minister Narendra Modi addresses a gathering at the inauguration of International Ramayana Mela at FICCI Auditorium on February 23, 2015 in New Delhi, India. Addressing the event the, Prime Minister said that world affairs are no longer on one track. Soft power is becoming increasingly critical in world affairs across the world and India should leverage its great traditions and culture in forging ties with countries around the world in a way that is deeper, more personal, and therefore, far more powerful. (Photo by Sanjeev Verma/Hindustan Times via Getty Images)

NEW DELHI — Prime Minister Narendra Modi accepted the recommendations of the 14th Finance Commission, which has recommended a record rise of 10 percentage points in states' share of central taxes.

This would mean states will get 42 percent of the divisible tax pool, or Rs 5.79 lakh crore of the central government's expected gross tax revenue of Rs 15.67 lakh crore.

This is on expected lines, because Modi has supported more involvement of states in decision-making, rather than the traditional top-down approach followed by previous federal governments. NITI Aayog was also set up primarily for the same reason.

In a letter to all chief ministers, Modi said: "We have wholeheartedly accepted the recommendations of the 14th Finance Commission, although it puts a tremendous strain on the Centre's finances."

Finance Minister Arun Jaitley is set to present the union budget this Saturday, and expectations are high that it will introduce bold, structural reforms to power India's growth.

"The 14th FC has recommended a record increase of 10 percent in the devolution of the divisible pool of resources to states," he said in a statement from the prime minister's office (PMO).

As per the increased devolution suggested in the report of the 14th Finance Commission, the states will get Rs.348,000 crore in 2014-15 and Rs.526,000 crore in 2015-16.

"There is a shift from scheme- and grant-based support from the central government to a devolution-based support. Hence, the devolution of 42 percent of divisible resources," the PMO said.

"Beyond this 42 percent and the grants to states for strengthening gram panchayats and municipal bodies, an additional amount has been allocated for 11 states that will still be revenue deficit after devolution," Finance Minister Arun Jaitley told reporters here.

"The big among these deficit states have been identified as Andhra Pradesh after division, Assam, Jammu and Kashmir, Himachal Pradesh and West Bengal while the smaller ones include some northeastern states like Manipur and Nagaland," he added.

After assessing the revenue and expenditure of the states for the period 2015-20, the commission has recommended a grant of Rs.1.94 crore (Rs.19.4 million) to meet the deficit of these 11 states.

"The higher tax devolution will allow states greater autonomy in financing and designing of schemes as per their needs and requirements," the report said.

"The consequence of this much greater devolution to the states is that the fiscal space for the centre will reduce in the same proportion," it added.

"States cannot become dependent on the Centre, while the command and control system of the past cannot work. It is this spirit of cooperative federalism that has underpinned the constitution of the NITI Aayog," Jaitley said.

"In the past, when Finance Commissions have recommended an increase, it has been in the range of 1-2 percent," he added.

The government has also accepted the recommendations of the commission on devolution of higher resources to the local bodies.

The total grant to the local bodies including panchayats and municipalities for the five-year period ending March 31, 2020 works out to Rs.288,000 crore.