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investment expenditures. However,this ,recommendation has been accepted by the Government of MACRO ECONOMIC PROFILE
India only in principle and is tied to raising internal resources by the State and fiscal consolidation
for which the Central Government will put in place an institutional mechanism.

1.77 An imbalance pointed to by Kerala (and many other states) in the Memorandum is the
centralization of the allocation of plan funds and a secular decline in the share of State plans. Such
reduction has come about owing to the proliferation of centrally sponsored schemes (CSS). Further,
many of these schemes are not suitable for the States. Kerala had strongly urged the Commission
to take a view on this to curb these tendencies. The Commission has taken a comprehensive view
of the fiscal relations between the Union and the States, reviewed the existing arrangements for
transfers and also the views of the various committees and commissions. Recognising the need
for transfer of funds from the Union to the States, which go beyond tax devolution and grants from
the Finance Commission, the Fourteenth Finance Commission has recommended that the existing
system be reviewed and necessary institutional changes be considered. The Commission is of the
view that the Union Government should continue to have fiscal space to provide grants to States for
functions that are broadly in the nature of ‘overlapping functions’ and for area-specific interventions.
But “the existing arrangements for transfers between the Union and the States need to be reviewed
with a view to minimising discretion, improving the design of transfers, avoiding duplication and
promoting cooperative federalism, insofar as such transfers are required to be made outside of the
recommendations of the Finance Commission”. The suggestion is to expand the present role of the
Inter-State Council to include the functions, such as to design schemes with appropriate flexibility
in overlapping areas, address economic and environmental concerns, and inter- state infrastructure
schemes in the North Eastern States. The Inter-State Council in this new form will go a long way
towards opening a new chapter in co-operative federalism.

1.78 An important recommendation made by the Commission as part of the changes in FRBM
mechanisms is the constitution of a Fiscal Council to “act as an autonomous body reporting to the
Ministry of Finance, which would, in turn, report to Parliament on matters dealt with by the Council in
accordance with current Constitutional provisions”. The Commission states that “there is increasing
recognition globally that the conduct of sustainable fiscal policy by governments and imparting
greater realism to the forecasts (including testing their consistency with the fiscal rules) calls for the
establishment of an independent fiscal institution which could undertake ex-ante assessment of the
impact of fiscal policy and the fiscal implications of budget proposals”.

1.79 Overall, the Fourteenth Finance Commission has come out with new and innovative
recommendations with greater flexibility to States to transform themselves and chart out new paths
of development and fiscal and expenditure management.

Section 7
Banking

1.80 Financial sector initiatives directly influence the growth of the economy, since capital is an
important pre-requisite. The recent trend in macroeconomic indicators shows economic recovery
and the economy is on growth path. The banking infrastructure in the State is well developed and
financial literacy is high. Over the years Commercial, Nationalized, Co-operative banks and a large
number of Grameen banks have sprung up within the State. Although, Kerala has only 1 percent
of the total land area, it has 4.84 percent of bank branches. Kerala has largest number of bank
branches among the semi urban areas in the country. At the end of March 2014, Kerala had total
5602 branches and there was an increase of 395 branches compared to March 2013. As on June
2014, total no of bank branches has increased to 5707. Despite Kerala’s small size, this is on par with
large states like Bihar, Madhya Pradesh and Rajasthan (Appendix 1.41).

Economic Review 2014