After hiking state's revenue share and creating NITI Aayog, the other policy challenge will be to bring cities and other local bodies under the ambit of cooperative and competitive federalism, says the Economic Survey.

"..The far-reaching recommendations of the FFC (14th Finance Commission) along with the creation of the NITI Aayog, will further the Government’s vision of cooperative and competitive federalism.

"The necessary, indeed vital, encompassing of cities and other local bodies within the embrace of cooperative and competitive federalism is the next policy challenge," said the Survey for 2014-15 tabled in Parliament

It further said: "There will be transitional costs entailed by the reduction in CAS transfers. But the scope for dislocation has been minimised because the extra FFC resources will flow precisely to the states that have the largest CAS (Central Assistance to States) financed schemes."

The Government recently decided to increase the state share in taxes from 32 per cent to 42 per cent as recommended by the FFC.

The Survey noted that the projections by the FFC must be treated as illustrative calculations as they are sensitive to the assumptions underlying GDP growth, revenue and expenditure estimations/projections for 2014-15 and 2015-16.

The assumptions are also made about CAS amounts in 2014-15 and about reductions in CAS amounts in 2015-16, it added.

It also pointed out that estimates (of FFC) have only been presented for the year 2015-16 and thereafter, additional factors such as GST implementation and the next Pay Commission awards will affect projections beyond the coming year.

It observed that the FFC has made far-reaching changes in tax devolution that will move the country towards greater fiscal federalism, conferring more fiscal autonomy on the states.

The document said: "The states will now have greater autonomy on the revenue and expenditure fronts...This renewed impulse toward fiscal federalism need not be to the detriment of the centre’s fiscal capacity. A collateral benefit of moving from CAS to FFC transfers is that overall progressivity will improve."

The Survey quoted both first Prime Minister Jawaharlal Nehru and Prime Minister Narendra Modi and said that adoption of FFC recommendation and creation of NITI Aayog would promote Government's cooperative and competitive Federalism.