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Insights into Editorial: Navigating the storm: On the Fifteenth Finance Commission

 

Revenue

 

Context: Pair of balanced scales maintained by the 15th FC:

The government has accepted the Fifteenth Finance Commission’s recommendation to maintain the States’ share in the divisible pool of taxes to 41% for the five-year period starting 2021-22.

A pair of balanced scales representing the Union of India and the States, the cover visual of the Fifteenth Finance Commission’s report for the period 2021-22 to 2025-26, seeks to highlight the Commission’s endeavour to maintain an equitable approach at a time when the Centre and States are facing unprecedented revenue stress and fiscal demands.

 

About 15th Finance Commission:

The 15th Finance Commission tenure was extended by a year, requiring it to give an interim report first, with its work culminating in a virtual zero-visibility zone as the COVID-19 pandemic broke out months before its deadline.

  1. The Finance Commission (FC) is a constitutional body, that determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states as per the constitutional arrangement and present requirements.
  2. Under Article 280 of the Constitution, the President of India is required to constitute a Finance Commission at an interval of five years or earlier.
  3. The 15th Finance Commission was constituted by the President of India in November 2017, under the chairmanship of NK Singh. Its recommendations will cover a period of five years from the year 2021-22 to 2025-26.

 

Govt. agrees to maintain States’ share in the divisible pool of taxes:

  1. The Centre has accepted much of the Commission’s broad recommendations, including giving States a 41% share of the divisible pool of taxes and revenue deficit grants of nearly ₹2.95-lakh crore for 17 States over the next five years.
  2. It has also acceded to the Commission’s suggestion to make grants towards urban and rural local bodies conditional upon States setting up their own finance commissions and publishing online the accounts of local bodies.
  3. And 60% of these grants will be further linked to these bodies’ providing sanitation and water services.
  4. There is an ‘in-principle’ nod to the panel’s suggestion to set up a non-lapsable dedicated fund to support defence and internal security modernisation — a response to the Centre’s belated request to examine if such a fund can be considered for funding defence capex beyond normal Budget allocations.
  5. While the panel has suggested moving ₹1.53-lakh crore out of the Consolidated Fund of India over five years to partly finance this, the Centre has said the funding nitty-gritties will be examined later.
  6. States would monitor how the modalities here evolve, even as they have reason to fret about the Centre’s non-committal response to the Commission’s recommendations of sector-specific and other grants for them adding up to about ₹1.8-lakh crore.

 

Health & Disaster Risk Management:

  1. The 15th Finance Commission has recommended that the spending on health by states should be increased to more than 8 per cent of their budget by 2022.
  2. The commission also noted the need to constitute an All India Medical and Health Service as envisaged under Section 2A of the All-India Services Act, 1951 given the inter-State disparity in the availability of medical doctors.
  3. The commission has recommended health grants amounting to Rs. 70,051 crore for urban health and wellness centres (HWCs) and other block-level healthcare units.
  4. The remaining grant worth Rs 31,755 crore has been suggested for the health sector and Rs. 15,265 crore for critical care hospitals, which includes Rs. 13,367 crore for general States and Rs 1,898 crore for NEH States.
  5. The commission has also recommended Rs. 13,296 crore for training of the allied healthcare workforce.
  6. The Commission has recommended that mitigation funds should be set up at both state and national levels in line with Disaster Management Act provisions.
  7. The fund will be used for local level and community-based interventions that help reduce risks and promote environment-friendly settlements and livelihood practices.
  8. The commission has recommended Rs.1,60,153 crore for States for disaster management for 2021-26, of which the centre’s share will be Rs. 1,22,601 crore and States’ share Rs. 37,552 crore.

On horizontal devolution, while the 15th Finance Commission agreed that the Census 2011 population data better represents the present need of States, to reward the states that have done better on the demographic front, 15th FC has assigned a 12.5 per cent weight to the demographic performance criterion.

The commission has also re-introduced tax effort criterion to reward fiscal performance.

 

Areas of concern for the states:

  1. It is up to the Centre now to ensure that States do not feel short-changed from the new fiscal framework, given their frayed ties over GST compensation dues.
  2. States have also been steadily losing out, given the Centre’s penchant to raise more cesses and surcharges that do not have to be shared.
    1. This Budget has seen an encore with the agriculture infrastructure development cess.
    2. One wishes the Commission had at least noted its displeasure on this practice, like its predecessors did.
  3. Performance based incentives disincentivizes independent decision-making. Any conditions on the state’s ability to borrow will have an adverse effect on the spending by the state, particularly on development thus, undermines cooperative fiscal federalism.
  4. It does not hold the Union government accountable for its own fiscal prudence and dilutes the joint responsibility that the Union and States have.
  5. Unlike previous FC’s, however, the N.K. Singh-led panel had to cope with a tumultuous shift in the domestic and global macro-economic landscape.
  6. Given these pressures and the difficulties in projecting the economy’s path, the Commission has done well.
  7. It has resisted the Centre’s nudge to review what it felt was a too-generous 42% share granted to States by the previous Commission, and deftly dealt with most of the unusual terms of reference foisted on it.

 

Conclusion:

The recommendations made by the Finance Commission are of an advisory nature only and therefore, not binding upon the government. It is up to the Government to implement its recommendations on granting money to the states.

As N.T. Rama Rao said, India lives in the States. If the Centre takes them along, it might help attain the balance envisaged by the Commission, which is needed to drive the country onto a double-engine growth trajectory from the current nadir.