15th Finance Commission Recommendations - States’ Share

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February 12, 2021

What is the issue?

  • The 15th Finance Commission (FC) recently submitted its report with recommendations for 2021-26 period.
  • The Finance panel has pushed conditional grants, but left other concerning issues untouched.

What is the FC recommendation in this regard?

  • The 15th Finance Commission report has been quite conservative.
  • It has not suggested major changes in the vertical and horizontal devolution of finances from the Centre to States.
  • However, it moots a high ratio of incentive-linked grants (rightly linked to agriculture reform and health spend) to untied aid.
    • At about 25%, this amounts to a transfer of over Rs.10.3-lakh crore over 5 years till 2025-26.
  • The untied transfers to States over this period, at 41% of the divisible pool of tax revenues (excluding cess and surcharge), are estimated to account for Rs.42.2-lakh crore.
  • Significantly, the divisible pool for 2021-26 shrinks from Rs.135.2-lakh crore to Rs.103-lakh crore when cess, surcharge and cost of collection are left out.
  • Disappointingly, the panel sidesteps the contentious issue of cess and surcharge.
    • It has only suggested that they should be transparently accounted for in the Budget.

What is the States’ financial position?

  • The key task before any finance panel is to strike the right balance between promoting nationwide reforms and honouring the fiscal autonomy of the States.
  • The States account for 60% of total government expenditure of over Rs.60-lakh crore annually.
  • For this, it relies on central transfers through taxes and grants to the extent of 35% or more (about Rs.11-lakh crore annually).
  • This share has been climbing in view of the States’ inability to mop up own revenues.
  • On the other hand, the committed expenditures account for half the States’ budgets.
  • So, States end up borrowing to meet over 20% of their needs.

What are the other provisions and challenges?

  • The 15th Finance Panel report has been released in unprecedented, pandemic times.
  • The Central transfers to States have been under strain during these times.
  • Deficit - In order to relieve the burden on States, the Finance panel has done well to continue with revenue deficit grants.
  • The roadmap to bring revenue and fiscal deficit under control can be reset, as suggested by the panel and the Budget.
  • Revenue expenditures are necessary to keep social sector schemes going.
  • However, the panel lays down a stringent fiscal roadmap for States in this regard.
    • States should curb frivolous expenditure, such as loan waivers.
    • They can step up revenues from stamp duty and registration of property.
  • The Economic Survey 2020-21 points to a “decline in actual capital spending relative to BE observed in the States for the last 3 years”.
  • This should be checked to ensure a return on higher levels of spending in these times.
  • Devolution - Interestingly, the panel report moots two new criteria for horizontal devolution, even as income and population weights have been changed.
    • These are ‘demographic performance’ or fertility reduction and ‘tax effort’.
  • If this is an effort to reward governance in southern States, it has not worked so far; transfers to them did not improve in 2020-21.
  • A persistent north-south divide will not serve the cause of cooperative federalism.


Source: Business Line

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