15TH FINANCE COMMISSION – POLITY

News: The next Finance Commission will have a tough task

 

What is in the news?

       Recently, some government officials said that the sixteenth finance commission will be established in a short time.

 

Key recommendations of the 15th finance commission:

1. State's share in central taxes:

       The share of states in the central taxes for the 2021-26 period is recommended to be 41%.

       The Finance Commission reduced the share from 42%.

2. Criteria for devolution:

       Income distance: Income distance is the distance of a state’s income from the state with the highest income.

       Demographic Performance: The Commission used 2011 population data for its recommendations.

       The demographic performance criterion has been used to reward efforts made by states in controlling their population.

 

       Forest and ecology: This criterion has been arrived at by calculating the share of the dense forest of each state in the total dense forest of all the states.

       Tax and fiscal efforts: This criterion has been used to reward states with higher tax collection efficiency.

        It is measured as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three years between 2016-17 and 2018-19.

3. Grants:

       Revenue deficit grants: 17 states will receive grants worth Rs 2.9 lakh crore to eliminate revenue deficit.

       Sector-specific grants: Sector-specific grants of Rs 1.3 lakh crore will be given to states for eight sectors like health, higher education.

       State-specific grants: The Commission recommended state-specific grants of Rs 49,599 crore. The Commission recommended a high-level committee at state-level to review and monitor utilization of state-specific and sector-specific grants.

       Grants to local bodies: The total grants to local bodies will be Rs 4.36 lakh crore (a portion of grants to be performance-linked) including:

       Rs 2.4 lakh crore for rural local bodies,

       Rs 1.2 lakh crore for urban local bodies,

       Rs 70,051 crore for health grants through local governments.

4. Fiscal roadmap:

       Fiscal deficit and debt levels: The Commission suggested that the center bring down the fiscal deficit to 4% of GDP by 2025-26. 

       For states, it recommended the fiscal deficit limit 3.5% in 2022-23, and 3% during 2023-26.

       Extra annual borrowing worth 0.5% of GSDP will be allowed to states during the first four years (2021-25) upon undertaking power sector reforms.

       The Commission observed that the recommended path for fiscal deficit for the center and states will result in a reduction of total liabilities of:

       the center from 62.9% of GDP in 2020-21 to 56.6% in 2025-26,

       the states on aggregate from 33.1% of GDP in 2020-21 to 32.5% by 2025-26.

       Financial management practices:  An independent Fiscal Council should be established with powers to assess records from the center as well as states.  The Council will only have an advisory role.

5. Others:

       Funding of defense and internal security: A dedicated non-lapsable fund called the Modernisation Fund for Defence and Internal Security (MFDIS) will be constituted to primarily bridge the gap between budgetary requirements and allocation for capital outlay in defense and internal security.

 

Significance of the 15th finance commission recommendation:

1. Disaster mitigation fund:

       The FC recommends setting up the state and national level Disaster Risk Mitigation Fund (SDRMF). It is in line with the provisions of the Disaster Management Act.

       This will give more financial resources to the states to implement disaster mitigation projects.

2. Fund for defense modernization:

       The establishment of this fund will be useful to modernize the defense forces and thus will ensure national security.

3. Health grants:

       Health grants provided by the finance commission can be used by the states to effectively improve the health sector, particularly primary health sector across the country.

4. Fiscal consolidation:

       The commission has provided a clear path for the financial consolidation of the states and center.

       The recommendation of the establishment of fiscal council can be a first step for fiscal consolidation.

 

Concerns:

1. Conditional grants to local bodies:

       Critics argue that grants based on conditions to be met decrease States’ autonomy.

       States are required to set up state finance commissions to determine State government grants to report on the implementation of recommendations by March 2024.

2. Non-lapsable defense fund:

       The 15th FC has also accepted the Centre’s suggestion to set up a non-lapsable dedicated fund to support defense and internal security modernization.

       While a major part of the fund will be funded from the Consolidated Fund of India, there is an ambiguity over other sources to be tapped.

3. Issue of cesses and surcharges:

       The 15th Finance Commission has been criticized for not addressing the issue of increasing cesses and surcharges by the central government which are not required to be shared with the States.

4. Advisory role of fiscal council:

       The commission has recommended only advisory power to the independent fiscal council.  Higher power given to the center in this council can suppress the state's fiscal autonomy.