POLITY

Recommendation of the 15th Finance Commission

Context:

● Recently, the Fifteenth Finance report was tabled in the Parliament.

● The Fifteenth Finance Commission was constituted on 27 November 2017, under the chairman NK Singh. The Commission was required to submit two reports. The first report, consisting of recommendations for the financial year 2020-21, was tabled in Parliament in February 2020. The final report with recommendations for the 2021-26 period was tabled in Parliament on February 1, 2021.

Probable Question:

How does the recommendation of the 15th finance commission supplement the state financial resource? What are important recommendations of the 15th finance commission to promote fiscal stability and sound financial management?

Vertical devolution:

● The commission has recommended maintaining the vertical devolution at 41 %.

➢ It is at the same level of 42 per cent of the divisible pool as recommended by FC-XIV. However, it has made the required adjustment of about 1 per cent due to the changed status of the erstwhile State of Jammu and Kashmir into the new Union Territories of Ladakh and Jammu and Kashmir.

➢ Gross tax revenues for a 5-year period is expected to be 135.2 lakh crore. Out of that, the Divisible pool (after deducting cesses and surcharges & cost of collection) is estimated to be 103 lakh crore.

Horizontal devolution:

● Based on principles of need, equity and performance.

● It has various parameters with different weightage attached like population, forest cover, demographic performance, area etc.

Grants:

Revenue deficit grants to States:

● The commission recommended 17 states will receive grants worth Rs 2.9 lakh crore to eliminate the revenue deficit.

● While 11 states were provided revenue deficit grants by the Fourteenth Finance Commission.

● Revenue deficit grants cover the gap between the state’s revenue and expenditure.

Performance incentives and grants:

● It has recommended grants of Rs. 4,800 crore (Rs. 1,200 crore each year) from 2022-23 to 2025-26 for incentivising the States to enhance educational outcomes.

● XVFC has recommended grants for online learning and the development of professional courses (medical and engineering) in regional languages (matrubhasha) for higher education in India.

● It has recommended the performance-based incentive for all the States for carrying out agricultural reforms.

State-specific grants:

● The Commission recommended state-specific grants of Rs 49,599 crore. These will be given in the areas of (i) social needs, (ii) administrative governance and infrastructure, (iii) water and sanitation, (iv) preservation of cultural and historical monuments, (v) high-cost physical infrastructure, and (vi) tourism.

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). The grants to local bodies will be made available to all three tiers of Panchayat- village, block, and district.

Fiscal Roadmap :

● Fiscal deficit and debt levels: The Commission suggested that the centre bring down fiscal deficit to 4% of GDPby 2025-26. For states, it recommended the fiscal deficit limit (as % of GSDP) of: (i) 4% in 2021-22, (ii) 3.5% in 2022-23, and (iii) 3% during 2023-26.

● It recommended forming a high-powered inter-governmental group to (i) review the Fiscal Responsibility and Budget Management Act (FRBM), (ii) recommend a new FRBM framework for centres as well as states and oversee its implementation.

● Revenue mobilisation: Income and asset-based taxation should be strengthened. To reduce excessive dependence on income tax on salaried incomes, the coverage of provisions related to a tax deduction and collection at source (TDS/TCS) should be expanded.

● GST: The inverted duty structure between intermediate inputs and final outputs present in GST needs to be resolved. Revenue neutrality of the GST rate should be restored which has been compromised by multiple rate structures and several downward adjustments. Rate structure should be rationalised by merging the rates of 12% and 18%.

● Financial management practices: A comprehensive framework for public financial management should be developed. An independent Fiscal Council should be established with powers to assess records from the centre as well as states.

Other Recommendations in Different Sectors:

Health:

● States should increase spending on health to more than 8% of their budget by 2022.

● Primary healthcare expenditure should be two-thirds of the total health expenditure by 2022.

● Centrally sponsored schemes (CSS) in health should be flexible enough to allow states to adapt and innovate. The focus of CSS in health should be shifted from inputs to outcomes.

Defence 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 defence and internal security.

Disaster Risk Management:

● Mitigation Funds should be set up at both the national and state levels, in line with the provisions of the Disaster Management Act.

Conclusion:

On the whole, the Finance Commission faces new challenges in the process of the evolution of our federal polity. As an important Constitutional entity, the Commission is committed to balancing competing claims and priorities among all three tiers of government in a credible manner.