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Economy

15th Finance Commission and a brief analysis of its report

The 15th Finance Commission had recommended a share of 41% from the net proceeds of central taxes to the states for the financial year 2021-26. In this article, know more about the 15th Finance Commission and its recommendations.

Nov 17, 2022

20 min read

List of Contents in this article about the 15th Finance Commission

S.No	Contents
1.	About the Finance Commission
2.	Articles 280 defines more about the Finance Commission
3.	Finance Commission and Fiscal Federalism
4.	NITI Aayog and Fiscal Federalism
5.	First Finance Commission
6.	15th Finance Commission
7.	15th Finance Commission Report
8.	What is income distance?
9.	What is demographic performance criterion?
10.	What is forest and ecology criterion?
11.	What is tax and fiscal efforts criterion?
12.	Grants
13.	Fiscal Roadmap
14.	Other Recommendations

About the Finance Commission

The Finance Commission is a constitutional body constituted by the President of India under Article 280 to make recommendations to the President about

1. Distribution of net proceeds of taxes between the Union and States

2. Allocation of net proceeds of taxes among the States themselves.

3. Define financial relations between the Union and the States.

4. Determine factors governing Grants-in-Aid to the states and the magnitude of the same.

5. Measures needed to augment State Fund to supplement the resources of panchayats & municipalities on the basis of the State Finance Commission recommendations.

Article 280 defines more about the Finance Commission

1. Constituted by the President of India

2. Within two years from the commencement of the Constitution.

3. Thereafter, every fifth year or earlier.

4. FC shall include a Chairman and 4 members (President may determine the qualifications, and selection procedure).

Finance Commission and Fiscal Federalism

1. The Finance Commission is at the centre of fiscal federalism.

2. The Finance Commission evaluate the state of finances of the Union and State Governments.

3. The FC recommend the sharing of taxes between them.

4. It lay down the principles determining the distribution of these taxes among States.

5. Its working is characterised by extensive and intensive consultations with all levels of governments, thus strengthening the principle of cooperative federalism.

6. Its recommendations are also geared towards improving the quality of public spending and promoting fiscal stability.

7. On the whole the Finance Commission faces new challenges in the process of the evolution of our federal polity.

8. As an important Constitutional entity, the Commission is committed to balancing competing claims and priorities among all three tiers of government.

NITI Aayog and Fiscal Federalism

1. NITI Aayog replaced the Planning Commission of India with the main objective of promoting cooperative federalism.

2. As per NITI Aayog, "India is a diverse country with distinct languages, faiths and cultural ecosystems... The States of the Union do not want to be mere appendages of the Centre. They seek a decisive say in determining the architecture of economic growth and development. The one-size-fits-all approach, often inherent in central planning, has the potential of creating needless tensions and undermining the harmony needed for national effort”.

First Finance Commission

The first Finance Commission was set up in 1951 and there have been 15 so far. Each of them has faced its own unique set of challenges.

15th Finance Commission

1. The 15th Finance Commission was constituted on 27 November 2017.

2. Chairperson of the 15th Finance Commission- N. K Singh

3. Operational Duration - 2020-25

4. Two decisions redefined federal fiscal relations during the period - Planning Commission was abolished (also the distinction between Plan and non-Plan expenditure), introduction of GST.

The Terms of Reference of the 15th Finance Commission extends to

1.	Recommending monitorable performance criteria for important national flagship programmes.
2.	Examining the possibility of setting up a permanent non lapsable funding for India’s defence needs.
3.	The reorganisation of the State of J&K into 2 UTs – J&K and Ladakh – presents a new dynamic.

15th Finance Commission Report

First report (FY 2020-21) tabled in parliament in Feb 2020.

Final report (FY 2021-26) tabled in Parliament on Feb 1, 2021.

Share of states in central taxes as recommended by the 15th Finance Commission

Share of states in the central taxes (2021-26) - 41%.

Share of states in the central taxes (2015-20) - 42%

1% of centre's resources for newly formed UTs of J&K and Ladakh.

S.No	Criteria (FY 2021-26)	Weight
1.	Income Distance	45
2.	Area	15
3.	Population (2011)	15
4.	Demographic Performance	12.5
5.	Forest and Ecology	10
6.	Forest Cover	Nil
7.	Tax and Fiscal Efforts	2.5
	Total	100

What is income distance?

1. Difference between state's income (avg.per capita GSDP) and state with highest income.

2. State with lower per capita income will have a higher share to maintain equity among states.

What is demographic performance criterion? (as per 2011 census data)

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

2. States with a lower fertility ratio will be scored higher on this criterion.

What is forest and ecology criterion?

1. Share of dense forest of each state in the total dense forest of all the states.

What is tax and fiscal efforts criterion?

1. To reward states with higher tax collection efficiency.

2. Ratio of average per capita own tax revenue and average per capita state GDP.

Grants

Following grants will be provided from the centre’s resources

Revenue deficit grants (Rs. 2.9 lakh)

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

Sector-specific grants (Rs 1.3 lakh crore)

Sector-specific grants of Rs 1.3 lakh crore will be given to states for eight sectors. A portion of these grants will be performance-linked.

1.	Health
2.	School Education
3.	Higher Education
4.	Implementation of agricultural reforms
5.	Maintenance of PMGSY roads
6.	Judiciary
7.	Statistics
8.	Aspirational districts and blocks

State-specific grants (Rs. 49,599 crore)

The 15th Finance Commission recommended state-specific grants of Rs 49,599 crore. These will be given in the areas of

1.	Social Needs
2.	Administrative Governance and Infrastructure
3.	Water and Sanitation
4.	Preservation of Culture and Historical Monuments
5.	High-Cost Physical Infrastructure
6.	Tourism

The Commission recommended a high-level committee at state-level to review and monitor utilisation of state-specific and sector-specific grants.

Grants to local bodies (Rs 4.36 lakh crore)

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

1.	Rural local bodies (For all 3-tiers)	Rs 2.4 lakh crore
2.	Urban local bodies (For all 3-tiers)	Rs 1.2 lakh crore
3.	Health grants through local govts	Rs 70,051 crore

Disaster risk management

Cost-sharing pattern between centre and states for disaster management is

S.No		Centre	State	Total
1.	North-eastern and Himalayan states	90 %	10 %	100 %
2.	All other states	75 %	25 %	100 %
3.	State disaster management fund corpus	1.2 lakh crore	0.4 lakh crore	1.6 lakh crore

Fiscal roadmap

Fiscal deficit and debt levels

S.No	Financial Year	Centre (% of GDP)	State (% of GSDP)
1.	Fiscal Deficit 2021-22	-	4 %
2.	Fiscal Deficit 2022-23	-	3.5 %
3.	Fiscal Deficit 2023-26	-	3 %
	Fiscal Deficit 2025-26	4 %	-

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

1.	Reduction in operational losses
2.	Reduction in revenue gap
3.	Reduction in payment of cash subsidy by adopting DBT
4.	Reduction in tariff subsidy as a percentage of revenue

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

S.No	Financial Year	Centre	States
1.	Debt to GDP 2020-21	62.9 %	33.1 %
2.	Debt to GDP 2025-26	56.6 %	32.5 %

It recommended forming a high-powered inter-governmental group to

1. Review the Fiscal Responsibility and Budget Management Act (FRBM)

2. Recommend a new FRBM framework for centre as well as states, and oversee its implementation.

Revenue mobilisation

1. Income and asset-based taxation should be strengthened.

2. To reduce excessive dependence on income tax on salaried incomes, the coverage of provisions related to tax deduction and collection at source (TDS/TCS) should be expanded.

3. Stamp duty and registration fees at the state level have large untapped potential.

4. Computerised property records should be integrated with the registration of transactions, and the market value of properties should be captured.

5. State governments should streamline the methodology of property valuation.

GST

1. The inverted duty structure between intermediate inputs and final outputs present in GST needs to be resolved.

2. Revenue neutrality of GST rate should be restored which has been compromised by multiple rate structure and several downward adjustments.

3. Rate structure should be rationalised by merging the rates of 12% and 18%.

4. States need to step up field efforts for expanding the GST base and for ensuring compliance.

Financial management practices

1. Comprehensive framework for public financial management.

2. Independent Fiscal Council with powers to assess records from centre & states. The Council will only have an advisory role.

3. Phased adoption of standard-based accounting and financial reporting for centre and states. Eventual adoption of accrual-based accounting.

4. Not resort to off-budget financing or non-transparent means of financing for any expenditure.

5. Standardised framework for reporting of contingent liabilities.

6. Improve the accuracy & consistency of macroeconomic & fiscal forecasting.

7. States should amend their fiscal responsibility legislation to ensure consistency with the centre’s legislation, in particular, with the definition of debt.

8. States should have more avenues for short-term borrowings other than the ways and means advances, and overdraft facility from the Reserve Bank of India.

9. States may form an independent debt management cell to manage their borrowing programmes efficiently.

Other recommendations

Health

1. States should increase spending on health to >8% of budget by 2022.

2. Primary Healthcare expenditure should be 2/3rds of total health expenditure by 2022.

3. Centrally sponsored schemes in health should be flexible to allow states to adapt & innovate. Focus should be shifted from inputs to outcome.

4. All India Medical and Health Service should be established.

Funding of defence and internal security

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

2. Fund will have a corpus of Rs 2.4 lakh crore over the 5 years (2021-26).

3. 1.5 lakh crore will be from Consolidated Fund of India. 0.9 lakh crore from disinvestment of defence PSEs, and defence land monetisation.

Centrally-sponsored schemes (CSS)

1. Phase out CSS which outlived its utility or has insignificant outlay.

2. Third-party evaluation of all CSS should be completed within a stipulated timeframe.

Based on the article 'Undermining federalism, eroding State's autonomy' in The Hindu by B. Vinod Kumar

References/Image: The Hindu, FincomIndia, Press Information Bureau, PRS Legislative Research, Wikipedia/PM India

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