– V.Srinivas IAS –
Government notified the 15th Finance Commission on November 27, 2017. The setting up of a Finance Commission every five years is a constitutional mandate. The Finance Commission has an important role to play in resource sharing based on constitutional division of functions and finances between Centre and the States. The Finance Commissions over the past 70 years have achieved significant equalization, instituted a workable system of resolving the outstanding issues between the Centre and States and amongst the States. Financial year 2015 represented a new era in India’s Fiscal Federalism – the 14th Finance Commission had recommended highest ever devolutions to the States,the NITI Aayog and the Goods and Services Tax Council were constituted.
The 12th and 13th Finance Commissions had recommended an increase in States’ share in the divisible pool of central taxes by 1.5 percent and 1 percent respectively. The 14th Finance Commission increased the States’ share by 10 percentage points from a level of 32 percent to 42 percent by an increase in untied devolution grants and a corresponding reduction in the tied grants of central assistance to States. The NITI Aayog examined the Social Sector Expenditure of States pre and post 14th Finance Commission and observed that barring Sikkim, Tripura and Uttarakhand, all other States were better off in terms of financial allocations in Financial Year 2014-15. The total central transfers to States in the financial years 2014-15 and 2015-16 increased by 21.19 percent. The 14th Finance Commission had taken the gigantic step of restoration of budget balance and restructuring of public finances by viewing plan and non-plan grants in tandem. States were mandated to pursue the objectives of zero revenue deficit, fiscal deficit not exceeding 3 percent of GSDP, interest payments to revenue receipt ratio not exceeding 10 percent and debt to GSDP ratio not exceeding 25 percent.
The 14th Finance Commission assessed State Finances as (a) For States with above average tax-GSDP ratio the assumed tax buoyancy was 1.05 implying a moderate increase and (b) for other States a higher buoyancy of 1.5 was assumed. The 14th Finance Commission assumed an increase in aggregate tax-GSDP ratio from 8.26 of GSDP to 9 percent in the terminal year. On the expenditure side, the 14th Finance Commission included the expenditure incurred on the centrally sponsored schemes in revenue expenditure. The expenditure was projected as 11.12 percent of GDP against 13.57 percent projected by the States.
The Presidential Order dated November 27, 2017 constituting the 15th Finance Commissionsays that the Commission shall make recommendations on the distribution between the Union and the States of the net proceeds of taxes, the allocation between the States of respective shares of such proceeds; the principles which should govern the grans-in-aid of the revenues of the States out of the Consolidated Fund of India and the measures needed to augment the Consolidated Fund of a State to supplement resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.The 15th Finance Commission terms shall review the current status of the finance, deficit, debt levels, cash balances and fiscal discipline efforts of the Union and the States and recommend a fiscal consolidation roadmap for sound fiscal management, taking into account the responsibility of the Central Government and State Governments. The Commission may also examine whether revenue deficit grants be provided at all. Several experts have expressed concerns on the terms of reference as the commitments for New India 2022 could mean roll-back of the recommendations of the 14th Finance Commission and lesser devolution to the States from the current level of 42 percent.
The 15th Finance Commission will have to contend with the slowdown in the Indian economy. There is an upward trend in the fiscal deficits of States. The vertical balances to the States relative to Centre’s gross revenue receipts have shown trend increases in every Finance Commission and it would not be possible to reduce the devolution without a corresponding increase in fiscal and revenue deficits of States. The higher devolutions under the 14th Finance Commission are yet to result in significant increases in social sector allocations. There are pressures to increase allocations to the CSS schemes for higher expenditures on Health and Education. The tax buoyancies have been affected by the transition to the GST and the GST compensation to States will continue till 2022. The GST is expected to augment the Centre’s fiscal efforts with higher tax collection. On the Horizontal balances, the 15th Finance Commission has the responsibility of equalizing the widening gap between richer States and low income States. The inequalities in fiscal capacities between States have resulted in widely differing social and capital expenditures between States. A large part of the equalization effort by the 15th Finance Commission would have to be through grant-in-aid rather than devolution.
The best way forward would be to adhere to the letter and the spirit of the Constitution (balancing the Union and State’s revenue powers with expenditure responsibilities listed in the 7th schedule of the Constitution), appreciate the problems raised by stakeholders, and attempt to address the contemporary issues relevant to the Terms of Reference.
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About the author
V.Srinivas IAS
Senior Bureaucrats and Author
V.Srinivas is an IAS officer of 1989 batch, presently posted as Chairman Board of Revenue for Rajasthan
He had previously served in the Ministry of Finance and as Advisor to Executive Director (India) IMF, Washington DC. Also worked as Planning and Finance Secretary of Rajasthan.
Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of INVC NEWS.
