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[Explained] 15th Finance Commission: Recommendations and criticism

 

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Introduction

According to Article 280 of Indian Constitution, "The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President". In short Finance Commission is a constitutional as well as a quasi-judicial body. The recommendations of the finance commission are advisory and non-binding in nature. But these recommendations are generally accepted by the central government

 The major role of the finance commission is to deal with the problem of fiscal imbalance between the centre and the states and among the states as well. The 15th Finance Commission has made recommendations for the period of 2021-2026. 


Term of references

The terms of reference of 15th Commission were majorly to review the impact of the recommendations of 14th finance commission, to assess the impact of Goods and Services Tax(GST), to study the debt level of centre and state and also to recommend a roadmap to control it, to recommend the performance-based incentives for example performance of the state in controlling populations and the level of ease of doing business etc and also to consider the question of providing revenue deficit grants. The term of references also includes the static role of the finance commission to determine the vertical and horizontal distribution of taxes and to provide the grant in aids to the states. The taxes distributed between the state and the centre is called the divisible pool. It consists of all the taxes other than the cess and surcharge. With this background, we can move forward with the key recommendations made by the 15th finance commission.


Recommendations


  1. Vertical devolution 

The 15th finance commission has failed the vertical distribution of taxes at 41%. It can also be said as 42% adjusted to 41% because 1% will be given to Jammu and Kashmir and Ladakh. The estimated total transfer to the states by 2026 would be around ₹52 lakh crore including the grants.


  1. Horizontal devolution 

The horizon devolution would be done based on the categories given below.


Population 

15%

Area

15%

Forest and Ecology

10%

Income distance 

45%

Tax and fiscal effort

2.5%

Demographic performance

12.5%


100%


               The population will be calculated as per the 2011 census. Forest and ecology mean the area under dense forest. Income distance would be calculated as per capita Gross State Domestic Product(GSDP). The base year for calculating tax and fiscal effort is 2016-2019. Demographic performance would be calculated as the total fertility rate. The state's total fertility rate would be allocated more money. 


  1. Grant in Aid

There are a total of 5 types of grant in aid namely Revenue deficit grant, sector-specific grant, state-specific grant, grants to local bodies, grants for disaster management. There are 8 specific sectors where grants will be given to the states. These sectors are health, school education, higher education, judiciary, maintenance of PMGSY roads, agriculture, statistics and aspirational districts and blocks. Some grants are performance base while some of them are static.


  1. Fiscal roadmap

Due to the unforeseen situation and a chaotic atmosphere created by the coronavirus pandemic, the finance commission has not given any specific roadmap for the fiscal deficit but it has recommended that the centre should stick to the debt levels recommended by the FRBM Act and the states as per their law. It has also recommended that the extra-budgetary borrowings must be eliminated and their full disclosure should be done. It has done so because lately the central government was indulged in extra-budgetary borrowings so that the debt data doesn't reflect in the fiscal deficit discourse done by the central government. Furthermore, the commission advised that an expert panel should be set up to recommend a framework to the government for sound public financial management. 


  1. Taxation

As far as taxation is concerned the commission recommended that the tax base should be broadened because the level of tax collection happening today isn't sufficient for a good economy to function. It has also recommended the government increase the capacity and expertise of the tax administration in all the tiers of the government so that more and more tax can be collected. 


  1. GST

The commission while assessing the impact of GST on the Indian Economy noticed that the GST collection is nowhere near to the original forecast done by the central government. It also found that the GST collection is very highly volatile and there are delays in refunds as well as glitches in the system also such as invoice problems. 


  1. Defence

The 15th Finance Commission has recommended the establishment of a non-lapsable fund named Modernization Fund for Defence and Internal Security(MFDIS) in public accounts. The fund will be used for the modernization of defence services, CAPFs, modernization of the state police as projected by MHA, and also for creating a welfare fund for soldiers and paramilitary personnel.


The concern of Southern states

The recommendation made by the 15th finance commission faced backlash by the southern states because of some specific reasons. The reasons being the calculations of the population based on the 2011 census which puts them in an unfavourable situation because of the relatively less population of the southern states. Other than this since all the other parameters like income distance, tax effort and demographic performance are being calculated based on the 2011 census this cumulatively negatively affects the southern states, as a result, reducing their share in the divisible pool. It is also said that the top four losers as far as the 15th finance commission is concerned will be the southern states like Kerala and Tamil Nadu etc. 


Assessment

The concerns of southern states have been acknowledged by the Finance Commission and it has said that though the 2011 census will the basis of all the parameters the weightage given to the population had been drastically reduced to 15% and a new parameter has been added which is the demographic performance which will surely help the southern states gain more rather than losing. So it can be said that the 15th finance commission has made recommendations quite fairly and if implemented in a good manner will surely help in The growing economy and making India prosperous. 


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