15th Finance Commission – Everything you need to know

Economic Recession has been the subject of various socio-political and economic discussions in India today as the country is expected to enter a period of irregular growth. At this juncture in the Indian economy, one of the major stakeholders for the plan of action ahead is the Finance Commission. As we are just about 2 months away from the submission of the 15th Finance Commission report, Here is all you need to know about FFC.

Finance Commissions in India

The Finance commission of India is an autonomous body under the Government of India recommended and established by the constitution in The Finance Commission Act, 1951. It was pioneered by the then Law Minister BR Ambedkar. Article 280 of the Indian constitution defines the scope of the commission. It is appointed every 5 years and consists of a chairman and 4 other members. The First Finance Commission was constituted in 1951 under the chairmanship of KC Niyogi.

India is a federal democracy with a unitary bias. Hence, the financial relationship between the union and the states is of utmost importance for efficient functioning. The union has a responsibility to provide economic assistance and grants to the states. Further, with the constant evolution of the macroeconomic policies in India, the Finance Commission has played a crucial role in creating a road map for Indian economy.

Purpose

One of the major goals of the Finance Commission is working towards handling the horizontal and vertical fiscal imbalances and strive to equalise public services across states. It deals with the distribution of tax proceeds among the union and the state along with forming the principles on which states receive grants.

One of its fundamental functions also includes provision of resources from the consolidated funds of India to Municipal Bodies and Panchayats. The impact of the Finance commissions ranges from a Macroeconomic national level to the comprehensive grassroots levels, touching every citizen of India.

The 15th Finance Commission

The Fifteenth Finance Commission (FFC) was constituted by the Government of India on 27th November 2017 after the ceremonial approval of the President. It was created with the objective of giving recommendations on fiscal matters from April 1st 2020. It is presided by Nandh Kishor Singh, a retired IAS officer. The commission will submit its report on November 30th 2019 on the basis of its Terms of Reference (ToR).

Aims

Review the impact of the 14th Finance Committee recommendations on the fiscal status of the government. Vertical division of tax revenue between the center and the state. Recommend performance based incentives for states on their results on controlling population, reducing expenditure on populist schemes and sound fiscal management. Creation of range of parameters to incentive states to stick to fiscal discipline.

Provide new fiscal targets for the Union and the states and find ways to handle the current deficits. As the economy has not fully understood the impact of GST, the FFC is expected to study its effects and resolve conflicts arising out of it.

Demands

The 14th finance commission provided a 10 percent rise for states in total tax collected centrally from 32% to 42%. Now, the center demands a review of this decision from the FFC whereas the states demand a further rise to 50%.

The center has expects FFC to find a way to safeguard profit producing expenditure while still reducing the debt of states. While extending the term of the FFC, the center has assigned to the commission to address the issue of providing secure and adequate funds for defense and internal security.

Members of Parliament have questioned the definition of a “backward” state and requested the commission to find ways to combat losses due to GST.

Individual states have voiced their concerns to the commission as well. Bihar has asked the commission to rethink the 3% fiscal deficit limit and West Bengal is looking for a way to restructure its debt. Several southern states have had meetings and raised objections over points in the ToR.

Challenges

The 15th Finance Commission is the first finance commission set up after the abolishment of the Planning Commission. Previously, the Planning Commission undertook plan expenditures, but now, with more power in the hands of FC, revolutionary measures to equalise opportunities, bring uniformity in public services and promote labor intensive growth.

The 15th Finance Commission is also the first finance commission set up after the launch of GST. Not only it is the commission’s responsibility to study the effects of GST on the economy and identify sectors which have under performed but it is also its mandate to suggest remedies to improve these sectors and aid problem- solving.

The 15th Finance Commission is also the first finance commission set up after the elimination of distinction between Plan and Non-Plan commission.

It is also a challenge for FC to accommodate the requests of the center regarding funds for Ministry of Defence, considering the limitations in its constitutional mandate and the history of finance commission in this regard.

After The Jammu and Kashmir Re-organization Bill, 2019, another challenge for the FC is to recommend policies for the complete economic integration of the 2 newly created UTs. Further FC is expected to recommend, that unlike other UTs, Jammu-Kashmir and Ladakh will receive funds from the divisible tax pool of the Centre.

Key Areas of Focus

#1. Centrally Sponsored Schemes

Since the abolishment of the planning commission, the CCS have come under the radar of the Finance Commission. It is expected that the FC will recommend either abolishment or pruning of the CCSs. The issue itself has attracted various opinions from states like Andhra Pradesh, Arunachal Pradesh and from the union government and its departments.

The Niti Aayog recently observed that CCSs were bleeding the states of revenue. When the Niti Aayog rationalised 66 CCSs into 28, the state’s share went up from 20 per cent to 40 per cent in core sector schemes. This adversely impacted the revenues of several states. Though various approaches are being suggested to handle the issue, it will be interesting to see what course the FC takes.

#2. Tax Devolution

There has been considerable speculation on the states share in tax devolution to be decided by the FFC. The Union government has been persistent in its demands, as Former Finance Minister Arun Jaitely said “India is a union of states but the union must survive too.”

The union has repeatedly asked the FFC to review the 10% jump in the states’ share recommended by the previous FC. The states on the other hand have claimed that they have not really benefited from the increase. Total revenue to the states as a percent of gross tax revenue of the union has not seen a rise.

States remain more financially prudent than the union government. Another cause of worry is the FFC being asked to consider whether revenue deficit grants should be given at all. The Center’s focus on national development plan – New India 2020 has also been a cause of concern as experts worry if this scheme will be financed from what is taken from the states.

#3. Health Sector

The High- Level group of the FFC has spoken about moving health from the state list to the concurrent list. It has also bought in the idea of “right to health”. It is feared that the country does not procure the bandwidth to actually provide systematic and extensive healthcare across the country.

Further, moving a state subject to concurrent list is seen as a lack of trust on the cooperative federalism. Rather than using its resources and expertise to design schemes and fund them, the union is also trying to undertake implementation. The centre already has exhaustive responsibilities of its own and it is to be seen whether it can take more on its plate.

#4. Terms of Reference

The basic ToR for the Finance Commission has been outlined in the article 280 of the Indian constitution. But the ToR of the FFC has raised quite a few eyebrows. For starters, a number of amendments have been directed by the center to the ToR through presidential orders. This has been accused as a move to influence the workings of the FFC.

Further, it has been specifically mentioned in ToR that “The Commission may also examine whether revenue deficit grants be provided at all.” Using 2011 census has again been met with considerable opposition. The incentives parameters are seen as non-exclusive. The Kerala FM Isaac recently called for a seminar to discuss the ToR and said “Indian federalism in danger,’ after new ToRs were notified.

#5. States Unsatisfied

Throughout the formation and working of the FFC, the states have raised various concerns on its functioning. Firstly, the use of the 2011 census has led to many states wondering if the FFC will reduce the share of states which have undertaken population control.

While it is true that using a 50 year old data might not reveal the current needs of the states and nor does it take into account recent trends like migration, the southern states have questioned whether the FC will incentive backwardness.

Populist schemes have been draining state economies but measures to reduce that is being met with resistance from states as they are a major part of electoral politics.

The idea of North – South divide and some states benefiting way lesser than its contribution has also been a cause of fiction. New India 2020 by the center government is being seen as an excuse to keep more resources with the union itself. Performance parameters like efforts made for expansion of GST or total fertility rate are said to be unequal and biased.

Further, the above mentioned factors like the CCS, health sector schemes, tax devolution and issues with the ToRs have led the states to be unsatisfied.

It is premature to jump into conclusion on whether or not the 15th finance commission recommendations will solve the present issues and create a balance between the center and the states. As the chairman of the 9th FC said, Finance Commissions try to provide “uniform, just and equitable” yardstick to both union and the states.

But considering the challenges posed to the FFC and the various areas of concern, only time will tell if it will be able to deliver its promise.