15TH FINANCE COMMISSION – POLITY
News: The next Finance Commission will have a tough task
What is in the news?
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Recently, some government
officials said that the sixteenth finance commission will be established in a
short time.
Key recommendations of the 15th finance commission:
1. State's share in
central taxes:
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The share of states in
the central taxes for the 2021-26 period is recommended to be 41%.
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The Finance Commission reduced the share from 42%.
2. Criteria for devolution:
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Income
distance: Income distance is the distance of a
state’s income from the state with the highest income.
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Demographic
Performance: The Commission used 2011 population data for its recommendations.
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The demographic
performance criterion has been used to reward efforts made by states in
controlling their population.
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Forest
and ecology: This criterion has been arrived at by
calculating the share of the dense forest of each state in the total dense
forest of all the states.
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Tax
and fiscal efforts: This criterion has been used to
reward states with higher tax collection efficiency.
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It is measured as the ratio of the average per
capita own tax revenue and the average per capita state GDP during the three
years between 2016-17 and 2018-19.
3. Grants:
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Revenue
deficit grants: 17 states will receive grants worth
Rs 2.9 lakh crore to eliminate revenue deficit.
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Sector-specific
grants: Sector-specific grants of Rs 1.3 lakh
crore will be given to states for eight sectors like health, higher education.
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State-specific
grants: The Commission recommended state-specific
grants of Rs 49,599 crore. The Commission recommended a high-level committee at
state-level to review and monitor utilization of state-specific and
sector-specific grants.
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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)
including:
○ Rs
2.4 lakh crore for rural local bodies,
○ Rs
1.2 lakh crore for urban local bodies,
○ Rs
70,051 crore for health grants through local governments.
4. Fiscal roadmap:
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Fiscal deficit and debt
levels: The Commission suggested that the center bring down the fiscal deficit to 4% of GDP by
2025-26.
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For states, it recommended the fiscal deficit limit 3.5% in 2022-23,
and 3% during 2023-26.
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Extra
annual borrowing worth 0.5% of GSDP will be allowed to states during the first four years
(2021-25) upon undertaking power sector reforms.
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The Commission observed
that the recommended path for fiscal deficit for the center and states will
result in a reduction of total liabilities of:
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the
center from 62.9% of GDP in 2020-21 to 56.6% in 2025-26,
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the
states on aggregate from 33.1% of GDP in 2020-21 to 32.5% by 2025-26.
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Financial
management practices: An independent Fiscal Council should be
established with powers to assess records from the center as well as
states. The Council will only have an advisory role.
5. Others:
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Funding
of defense 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 defense and
internal security.
Significance of the 15th finance commission
recommendation:
1. Disaster mitigation fund:
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The FC recommends setting
up the state and national level Disaster Risk Mitigation Fund (SDRMF). It is in
line with the provisions of the Disaster Management Act.
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This will give more
financial resources to the states to implement disaster mitigation projects.
2. Fund for defense modernization:
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The establishment of this
fund will be useful to modernize the defense forces and thus will ensure
national security.
3. Health grants:
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Health grants provided by
the finance commission can be used by the states to effectively improve the health
sector, particularly primary health sector across the country.
4. Fiscal consolidation:
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The commission has
provided a clear path for the financial consolidation of the states and center.
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The recommendation of the
establishment of fiscal council can be a first step for fiscal consolidation.
Concerns:
1. Conditional grants to local bodies:
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Critics argue that grants
based on conditions to be met decrease States’ autonomy.
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States are required to
set up state finance commissions to determine State government grants to report
on the implementation of recommendations by March 2024.
2. Non-lapsable defense fund:
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The 15th FC has also
accepted the Centre’s suggestion to set up a non-lapsable dedicated fund to
support defense and internal security modernization.
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While a major part of the
fund will be funded from the Consolidated Fund of India, there is an ambiguity
over other sources to be tapped.
3. Issue of cesses and surcharges:
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The 15th Finance
Commission has been criticized for not addressing the issue of increasing
cesses and surcharges by the central government which are not required to be
shared with the States.
4. Advisory role of fiscal council:
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The commission has
recommended only advisory power to the independent fiscal council. Higher power given to the center in this
council can suppress the state's fiscal autonomy.