Every five years a constitutionally appointed body called Finance Commission decides how tax and certain other sources of revenue are be divided between the Centre and the states.
The 15th Finance Commission’s final report, with 108 recommendations, is all set to be tabled in Parliament today.
Why the report matters?
In terms of the size of funds, the number of stakeholders and period for which it’s implemented the commission’s recommendations tower over the Union Budget.
Two factors make this commission’s award even more important – it’s the first centre-state and inter-state division of funds after the GST has been rolled out and inter-state disparities are greater than ever before, which affects every Indian’s social-economic life in a silent but significant way.
What to watch out for
States’ share of central taxes: In its first report, the panel retained the share at 42% for the states, Jammu & Kashmir and Ladakh (which were converted into Union Territories). The 14th Finance Commission had faced flak for stepping up the states’ share significantly even as the Centre spent on various schemes related to education, health and employment, leaving it with limited resources for subjects under its exclusive domain. Over the years, the states’ share has increased.
Health sector allocation: Everyone agrees this needs to be stepped up. In the wake of Covid-19, the panel is expected to recommend an all-India service for health professionals, on the lines of IAS and IPS.
Allocation mechanism for defence: This includes a non-lapsable pool of funds for capital expenditure which could involve monetisation of assets. Creation of a fund will delink acquisition of key equipment from the annual Budget cycle.
Incentives for agriculture: In its first report, the panel had detailed a plan to encourage states to undertake farm reforms. So, states that boost farm exports and take other measures to diversify production and markets are likely to get incentives.
GST-linked incentives: It is the first Finance Commission to be set up since the new tax regime was launched in July 2017. One of its key mandates is to provide incentives to states that broaden and deepen the GST base.
What is the role of Finance Commission?
The Finance Commission works out the principles for distribution of resources between the Centre, states, and local bodies and recommends the formula for sharing of taxes. It also decides the distribution of taxes between different states and union territories as well as the principles for grants-in aid out of the Consolidated Fund of India. In addition, every Finance Commission has some unique terms of reference.
When was the current Finance Commission set up?
The 15th Finance Commission (FFC) was set up in November 2017, initially for two years, but its term was extended. It is only the second time since 1952, when the first Finance Commission was set up, that the award will be spread over six years – from April, 2020 to March, 2026. The Commission has already submitted its first report, with the award covering the current financial year (2020-21).
Who are the members?
The commission is chaired by N K Singh, a former civil servant who was part of Manmohan Singh’s reforms team in the finance ministry, and a member of Atal Bihari Vajpayee’s PMO. He was also a Rajya Sabha member.
Besides Singh, the other members of the panel are Ashok lahiri (Former chief economic adviser), Anoop Singh (Adjunct professor, Georgetown University), Ajay Narayan Jha (Former finance secretary).
Ramesh Chand (NITI Aayog) is a part-time member and Arvind Mehta (Civil servant) serves as the secretary.
How is the FFC different from its predecessors?
Apart from the tenure, it is dealing with some unique terms of reference, especially those related to reforms-linked incentives.
In addition, it has to do a balancing act given that it will use Census 2011 as the population base for its award. The change in base from 1971 Census had resulted in a protests from the southern states that fear an adversely impact due to the gains they have made.
The biggest challenge for the panel is the current pandemic, which has resulted in massive shortfall in revenue for the Centre and the states, making it tough for FFC to decide on the base year. Also, there is considerable uncertainty on the pace and evenness of the economic recovery, making estimation of growth, taxes and spending a tough task.