15th Finance Commission

15th Finance Commission: Relevance

• GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

About 15^th Finance Commission

• The 15th Finance Commission, chaired by Mr. N. K. Singh was required to submit two reports.
• The first report, consisting of recommendations for the financial year 2020-21, was tabled in Parliament in February 2020.
• The final report with recommendations for the 2021-26 period was tabled in Parliament on February 1, 2021.

15th Finance Commission: Key recommendations

Share of states in central taxes

• The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.
• This is less than the 42% share recommended by the 14th Finance Commission for 2015-20 period.
• The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the centre.

Criteria for devolution

15th Finance Commission: Key terms

• Income distance: Income distance is the distance of a state’s income from the state with the highest income. Income of a state has been computed as average per capita GSDP during the three-year period between 2016-17 and 2018-19.  A state with lower per capita income will have a higher share to maintain equity among states.
• Demographic performance: The Terms of Reference of the Commission required it to use the population data of 2011 while making recommendations. Accordingly, the Commission used 2011 population data for its recommendations. The demographic performance criterion has been used to reward efforts made by states in controlling their population.  States with a lower fertility ratio will be scored higher on this criterion.
• Forest and ecology: This criterion have been arrived at by calculating the share of the dense forest of each state in the total dense forest of all the states.
• Tax and fiscal efforts: This criterion have been used to reward states with higher tax collection efficiency. 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.

15th Finance Commission: Grants

• Sector-specific grants: Sector-specific grants of Rs 1.3 lakh crore will be given to states for eight sectors: (i) health, (ii) school education, (iii) higher education, (iv) implementation of agricultural reforms, (v) maintenance of PMGSY roads, (vi) judiciary, (vii) statistics, and (viii) aspirational districts and blocks.  A portion of these grants will be performance-linked.
• Disaster risk management:  The Commission recommended retaining the existing cost-sharing patterns between the centre and states for disaster management funds.  The cost-sharing pattern between centre and states is: (i) 90:10 for north-eastern and Himalayan states, and (ii) 75:25 for all other states.

15th Finance Commission: Fiscal roadmap

• Fiscal deficit and debt levels:
  • The Commission suggested that the centre bring down fiscal deficit to 4% of GDP by 2025-26.
  • For states, it recommended the fiscal deficit limit of: (i) 4% in 2021-22, (ii) 3.5% in 2022-23, and (iii) 3% during 2023-26.
  • Extra annual borrowing worth 0.5% of GSDP will be allowed to states during first four years (2021-25) upon undertaking power sector reforms including: (i) reduction in operational losses, (ii) reduction in revenue gap, (iii) reduction in payment of cash subsidy by adopting direct benefit transfer, and (iv) reduction in tariff subsidy as a percentage of revenue.
  • The Commission observed that the recommended path for fiscal deficit for the centre and states will result in a reduction of total liabilities of: (i) the centre from 62.9% of GDP in 2020-21 to 56.6% in 2025-26, and (ii) the states on aggregate from 33.1% of GDP in 2020-21 to 32.5% by 2025-26.
• It recommended forming a high-powered inter-governmental group to: (i) review the Fiscal Responsibility and Budget Management Act (FRBM), (ii) recommend a new FRBM framework for centre as well as states, and oversee its implementation.
• Revenue mobilisation: To reduce excessive dependence on income tax on salaried incomes, the coverage of provisions related to tax deduction and collection at source (TDS/TCS) should be expanded.
• GST: The inverted duty structure between intermediate inputs and final outputs present in GST needs to be resolved.  Revenue neutrality of GST rate should be restored which has been compromised by multiple rate structure and several downward adjustments.  Rate structure should be rationalised by merging the rates of 12% and 18%.  States need to step up field efforts for expanding the GST base and for ensuring compliance.
• Financial management practices: An independent Fiscal Council should be established with powers to assess records from the centre as well as states.  A time-bound plan for phased adoption of standard-based accounting and financial reporting for both centre and states should be prepared while eventual adoption of accrual-based accounting is being considered.

15th Finance Commission: Other recommendations

• Health: States should increase spending on health to more than 8% of their budget by 2022.  Primary healthcare expenditure should be two-thirds of the total health expenditure by 2022. All India Medical and Health Service should be established.
• Funding of defence 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 defence and internal security.
• Centrally-sponsored schemes (CSS): A threshold should be fixed for annual allocation to CSS below which the funding for a CSS should be stopped.

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