Fifteenth Finance Commission's Impact on India's Fiscal Management and Devolution of Powers

The Fifteenth Finance Commission has had a significant impact on India's fiscal management and devolution of powers. The commission's recommendations have led to a major overhaul of the country's fiscal framework.

The commission's report emphasizes the need for greater fiscal discipline and accountability at the state level. This is reflected in the commission's recommendation to reduce the share of states in central taxes from 41% to 39%.

The commission has also recommended a significant increase in the share of states in the Goods and Services Tax (GST) revenue. This is expected to help states generate more revenue and reduce their dependence on central transfers.

This shift in the balance of power is likely to have far-reaching consequences for India's fiscal management and the devolution of powers to states.

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The Fifteenth Finance Commission's commission structure is a key aspect of its work. The commission is headed by Chairman N.K. Singh, with a total of 15 members.

Each member brings a unique perspective to the table, but the commission's structure ensures that their expertise is utilized effectively. The commission's members include state finance ministers, experts in finance and taxation, and other specialists.

The commission's structure allows for a total of 15 members, with 11 members from the Centre and 4 from the States. This balance ensures that the commission can consider both Centre and State perspectives.

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The Fifteenth Finance Commission had a clear set of objectives. The commission was set up to give recommendations for devolution of taxes and other fiscal matters for five fiscal years, commencing April 2020.

One of the main tasks of the commission was to strengthen cooperative federalism. This means they aimed to improve the quality of public spending and help protect fiscal stability.

The commission's chairman, N. K. Singh, said that the commission would need to define populism. This is because the commission's terms of reference had a provision for rewarding states which were successful in eliminating or reducing expenditure incurred on populist schemes.

The commission had to find a balance between equity and efficiency. This was a challenge highlighted by Singh, who also emphasized the need to reappraise the formula of devolution of revenue through the union's taxes.

The commission also aimed to empower urban and rural local bodies. Singh mentioned that these bodies needed to be further empowered to stimulate added economic growth.

Chief Economic Adviser Arvind Subramanian suggested that the commission could function like the first finance commission. He also proposed dividing the tax devolution system into four pots: "return", "redistribution", "risk sharing" and "reward".

The commission's objectives were not without controversy. Pinaki Chakraborty, a professor at the National Institute of Public Finance and Policy, opposed Subramanian's idea of dividing tax devolution into four pots, citing the objective of offsetting revenue disabilities.

The commission aimed to ensure that there were mechanisms for coordination between the Finance Commissions and the GST Council. This was highlighted by Singh, who said that there should be ways for these bodies to work together to achieve multiplier benefits of a higher growth trajectory.

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The Fifteenth Finance Commission made several key recommendations to improve the country's fiscal allocation and economic effects. These recommendations covered various aspects of healthcare, defense, internal security, education, and agriculture.

The Commission suggested that states allocate over 8% of their budgets to health by 2022, with two-thirds of total health expenditure focused on primary healthcare. This emphasis on primary healthcare is a significant shift in the country's healthcare priorities.

The Fifteenth Finance Commission recommended creating a non-lapsable fund to support modernization efforts in defense and internal security. This fund will help ensure that the country's defense and internal security needs are met without any lapses.

The Commission also suggested setting a minimum funding threshold for Centrally-Sponsored Schemes (CSS) and phasing out those with limited impact. This will help streamline the country's CSS and ensure that only effective schemes receive funding.

To incentivize states to enhance educational outcomes, the Fifteenth Finance Commission recommended grants of 4,800 crores from 2022-23 to 2025-26. This funding will help states improve their education systems and achieve better outcomes.

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The Commission recommended a performance-based incentive of ₹45,000 crore for states undertaking agricultural reforms. This incentive will encourage states to implement effective agricultural reforms and improve the country's agricultural sector.

The Fifteenth Finance Commission also recommended regular third-party reviews of CSS and stable, transparent funding patterns. This will help ensure that the country's CSS are effective and efficiently managed.

Here are the key recommendations made by the Fifteenth Finance Commission:

The 15th Finance Commission made a significant recommendation regarding the devolution of powers. They suggested that the share of states in the central taxes, also known as vertical devolution, be set at 41% for the 2021-26 period.

This figure is lower than the 42% share suggested by the 14th Finance Commission for the 2015-20 period. The Commission did make an adjustment to account for the newly formed Union Territories of Jammu and Kashmir and Ladakh, reducing the share by 1%.

The Commission's recommendation is a key aspect of the devolution of powers, and it will have a significant impact on the distribution of resources between the central government and the states.

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Vertical devolution refers to the share of states in the central taxes. The 15th Finance Commission recommended a share of 41% for the 2021-26 period.

This figure is lower than the 42% share suggested by the 14th Finance Commission for the 2015-20 period. The 15th Finance Commission made this adjustment to reflect the changing landscape of India.

The Commission also adjusted the share by 1% to account for the newly formed Union Territories of Jammu and Kashmir and Ladakh, which are now being funded from central resources.

A key point to note is that the share of states in central taxes has been reduced, indicating a shift in the balance of power between the center and the states.

Horizontal devolution is a key aspect of the devolution of powers, where funds are distributed among states based on specific criteria.

The 15th Finance Commission recommended a specific weightage for horizontal devolution, which is 45% for income distance.

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Income distance refers to the gap between a state's income and that of the state with the highest income.

Demographic performance also plays a role, with a weightage of 12.5% allocated to it.

The commission evaluated demographic performance using the 2011 population data.

Forest and ecology are assessed by determining the proportion of a state's dense forest area compared to the total dense forest across all states, with a 10% weightage.

Tax and fiscal efforts are measured to acknowledge states with greater efficiency in tax collection, with a 2.5% weightage.

Area and population also have a significant impact, with 15% weightages allocated to each.

Here's a breakdown of the criteria for horizontal devolution and their corresponding weightages:

The Fifteenth Finance Commission's recommendations for fiscal management are quite detailed and aimed at reducing the fiscal deficit. The commission proposed a fiscal roadmap to reduce the fiscal deficit to 4% of GDP for the centre by 2025-26.

The commission also established a phased reduction for states, targeting limits of 4% in 2021-22, 3.5% in 2022-23, and 3% from 2023-26. This is a clear plan to bring down the fiscal deficit over a period of time.

One of the key recommendations is to review the Fiscal Responsibility and Budget Management Act (FRBM) through a high-level inter-governmental group. This is aimed at making the fiscal management more responsible and transparent.

The commission also recommended that states that did not fully utilize their sanctioned borrowing limits within the first four years should carry forward the unutilized amount to later years. This is a practical solution to help states manage their finances better.

Here are some of the key recommendations of the 15th Finance Commission:

The advisory council plays a crucial role in the commission's decision-making process. It was constituted to advise the commission on matters related to its terms of reference.

Arvind Virmani, the president of Forum for Strategic Initiatives and former Chief Economic Adviser to the Government of India, was a key member of the advisory council.

Surjit Bhattal, chairman of Oxus Research and Investments and a part-time member of the Prime Minister's Economic Advisory Council, also contributed to the council.

Sanjeev Gupta, a former deputy director in the IMF, brought international expertise to the table.

Pinaki Chakraborty, a professor at the National Institute of Public Finance and Policy, provided academic insight to the council.

Sajjid Chinoy, JP Morgan's chief India economist, offered economic analysis and forecasting skills.

Neelkanth Mishra, a managing director and India economist and strategist at Credit Suisse, was responsible for analyzing economic trends and data.

Krishnamurthy Subramanian, the Chief Economic Adviser to the Government of India, was inducted as a member of the advisory council in May 2019, bringing his expertise to the table.

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As the 15th Finance Commission began its interactions with members of parliament, it faced several demands and requests from various stakeholders. Some MPs asked the commission to recommend a plan on compensating states which suffered revenue losses after the roll-out of GST.

The commission was also asked to reassess the criteria of classifying a state as 'backwards' by some parliamentarians. The president of Nationalist Congress Party, Sharad Pawar, suggested creating a financial buffer against oil prices.

The chief minister of Bihar, Nitish Kumar, asked the commission to revisit the criterion of the target of a maximum 3% fiscal deficit under the Fiscal Responsibility and Budget Management Act, 2003, calling it "iniquitous". The state was still waiting for special financial allocations promised to it under the Bihar Reorganisation Act, 2000.

The commission was also asked by the Government of West Bengal to look into restructuring the state's debt, so that it does not become "a permanent drag on the economy of Bengal". The state's chief minister, Mamata Banerjee, said in a press conference, that "we expect that Finance Commission will consider our demand for debt restructuring or waiver".

Several state governments asked the commission to increase states' share in union's tax devolution from the existing 42 percent to 50 percent. The Government of India asked the commission to review a 10 percent hike from 32 percent to 42 percent in tax devolution given to states by the Fourteenth Finance Commission.

The Union Minister of Finance, Arun Jaitley, said that "India is a Union of states, the Union also has to survive".

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The Fifteenth Finance Commission award has a significant impact on the north-eastern states. The analysis reveals that the ratio of central transfers has been declining.

One of the main concerns is the structural disabilities of these states, which necessitates additional budgetary support from the union government. This support is crucial to supplement the finance commission transfers and ensure the states' financial stability.

The Fifteenth Finance Commission award aims to provide fiscal transfers to the north-eastern states. However, the effectiveness of this award is still a topic of discussion.

Here's a breakdown of the expected fiscal transfers to the north-eastern states under the Fifteenth Finance Commission award:

Fiscal transfers during a pandemic require careful consideration, as the Fifteenth Finance Commission found out. The commission had to divide fiscal resources between the union and the states while dealing with the uncertainty posed by the pandemic.

The commission recommended devolving 41% of the divisible pool of taxes to the states, despite the centre's nudging to review it. This is a significant amount, and it's no surprise that the phasing out of revenue deficit grants to the states in the next five years may pose challenges to the fiscally weak states.

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Revenue deficit grants are intended to address the fiscal needs of states that remain unmet after accounting for their own tax and non-tax resources, as well as tax devolution. This is a crucial aspect of fiscal transfers, especially during a pandemic when states may need extra support.

The Fifteenth Finance Commission also established a framework for grants in aid to the states for the 2021-26 period. This framework included various forms of financial assistance, such as revenue deficit grants, sector-specific grants, and grants to local bodies.

Here are some key features of the 15th Finance Commission Grants:

These grants are designed to help states address their specific needs and challenges, and to promote local governance and development.

The 15th Finance Commission of India has proposed a fiscal roadmap aimed at reducing the fiscal deficit to 4% of GDP for the centre by 2025-26. This target is to be achieved through a phased reduction for states, with limits of 4% in 2021-22, 3.5% in 2022-23, and 3% from 2023-26.

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One of the key recommendations of the commission is to review the Fiscal Responsibility and Budget Management Act (FRBM) to ensure it remains relevant and effective. This review is to be conducted by a high-level inter-governmental group.

States that do not fully utilize their sanctioned borrowing limits within the first four years will be allowed to carry forward the unutilized amount to later years. This is intended to provide flexibility to states in managing their finances.

The commission has also recommended additional borrowing of 0.5% of GSDP for states that implement power sector reforms. This is aimed at encouraging states to undertake reforms in the power sector.

The fiscal roadmap also aims to decrease total liabilities for the centre from 62.9% of GDP in 2020-21 to 56.6% by 2025-26, and for states from 33.1% to 32.5%. This is intended to reduce the burden of debt on the centre and states.

To enhance revenue mobilization, the commission has emphasized the need for strengthened income and asset-based taxation. This is aimed at increasing the tax base and reducing the reliance on indirect taxes.

The commission has also highlighted the need to address the inverted duty structure in GST and rationalize the rate structure. This is intended to simplify the tax system and reduce the burden on taxpayers.

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Finally, the commission has recommended establishing an independent Fiscal Council to oversee public financial management. This is aimed at ensuring transparency and accountability in fiscal management.

Here are the key recommendations of the 15th Finance Commission's fiscal roadmap:

Fees can be a significant source of revenue for governments, businesses, and individuals alike. A study found that in 2020, fees accounted for 12% of the total revenue of the US government.

Fees can be a more reliable source of income than taxes, as they are often paid by a specific group of people, such as drivers who pay for parking or tolls. This is evident in the example of the toll roads in California, which generated $1.4 billion in revenue in 2020.

However, excessive reliance on fees can lead to economic inequality, as those who cannot afford to pay may be disproportionately affected. For instance, the high cost of parking in urban areas can be a burden on low-income residents.

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Fees can also be used to fund specific services or infrastructure, such as public transportation or parks. In the case of the city of New York, fees from bike-share programs have helped to fund the expansion of bike lanes and other cycling infrastructure.

A well-designed fee system can be an effective way to manage public resources and provide essential services.

The Fifteenth Finance Commission has been no stranger to controversy. Politicians, including chief ministers and finance ministers, have opposed the commission's terms of reference.

The main point of contention was the use of data from the 2011 census instead of the 1971 census. South Indian states believed this would dilute their share of the union's tax revenue.

Finance ministers from Karnataka, Kerala, and Andhra Pradesh, along with the finance minister of Puducherry, met in Thiruvananthapuram to collectively denounce the commission's terms of reference.

These finance ministers felt the terms of reference were in contradiction with the principles of federalism. They eventually met with the President to discuss their concerns.

The Vice President, Venkaiah Naidu, also got involved, asking the commission's chairman if certain states would be penalized with the use of 2011 census data. The chairman assured him that performing and progressive states would not be penalized.

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The Fifteenth Finance Commission was established during a time of great uncertainty, the COVID-19 pandemic. The commission's primary focus was on fiscal stability, equity, and enhancing fiscal space through higher borrowing with a fiscal exit plan for both the union and states.

The commission's approach was shaped by the need to address macroeconomic uncertainties and rising fiscal needs. This led to a shift in focus from the traditional approach of the previous finance commissions.

One of the key recommendations of the Fifteenth Finance Commission was to increase borrowing to enhance fiscal space. This was done with a fiscal exit plan in place to ensure that the increased borrowing was manageable.

The commission's focus on fiscal stability and equity also led to the innovative use of targeted grants linked to performance-based criteria for specified sectors through the states and local governments.

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The 15 Finance Commission has made significant strides in addressing air pollution in India. The Commission's report led to a 10 times increase in the national budget for air pollution in 2020 compared to previous years.

India's central government transferred an estimated 85,526 crores ($11.1 billion) to states based on their forest cover in 2020-21. This allows states to fund public services like health care, education, sanitation, and infrastructure development.

The Commission's focus on air quality governance is a critical step towards sustainable development. The 15 Finance Commission's leadership and commitment to ecological fiscal transfers are setting a positive example for future policy-making.