Balance the needs

Context: Government has earlier changed Terms of Reference (ToR) of Fifteenth Finance Commission (FFC) and ToR of FFC were a matter of debates due to certain issues.

Background:

• On 5^th December 2019, Fifteenth Finance Commission (FFC) had submitted its report for Financial Year 2020-21.

• While presenting Budget 2020-21, Union Finance Minister said that the government had accepted most of the recommendations for Financial Year 2020-21.

• Finance commission will give its recommendations for April 1, 2021 to March 31, 2026 by October 30, 2020.

Controversies resolved by FFC’s first report for FY 2020-21: Southern states have complained that they will face disadvantages due to the use of 2011 Census Data in place of 1971 Census Data by Fifteenth Finance Commission. They said that their share in the central revenue pool would be lowered as their population has declined due to better family planning. In order to deal with the complaints of Southern States, FFC decreased the population weightage from 17.5% to 15% in its report for FY 2020-21. It also gave 12.5% weight to the demographic performance of southern states. FFC has tried to resolve complaints from Southern states in its report for Financial Year 2020-21. But, there are certain issues that FFC should resolve before finalizing its recommendations for April 1, 2021 to March 31, 2026.

Controversies, issues and debates about ToR of FFC that need to be resolved by FFC’s second report for FY 2021-26:

• GST compensation to states: Centre has promised to compensate states for the shortfall in GST collections till 2022. As compensation cess collections have fallen short, it is not clear how the states will be compensated for their GST revenue shortfall.
• Performance-based incentives to states: FFC’s report for FY 2020-21 contains a proposal for providing states performance-based incentives in six areas. Earlier Thirteenth Finance Commission has also provided states incentives for lowering infant mortality. Now, the issue is the funding for incentives proposed by FFC. This may require the lowering of tax devolution to states without changing overall transfer to states.
• Separate mechanism for funding defense and international security: If the mechanism for funding defense and international security will be created by funds from gross tax revenues, this will mean less divisible tax pool will be shared with states.

Way Forward: FFC, in its next report, can resolve the above issues by providing centre with more fiscal space or financial resources. But, this will lead to less financial resources available to states, which are already under pressure due to lack of funds. As Finance Commission is a constitutional body under Article 280 of the Constitution, it should prepare its report on the basis of the assessment of fiscal requirements of the Centre and states in order to uphold the federal principles enshrined in the Constitution of India.