15th Finance Commission – A Roadmap

What is the issue?

15^th Finance commission (FC) which is about to make recommendations for the 5 years (2020-2025). These are some suggestions for them.

What were their problems?

Dilution of the original mandate of equalising opportunities for every citizen by ensuring uniform public services.
Reluctant to rock the boat and lose credibility by doing anything very different.
Average Indian continued to suffer from poor public services.

What had the past FCs’ done?

The 12^th FC had the most success with a combination of carrots and sticks — debt restructuring conditional on acceptance of State-level Fiscal Responsibility and Budget Management (FRBM) legislation.
The 13^th FC introduced incentive payments but since capacity constraints prevented some States from utilising them.
The14^th FCs shifted to payments towards capacity building. Data is required on what worked.

What are the major issues?

Independence vs. uniformity for States.
The public services are poor because the facilities tend to cut to match the funds available, rather than raising funds to provide a uniform level of services.
There are no limitations on imposing conditions on grants in aid of revenue and in CSS.
States delay giving the final urban status to rapidly growing census towns because of tax and municipal service provision issues.
Tax share is regarded as a right, so the States resist conditionality in devolution.

What can be solution?

Richer States or those with competitive own schemes may want to opt out of CSS.
They could be given the choice, conditional on outcomes being above a threshold which encourages healthy competition in schemes.
Appropriate compensation in devolution could be on the basis of quality adjusted least cost schemes.
A rich database is needed, also for other TORs such as 3 and 7 on assessing revenues and needs.
NITI Aayog has long been ranking States on various criteria which can be used as a database.
A research suggests that incentives work but intergovernmental transfers, given tax capacity, have a negative association with tax effort of States which should be concentrated on.

What changes can be made to the current system?

Setting up of Permanent Fiscal Council to make them responsible for conditional data-based fund devolution to States.
Revival of Inter-State Council to get participation and feedback from States for a vibrant fiscal federation, so that the sanctioning delays may also reduce.
The taking over of erstwhile Planning Commission functions by central ministries, has created resentment among States.

What changes can be made in the 15th FC?

Improving the level and uniformity of public services can be a lens to look at the terms of reference (TOR) of the 15th FC.
It could give funds conditional on implementing devolution to the third tier, with payments made for improvements in rather than for levels of services provided.
The CSS can be rationalised and clubbed further.
Money paid could be partly replaced by well-targeted central direct benefit transfer (DBT) to individuals.
Economies of scale from pooling and coordination efficiencies may reduce costs in health and education.

Although now there is GST, user charges are a major area where States still have to make efforts.
Ring fencing productive expenditure could also raise revenue effort.
An award in line with broad principles of justice would generate less resistance.

How to reduce the States’ debt (TOR 2)?

Safeguarding of expenditure that creates future income.
Encouraging higher growth brings down debt ratios as growth rates normally exceed interest rates on catch-up growth paths.
Rise in revenue deficit decreases growth and therefore slows reduction in debt ratios.
There are plans to increase the market discipline on States further by releasing more high frequency data on State finances to enhance rating.
Expenditures are cut (often developmental and capital expenditures).
Incentives must also protect the quality of expenditure.

Source: Business Line