The Finance panel has pushed conditional grants, but left other concerning issues untouched.
What is the FC recommendation in this regard?
The 15th Finance Commission report has been quite conservative.
It has not suggested major changes in the vertical and horizontal devolution of finances from the Centre to States.
However, it moots a high ratio of incentive-linked grants (rightly linked to agriculture reform and health spend) to untied aid.
At about 25%, this amounts to a transfer of over Rs.10.3-lakh crore over 5 years till 2025-26.
The untied transfers to States over this period, at 41% of the divisible pool of tax revenues (excluding cess and surcharge), are estimated to account for Rs.42.2-lakh crore.
Significantly, the divisible pool for 2021-26 shrinks from Rs.135.2-lakh crore to Rs.103-lakh crore when cess, surcharge and cost of collection are left out.
Disappointingly, the panel sidesteps the contentious issue of cess and surcharge.
It has only suggested that they should be transparently accounted for in the Budget.
What is the States’ financial position?
The key task before any finance panel is to strike the right balance between promoting nationwide reforms and honouring the fiscal autonomy of the States.
The States account for 60% of total government expenditure of over Rs.60-lakh crore annually.
For this, it relies on central transfers through taxes and grants to the extent of 35% or more (about Rs.11-lakh crore annually).
This share has been climbing in view of the States’ inability to mop up own revenues.
On the other hand, the committed expenditures account for half the States’ budgets.
So, States end up borrowing to meet over 20% of their needs.
What are the other provisions and challenges?
The 15th Finance Panel report has been released in unprecedented, pandemic times.
The Central transfers to States have been under strain during these times.
Deficit - In order to relieve the burden on States, the Finance panel has done well to continue with revenue deficit grants.
The roadmap to bring revenue and fiscal deficit under control can be reset, as suggested by the panel and the Budget.
Revenue expenditures are necessary to keep social sector schemes going.
However, the panel lays down a stringent fiscal roadmap for States in this regard.
States should curb frivolous expenditure, such as loan waivers.
They can step up revenues from stamp duty and registration of property.
The Economic Survey 2020-21 points to a “decline in actual capital spending relative to BE observed in the States for the last 3 years”.
This should be checked to ensure a return on higher levels of spending in these times.
Devolution - Interestingly, the panel report moots two new criteria for horizontal devolution, even as income and population weights have been changed.
These are ‘demographic performance’ or fertility reduction and ‘tax effort’.
If this is an effort to reward governance in southern States, it has not worked so far; transfers to them did not improve in 2020-21.
A persistent north-south divide will not serve the cause of cooperative federalism.
