Why in the News?
The Sixteenth Finance Commission is to be set up shortly later this year, as mandated by the constitution to set up the constitutional body once in every 5 years.
Significant aspects that require reconsideration of the 16th Finance Commission:
S. | Important aspects to be considered in the 16th Finance Commission | Recommendations/ Reforms need in the new Finance Commission |
1. | Re- examination of non-shareable cesses and surcharges:
Rationale includes: The shares of states in the Centre’s gross tax revenues have decreased from 35% in 2015-16 to 2019-20 to 31% during 2020-21 to 2023-24, due to increase in share of cess and surcharges from 12.8% to 18.5% during the corresponding period | A 10% upper limit of share of cesses and surcharges has to devised.
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2. | The Income Distance Criterion is given the highest weightage of 45% among other indicators in the Horizontal devolution of funds. · This implies large share of divisible pool to the lower income countries. · High income states accuse of disadvantageous position in sharing of resources. · However, the lower income states had to be paid attention, for they will contribute to a large ‘demographic dividend’ in the future. | A freeze in the weight of income distance criterion at the current level of 45% or reduction to 40% |
3. | Currently many indicators are used for devolution of funds: · Population · Per capita income · Area · Forest cover · Demographic change | An equalisation principle with limited criteria for transfer of resources can be considered · Population · Area · Income distance Supplemented by suitable scheme of grants, is sufficient for transfer of resources. |
4. | The Centre’s Fiscal deficit stands at 9.2% of GDP and states’ fiscal deficit at 4.1%, well above the FRBM recommendations. | To set up a Loan Council (recommended by the 12th Finance Commission) to oversee loan magnitudes and profiles of central and state governments, including merit in subsidies provided the governments. |
About:
Finance Commission of India:
1. Article 280 of the Constitution mandates setting up of a quasi-judicial body.
2. It is constituted by the President every fifth year or such earlier time as he considers necessary.
3. Composition:
a. A Chairman & 4 other members appointed by the President.
b. They are eligible for re-appointment
c. The qualifications of the members of the commission are determined by the Parliament. Such Qualifications laid down includes:
i. Chairman – Person having experience in public affairs
ii. Other members:
· A judge of a high court or one qualified to be appointed as one
· A person with specialised knowledge of finance and accounts of the government.
· A person with wide experience in financial matters and in administration
· A person with specialised knowledge in economics
4. Functions:
(i) Evaluate the state of finances of the Union and State Governments
(ii) Recommend the sharing of taxes between them
(iii) Lay down the principles determining the distribution of these taxes among States.
(iv) The principles that govern the grants-in-aid to the states by the centre.
5. The commission submits its support to the President who in turn lays it before both the houses of the parliament.
6. The recommendations made by the commission is only Advisory and not binding on the government.
7. The first Finance Commission was set up in 1951 and there have been fifteen so far.
15th Finance Commission:
Terms of Reference:
1. Efforts taken by states to expand GST revenues.
2. Efforts taken by states to achieve replacement rate of population growth
3. Achievement of states in implementation of Flagship programmes of GOI and the quality of expenditure involved.
4. Progress achieved in increasing tax/ non-tax revenues of the states (tax efforts)
5. Efforts taken in promoting Ease of Doing Business and promoting Labour intensive growth.
6. Progress made in Sanitation, solid waste management and bringing in behavioural change to end open defecation.
Criteria involved:
Report of 15th Finance Commission:
1. Recommended maintaining the vertical devolution at 41% in contrast to 42% in 14th FC due to the adjustment of ~1% for the changed status of the erstwhile State of Jammu and Kashmir into the new Union Territories of Ladakh and Jammu and Kashmir.
2. Total transfers (devolution + grants) of 34% of estimated Gross Revenue Receipts of the Union leaving it adequate fiscal space for the Union to meet its resource requirements and obligations on national development priorities.
3. Total revenue deficit grants (RDG) of Rs 2,94,514 crore over the award period for seventeen States.
4. Urban local bodies have been categorised into two groups, based on population
a. Basic grants proposed for cities/towns having a population of less than a million.
b. For Million-Plus cities, 100 per cent of the grants are performance-linked through the Million-Plus Cities Challenge Fund (MCF).
5. Recommended that the health spending by States to be increased to >8 % of their budget by 2022.
6. To constitute an All India Medical and Health Service as is envisaged under Section 2A of the All-India Services Act, 1951, to narrow down the inter-state disparity in access to healthcare.
7. The Union Government may constitute in the Public Account of India, a dedicated non-lapsable fund, Modernisation Fund for Defence and Internal Security (MFDIS).
8. Mitigation Funds to be set up at both the national and State levels, in line with the provisions of the Disaster Management Act for local level and community-based interventions to promote environment-friendly settlements and livelihood practices.
9. Major restructuring to achieve debt sustainability by establishing a High-powered Inter-governmental Group to craft the new FRBM framework and oversee its implementation.
10. State Governments can form independent public debt management cells to chart their borrowing programme efficiently.
