Questions for the 15th Finance Commission to Answer

The 15th Finance Commission is expected to submit its five year report. Read on to know how and why this is important, especially for centre-state relations and a list of questions the commission will have to confront.

The bulk of the responsibility to fight the virus is upon the states. This battle has exponentially increased their expenditure burden. Meanwhile, revenues have been hit by the various phases of lockdown. Against this backdrop, the 15th Finance Commission is expected to submit its report in about four months from now.

That the terms of reference of the commission were contentious to begin with is beyond debate. They sought to nudge the commission toward re-centralization by suggesting it review the enhanced devolution offered by the 14th Finance Commission against the backdrop of the fiscal health of the center and the need to continue the “imperative of the national development program, including New India 2022”.

The Commission’s report will– 

(1) Determine how India’s fiscal architecture is reshaped, and 

(2) Determine how Centre-state relations are reset as the country attempts to recover from the COVID-19 shock. 

How the Commission settles the following questions will be critical in shaping the aforementioned outcomes:

- Given that the debt-to-GDP ratio may well be over 80 per cent this year, will the burden of debt reduction fall equally upon the Centre and states? Or will the Commission allow the Centre to have greater leeway when it comes to fiscal consolidation?

- As the hit from the ongoing crisis spreads over multiple years, state governments may want to continue borrowing more than is settled – as they have been allowed to do this year on certain conditions. Will the Finance Commission, in line with its terms of reference, go along with the Centre’s stance and recommend imposing conditions on additional borrowing and formalise this arrangement? It is difficult to see such an arrangement being rolled back once formalised.

- At a time when the Centre is struggling to fulfil its promise of assuring states their GST revenues, will the Commission argue in favour of extending the compensation period, as states desire, but, perhaps, lower the assured 14% growth in compensation and link it to nominal GDP growth? 

Next comes the issue of tax devolution to states.

- As per the interim report of the 15th Finance Commission delivered in February 2020, the tax share of most southern states, including Andhra Pradesh, Kerala, and Karnataka, has come down, while the share of Bihar, Madhya Pradesh, Punjab, Maharashtra, and Gujarat has gone up. 10 out of India’s 28 states have seen a reduction in their share in central tax devolution. Will this reduction be further exacerbated in the final report? Will the Commission go by the Centre’s terms of reference and think it wise to claw back fiscal space during the on-going crisis? 

- As a neutral arbiter of Centre-state relations, the Finance Commission should seek to maintain the delicate balance in deciding on contesting claims. This may well require giveaways especially if states are to be incentivised to push through legislation on items on the state and concurrent list. How will the Commission choose to strike this balance?

- And finally, will the Commission simply ask for another year’s extension to present its full five-year report citing the prevailing uncertainty?

Read more in this piece by Ishan Bakshi at the Indian Express:

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