A Plea for Partnership

Business Standard     6th November 2020     Save    

Context: An analysis of the need of the Fifteenth Finance Commission (FFC) in current circumstances.

Importance of the report in present circumstances:

  • Identification of the impact of COVID-19: It will take cognizance of the fiscal implication of slowdown, the fiscal position of the Central and State governments and tax revenue collection and expenditure aggregates.
  • Provide a medium-term fiscal road map: Since there is no other entity in government that has the mandate to do so, it will recommend fiscal consolidation for the same purpose.
  • To relieve strain on state finances: Since state finances bear a disproportionate share of the fiscal responsibility for dealing with the pandemic and are strained due to:
  • Shortfall in Goods and Services Tax (GST) compensation cess.
  • Decline in the share of the states in the divisible pool to 33% (far below the mandated 42 % under the 14th Finance Commission). 
  • Decline in tax- GDP ratios: Revenue receipts of the states in 2019-20 were Rs 4 trillion lower than projected in the budget estimates.
  • To take note on the impact of autonomy of states: including control on “populist measures” adoption of direct benefit transfers and progress on flagship central government schemes.

Issues with the Finance Commission Reports:

  • Government presents the report in parliament as a fait accompli: By tabling the report just one or two days before the budget (due to bureaucratic delays), the government often escapes the discussion.
  • Constitutionally validated asymmetry: Centre is in a privileged position to decide on the recommendations which can lead to FFC’s response being politically contentious.

Way Forward:

  • Discuss the medium-term economic and fiscal situation: There should be a proper discussion on the medium-term economic and fiscal situation based on the FFC’s medium-term assessment.
    • Article 281 of the Commission requires the government to table an action taken on the report.
    • This would enable the states to prepare better budgets for FY 2021-22 and would add credibility to the fiscal formulation process.