A Plea for Partnership

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.