The 15th Financial Commission

Feb 28, 2021

The 15th Commission (XVFC) led by Chairman N. K. Singh, submitted its report for the period 2021-26 to the Honourable President of India. The commission has given its recommendations for five years from 2021-22 to 2025-26. The cover and title of the Report are also unique - “Finance Commission in Covid Times” and the use of weighing scales on the cover indicates the balance between the States and the Union.

The commission was asked to give recommendations on many unique and wide range of issues apart from the vertical and horizontal tax devolution, local government grants, disaster management grants. The commission was also asked to examine and recommend performance incentives for states in many areas like power adoption of DBT solid waste management etc.

The major challenge is addressing the issue of the 2011 population census. Other issues include the non-lapsable defence fund, the use of certain parameters for performance incentives. The commission was also required to perform the task of assessing and projecting the fiscal roadmap for the Union and State.

Key Recommendations

In its final report, vertical devolution was recommended at 41% adjusting 1% for the state of Jammu and Kashmir

Horizontal Distribution

For horizontal distribution, the commission has tried to work on the principles of expenditure needs, equity and performance. This will be achieved by the introduction of efficiency criteria of tax and fiscal efforts and by assigning 12.5% weight to demographic performance. Consideration of demographic performance will be resolving the demographic debate and incentivising states in moving towards the replacement rate of population growth.

Principles governing Grant-in-aid

The commission has recommended a total grant of Rs 10,33,062 crore during 2021-26. These grants are further classified into revenue deficit grants, grants for local government, grants for disaster management, sector-specific grants and state-specific grants. Many of these grants are provided on the basis of performance thereby promoting the principles of transparency and accountability, making it easier to monitor expenditures

Conditional grants to local bodies

The commissions grant for local government is different from that of its predecessors, for the set of entry-level conditions: (a) Constitution of State Finance Commission (b) Timely auditing and online availability of accounts for rural local bodies coupled with (c) notifying consistent growth of property tax revenue for urban local bodies. The recommendations are in alignment with the national programmes of the Swachch Bharat Mission and Jal Jeewan Mission.

Incubation of new cities and urban grants :

It is for the first time that a finance commission has recommended Rs 8000 crores to states for incubation of new cities, granting Rs 1000 crores for new cities. The focus of urban grants is to the improvement of AQI (Air Quality Index) and meeting the service benchmark of solid waste management and proper sanitation

Grants for health and disaster mitigation fund :

The commission recommends setting up the health grant of Rs 70,051 crore through local bodies addressing the gap in primary health and infrastructure. The commission has recommended setting up the State and National level Disaster Risk Mitigation Fund (SDRMF). For the time, the finance commission has introduced a 10-25% guaranteed cost-sharing basis by the states for the NDRF and NDMF which has not been appreciated by the states

Non-lapsable fund for defence :

The commission has recommended setting up a dedicated non-lapsable fund The Modernisation Fund for Defense and Internal Security (MFDIS). The objective of the fund is to bridge the gap between projected budgetary requirements and budget allocation for defence and internal security and to provide greater predictability for enabling critical defence capital expenditure. The funds will have 4 specific sources (a) Transfers from Consolidated Fund of India (b) disinvestments proceeds of DPSE’s (c) proceedings from the monetisation of surplus defence land and (d) proceeds of receipt or defence land likely to be transferred to state governments and for public projects in future. The total inductive size of the proposed MFDIS over the period 2021-26 is Rs 2,38,354 crore. The union government has accepted this recommendation in principle.

The reports start with the words from “The future depends on what we do in the present” - Mahatma Gandhi. It would be interesting to see the impact of these recommendations in the times ahead.

This article has been written by Siddhesh Patil for The Paradigm

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