Why 15th Finance Commission will be the last word on key Budget numbers

Topics Budget 2020 | N K Singh

Chairman of the 15th Finance Commission of India N K Singh along with Finance Minister Nirmala Sitharaman with the Commission’s report for the Financial Year 2020-21
Every time a chief minister has handed over a gripe sheet of their fiscal woes to the chairman of 15th Finance Commission N K Singh, which is what they are expected to do, they have added another booklet which is not what they were expected to do. The booklet is a list of grassroot innovations compiled by each state government. They have done so because it is a request from the Commission, aka Singh. No other chief from the past 14 finance commissions has made similar demands. The Commission has no role to play with those innovations, it will not provide funds to them, and neither is the list exhaustive. Yet joining of the two is an example of Singh’s trademark flamboyance and has made the 15th Finance Commission the key organisation to watch in the run up to the Budget.


It would not be wrong to say that the commission is now poring over issues that are almost as detailed as those the finance ministry is examining. One could effectively say the Budget will be a joint handiwork of Singh and finance minister, Nirmala Sitharaman, a position that no other finance commission has enjoyed. There was a fine picture of the two seated together at a luncheon invite thrown by Sitharaman, for economists and journalists, last week.


Finance commissions are appointed every five years by the President of India under Article 280 of the Indian Constitution. The commissions are supposed to recommend the rules for the distribution of taxes between the Centre and the states and among the states; they also decide the principles that should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India.


The remit, already wide, has grown wider after the centre scrapped the Planning Commission in 2015. Instead of just deciding on the principles governing the allocation of non-tax revenues to the states from the Centre (grants-in-aid) the commission led by Singh is also advising on the details of the allocation. This was made explicit in its terms of reference issued in 2017.


But the influence on the Budget-making process stems even more from the other subjects that have made their way to the plate of this commission. Look at those carefully. For the Centre, the commission has asked for minute breakdown of data on all infrastructure projects, sector-wise: Roads, railways, airports, waste management, projects in health, education and even tourism to international convention centres — the list goes on and on. The details to be furnished include data on their mode of financing (whether these were on build-operate-transfer or build-own-perate); the amount of equity, loans and grants raised for the project; the estimated size of the population that will benefit from the project; viability gap funding; other concessions and so on. It is a work of phenomenal detail that even the finance ministry rarely pores over and rarely furnishes with its Budget numbers or at any other time of the year. In another statement, the commission has asked for a statement of flow of funds from the government of India, other than share in taxes to all the ministries, calculated year wise and cumulatively. It is a data that no finance ministry has ever worked out, forget about sharing with any other organisation. It has also asked for equally detailed information on public sector enterprises and on subsidies, both explicit and implicit.


Incidentally, Singh’s imprimatur on this level of detailing comes from his  chairmanship of the earlier FRBM Review Committee. The report was submitted in January 2017 but since he was made chairman of the Finance Commission soon after, the late Arun Jaitley decided to merge examination of the recommendations co-terminus with the latter.


With the dynamic data warehouse on expenditure of the central government that not only rivals the finance ministry but far exceeds it in sophistication, the commission is in a position to put its hand on every key Budget number. It can and is understood to be advising the government on the size of the fiscal deficit, the debt-to-GDP level and the areas where the government can cut back on spending without affecting the economy adversely. One should remember while the Commission is notionally an advisory body, the advice is different in nature from those proffered by other bodies. It is tantamount to an award once it is tabled in Parliament occupying the same prestige as the Budget papers. It has already submitted an interim report with some of these numbers and one understands, those are working their way into the Budget numbers. The commission has been given an extension for a year (to October 2020), which means it can continue to advise the finance ministry well after the Budget is presented. Its terms of reference has been added to twice, which is the first for any Finance Commission. Compare this with the term of the Eleventh Finance Commission, which effectively got only a month’s extension, when its terms of reference were extended slightly.


In the second extension of the terms of reference, Singh has been asked to examine entirely new areas of expenditure. The commission will examine “whether a separate mechanism for funding of defence and internal security ought to be set up, and if so, how such a mechanism could be operationalised”. So there is nothing in the Centre’s expenditure budget that the Commission will not pore over. To do its task, it has asked both the Centre and states for as minute details such as money spent year-wise on police infrastructure, money spent on fortified police stations capping those with “a detailed note on the impact of expenditure of internal security/police”.


On the receipts budget, the commission is in any case seized of all the tax matters direct and indirect, including those on GST. Its terms of reference says this includes “the impact of the GST, including payment of compensation for possible loss of revenues for five years, and abolition of a number of cesses, earmarking thereof for compensation and other structural reforms”.


Can it get any more explicit than this? It is for all these reasons that the 15th Finance Commission will be the last word on all the key Budget numbers that the finance minister will spell out on February 1.


Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel