Stay the course

On Saturday, Finance Minister Nirmala Sitharaman tabled the first report of the Fifteenth Finance Commission in Parliament for the financial year 2020-21 alongside her presentation of the Union Budget. The Finance Commission’s terms of reference had become something of a controversy, given that they departed in several important criteria from previous iterations. Among the states’ concerns were that the Commission was told to stop using population weights from the 1971 Census, and instead use more recent relative population numbers — which significantly disadvantages those states in the south that have done better on family planning. It was also suggested that funds for defence and internal security be put into a separate fund from the divisible pool of taxes, and that “populist” policies be disincentivised for the states.

 

Given these constraints, the Finance Commission’s interim report charts a middle path between the demands of the states and the Union government. Although it no longer uses the 1971 Census numbers, it has tweaked the formula by which taxes are divided among states in a manner designed to partially compensate for this change. For example, the population weight has been decreased to 15 per cent from 17.5 per cent, and the weighting given to demographic performance has been hiked from 10 per cent to 12.5 per cent. The weighting given to relative income has also been decreased by five percentage points. However, the southern states of Tamil Nadu, Telangana, Karnataka and Kerala will still see their relative share in the states’ tax haul decrease. Though the Finance Commission has recommended a special grant to some states to overcome this sharp decrease, the Union government has frowned upon this grant. The Kerala finance minister tweeted that the Union Budget slashed the revenue deficit grant recommended by the Commission from Rs 74,000 crore to Rs 30,000 crore. This will no doubt become a serious issue going forward, and there is little justification for this move on the part of the Union. The Union finance ministry should seek to implement the Commission’s recommendations in the right spirit, especially since transfers to states in the ongoing fiscal year have been lower by more than Rs 1.5 trillion and there is an ongoing dispute about the status of the goods and services tax compensation.

 

The most important aspect of the Commission’s award, however, is the states’ total share of taxes, which was fixed at 42 per cent by the Fourteenth Finance Commission and has only been reduced by 1 percentage point by the Fifteenth Finance Commission on account of the reorganisation of Jammu and Kashmir. This should not be tinkered with further in the final report of the Commission.

 

It is correct that the Union government is in a difficult fiscal situation, but shifting the burden to states will not solve the problem. There is a need for bringing in more efficiency in fiscal management. The Finance Commission is a constitutional body which must consider the long-term importance of Indian federalism, not the short-term fiscal concerns of the government of the day. Its final report should reflect that high duty as much as the interim report.



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