Finance panel: Ensured states get a good deal, says Singh

By Prasanta Sahu & KG Narendranath

The 15th Finance Commission (FC) has endeavoured to arrest a trend of concentration of fiscal powers with the Centre, its chairman NK Singh told FE.

The commission also sought to mitigate an inevitable fall in the shares of some states in the divisible tax pool resulting from its terms of reference (ToR), by rewarding their creditable demographic performance and earmarking adequate revenue deficit grants, he added.
Recent years have seen a shift towards more fiscal resources being at the disposal of the Centre.

Even a liberal tax-devolution award for states by the 14th Finance Commission or guaranteed GST revenue growth for states could not completely hold it back. Increased resort to cesses and surcharges by the Centre to bolster its non-shareable tax receipts and a redesigning of the centrally sponsored schemes fuelled the trend.

While the terms of reference given to the 15th Finance Commission by the President raised the fears of further concentration of fiscal powers at the Centre, the commission seems to have sought a slowing of the pace of erosion of the relative fiscal space with the state governments.

The 15th FC assessed that aggregate transfers to states — untied tax transfers and assorted grants, including those to local governments — would be Rs 52.5 lakh crore or 34% of the Centre’s gross revenue receipts (GRR) during its award period, FY22-26. The divisible tax pool is envisaged to be 76% of the Centre’s gross tax receipts.

On these estimates barely signifying an improvement in states’ share of fiscal resources — total transfers turned out to be 35% of the GRR in 14th Commission’s award period and 33.2% in the terminal year of FY20 — Singh said: “We were quite cognizant of the fact that between 14th and 15th FCs, the incidence of cesses and surcharges has gone up. Though these imposts clearly defeat the intention of (fiscal) transfers, absent a Constitutional amendment, they do remain outside the divisible pool. We have, therefore, sought to compensate rising incidence of cesses and surcharge by seeking a much deeper consolidation of the centrally sponsored schemes and central outlays and calibrating the grants component of the transfers, seen at a little over Rs 10 lakh crore in the commission’s five-year award period (FY22-FY26) against tax transfers of Rs 42.2 lakh crore”.

The commission says in its report: “The CSSs co-financed by the government of India should be flexible enough to allow states to adapt and innovate. Top-down mandates and strictures on programme implementation are the antithesis of an open-source model. CSS should grant states significant latitude to tailor implementation modalities to local realities…the Union Government can shift the focus of CSS and transfers away from line-items and activities and towards outputs and outcomes, with States being empowered to choose their own pathways to achieve results. ”

Essentially, the eligibility for states to access the CSS funds is being sought to be relaxed and they will also get greater discretion on how to use the grants. Of course, the steps might not suffice to fully neutralise the trend (of Centre laying its hands on a higher share of fiscal resources), Singh admitted. He, however added that, “we are not looking at greater centralisation”.

The 15th FC has kept tax devolution rate at roughly the same level at 41% (+ ~1% for the UTs of Jammu & Kashmir and Ladakh) of the divisible pool. However, it seeks the grants component of the transfers to jump 92% from the previous commission’s period, to Rs 10.3 lakh crore, in proof that an effort has been made to buttress the states’ fiscal capacity.

Even as the commission, in keeping with its ToR, proposed a non-lapsable Modernisation Fund for Defence and Internal Security with an indicative size of Rs 2.38 lakh crore for the award period, it again sought to mitigate any adverse impact of the move on resources to be available for states by calibrating the charge on the Consolidated Fund of India.

“We have obtained a legal opinion that funding of defence obligations is the responsibility of every Indian stakeholder and it transcends classifications in the Seventh Schedule (of Constitution). Though a special financing mechanism via a defence cess or surcharge was suggested, we decided against it. Monetization of defence lands and disinvestment of defence PSUs are ways to generate resources internally by the defence ministry,” Singh said. Also, the GRR has been adjusted in a manner allowing fiscal space for the Union government to generate funds for defence capex to the tune of Rs 50,000 crore a year.

Singh said the the adverse impact on some states due to the adoption of 2011 population census for horizontal devolution was being sought to be mitigated by creating a new criterion of demographic performance and assigning a weight of 12.5% to it. Also, revenue deficit grants (RDG), seen to be `2.94 lakh crore during the award period, would greatly benefit states like Andhra Pradesh and Kerala, which would have otherwise seen an even bigger decline in their tax pool share. “If you look at the nature and distribution of RDG, it is also to compensate those states where based on a normative assessment, we estimated a gap in revenue and sought to address it,” Singh said. He also pointed out that the 15th FC assigned a lower weight of 45% to the crucial need-criterion for horizontal transfers, namely ‘income distance,” compared with 50% weight given by the 14th FC.

Still, the share in divisible tax pool of states such as Bihar (10.05 versus 9.66), Gujarat (3.47/3.08, Madhya Pradesh (7.85/7.54) and Maharashtra (6.31/5.52) are seen to rise substantially in the 15th FC award period, while Karnataka (3.64/4.71) and Kerala (1.92/2.5) are losing out.