The Fifteenth Finance Commission: Balancing Federalism and Fiscal Prudence
The Fifteenth Finance Commission, constituted on November 27, 2017, under the chairmanship of N.K. Singh, played a pivotal role in shaping the fiscal landscape of India for the period 2021-26. Its core mandate, as with previous Finance Commissions, involved recommending principles governing the distribution of net tax proceeds between the Union and the States (vertical devolution) and among the States themselves (horizontal devolution). However, the Fifteenth Finance Commission faced unprecedented challenges and addressed critical issues concerning fiscal federalism in a rapidly evolving economic context. One of its key recommendations centered on the vertical devolution. The Commission recommended that 41% of the divisible pool of central taxes be allocated to the states. This was a 1% decrease compared to the Fourteenth Finance Commission’s recommendation. This adjustment was primarily due to the creation of the Union Territories of Jammu and Kashmir and Ladakh, which are now directly funded by the Union government. The Commission meticulously analyzed the fiscal needs of both the Union and the States, factoring in revenue projections, expenditure commitments, and debt sustainability considerations. The horizontal devolution formula, used to allocate the states’ share, was subject to significant debate and scrutiny. The Fifteenth Finance Commission introduced several modifications to the criteria employed. While population (2011 Census) continued to hold a substantial weight (15%), reflecting the need to cater to states with larger populations, it was complemented by factors addressing demographic performance, income distance, area, forest & ecology, tax and fiscal efforts. The introduction of “demographic performance” (12.5%), rewarding states that had made progress in controlling their population growth, was a significant move. This aimed to incentivize states to actively participate in national population control programs. “Income distance” (45%) remained a crucial criterion, giving greater weight to states with lower per capita income to address regional disparities. The “Area” criteria was retained at 2.5%. “Forest & ecology” (10%) rewarded states for maintaining forest cover, promoting environmental conservation and sustainable development. Tax and Fiscal Efforts (2.5%) was introduced to incentivize fiscal prudence and revenue mobilization. Beyond tax devolution, the Commission made significant recommendations regarding grants-in-aid to states. It proposed revenue deficit grants to states facing a revenue gap after devolution, aimed at helping them meet their essential expenditure commitments. Sector-specific grants were also recommended for sectors like health, education, and agriculture, focusing on improving service delivery and addressing specific challenges. Local government grants, critical for strengthening grassroots governance, were given special attention. The Fifteenth Finance Commission also addressed the issue of fiscal consolidation. It emphasized the importance of sound fiscal management by both the Union and the States, advocating for debt sustainability and expenditure rationalization. The Commission’s report encouraged states to increase their own tax revenues and reduce their reliance on central transfers. In conclusion, the Fifteenth Finance Commission played a crucial role in shaping India’s fiscal federalism framework. It navigated complex challenges by carefully balancing the principles of equity, efficiency, and fiscal responsibility. Its recommendations, while subject to debate and scrutiny, provided a roadmap for promoting balanced regional development, strengthening state finances, and ensuring sustainable fiscal practices. The modifications to the horizontal devolution formula, in particular, reflected an attempt to incentivize performance in key areas such as demographic control, environmental conservation, and fiscal discipline, thereby contributing to a more equitable and sustainable economic future for the nation.
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