The 15th Finance Commission, constituted by the President of India in November 2017, has been a significant topic of discussion in the Indian financial landscape. Chaired by N.K. Singh, the commission was tasked with making recommendations for the distribution of tax revenues between the Union and the States for a five-year period commencing from 2021-22. This article delves into the key aspects of the 15th Finance Commission's reports, their implications, and the road ahead.
The commission's mandate was expansive, encompassing not just the vertical and horizontal distribution of taxes, but also the fiscal situation of the states, the performance of the Union and the states on fiscal discipline, and the measures needed to achieve fiscal consolidation and sustainability. Let's explore the commission's reports under these broad themes.
Tax Distribution and Fiscal Federalism
The 15th Finance Commission recommended a significant shift in the tax distribution formula, moving from the existing 42:26:32 (Union:States:Local Bodies) to 38:26:36. This change reflects the commission's emphasis on incentivizing states to improve their revenue generation capabilities and promote fiscal responsibility.
To encourage states to enhance their tax-to-GDP ratio, the commission proposed a performance-based incentive. States that improve their tax-to-GDP ratio by 1% or more would be rewarded with an additional 0.5% share of the divisible pool. This carrot-and-stick approach aims to foster a culture of fiscal discipline and competitiveness among the states.
Performance-Based Incentives
The commission also introduced a 'Performance Grading' system to assess the states' fiscal performance. This grading would consider factors such as fiscal discipline, public expenditure efficiency, and debt management. The better a state performs, the higher its share of the divisible pool would be.
To illustrate, the commission suggested that the top 10 performing states could receive an additional 1% share of the divisible pool. This incentive structure is designed to motivate states to adopt best practices and improve their fiscal health.
GST Compensation and Borrowing Limits
The commission recommended extending the GST compensation to states until 2026, ensuring that states do not face revenue losses due to the Goods and Services Tax (GST) implementation. It also suggested capping the states' market borrowing at 4% of their Gross State Domestic Product (GSDP) to prevent excessive debt accumulation.
To provide states with additional fiscal space, the commission proposed allowing them to borrow an additional 1% of their GSDP, subject to certain conditions. This additional borrowing limit would be available to states that meet the performance criteria set by the commission.
Fiscal Consolidation and Debt Management
The 15th Finance Commission emphasized the need for fiscal consolidation and sustainable debt management. It recommended that the Union and the states should aim to achieve a fiscal deficit of 3% and 4% of GSDP, respectively, by 2023-24.
The commission also suggested measures to improve the quality of public expenditure. It proposed linking capital expenditure to outcomes and performance, and encouraged states to invest more in infrastructure and human capital development.
Union's Fiscal Deficit and Public Debt
The commission recommended that the Union should aim to reduce its fiscal deficit to 2.5% of GDP by 2023-24. It also suggested that the Union's public debt should not exceed 60% of GDP by the end of the five-year period.
To achieve these targets, the commission proposed measures such as rationalizing subsidies, improving tax administration, and enhancing the efficiency of public expenditure. It also emphasized the need for the Union to provide states with adequate resources to meet their fiscal targets.
States' Fiscal Deficit and Public Debt
The commission recommended that states should aim to reduce their fiscal deficit to 3% of GSDP by 2023-24. It also suggested that the states' public debt should not exceed 40% of GSDP by the end of the five-year period.
To achieve these targets, the commission proposed measures such as improving the efficiency of public expenditure, enhancing revenue generation capabilities, and promoting fiscal discipline. It also emphasized the need for the Union to provide states with adequate resources and flexibility to manage their fiscal affairs.
The 15th Finance Commission's reports have set the stage for a significant shift in India's fiscal federalism. The commission's recommendations, if implemented, could lead to a more balanced and sustainable fiscal structure, promoting economic growth and development. As the Union and the states work towards achieving the commission's targets, it is crucial to monitor their progress and make necessary adjustments to ensure the long-term fiscal health of the country.