An Analysis of 15th Finance commission’s recommendations

Synopsis: The 15^th Finance Commission recommendations are slightly different from the other Finance commissions. It has introduced many revolutionary changes that can shape India’s future.

What are the major challenges faced by 15^th Finance commission?

The 15^th Finance commission (FC) had many challenging tasks while preparing its report for the year 2021-26. The most important among them are,

1. One, the issue of using 2011 population census data. The southern states were against it.
2. Two, the issue of creating a non-lapsable defence fund.
3. Three, using certain parameters for calculating performance incentives to states.
4. Fourth, the 15^th FC required to prepare the fiscal roadmap for the Union and state amid a shortfall in the GST collection and the Pandemic.

How the 15^th FC report addressed these challenges?

1. First, the 15^th FC recommended vertical devolution at 41 per cent to states against 14^th FC recommendation of 42%. The 15^th FC adjusted 1 per cent for the erstwhile state of Jammu and Kashmir.
2. Second, for horizontal distribution, it introduced efficiency criteria for tax and fiscal efforts of states. This is expected to harmonise the principles of revenue needs and performance.
3. Third, the 15^th FC assigned 12.5 per cent weight to demographic performance. By that, it incentivized the states for the progress made by southern states in replacement rate of population growth.

What was the recommendation by 15^th FC for distributing grant in aids to the states?

• The grant allocation will be based on the below five categories. 1. Revenue deficit grants, 2. Grants for local governments, 3. Grants for disaster management, 4. Sector-specific grants and 5. State-specific grants.
• The centre in its Action Taken Report accepted all the grants except sector-specific grants (Rs 1,29,987 crore) and state-specific grants (Rs 49,599 crore).
• The Commission also tasked to examine, whether revenue deficit grants should be provided at all to the states. Some states argued that providing revenue deficit grants will disincentives tax efforts and prudence in expenditure.
• However, the FC recommended revenue deficit grants of Rs 2,94,514 crore for (2021-26). It will help fiscally stressed states by COVID, such as Kerala, Punjab, West Bengal.

What were the Changes brought by 15^th FC regarding grants to local governments?

• First, the 15^th FC has prescribed the following conditions to local bodies to get access to the grants.
  • Constitution of State Finance Commissions
  • Timely auditing and online availability of accounts for rural local bodies
  • Notifying consistent growth rate for property tax revenue for urban local bodies.
• Second, it has also recommended for tying the grants to the local bodies to drinking water, sanitation, solid-waste management and faecal sludge management. This is in line with the national programmes such as Swachch Bharat Mission and Jal Jeevan Mission.
• Third, for the first time, the FC recommends Rs 8,000 crore to states for incubation of eight new cities. It also provides for urban grants to million-plus cities for improving air quality, to meet the benchmark of solid waste management and sanitation.
• Fourth, the landmark recommendation of the 15^th FC is the health grant of Rs 70,051 crore through local bodies. It will help to address the gaps in primary health infrastructure.

15^th FC recommendations for strengthening Disaster risk management

• The FC recommends setting up the state and national level Disaster Risk Mitigation Fund (SDRMF). It is in line with the provisions of the Disaster Management Act.
• Also, for the first time, it introduced a 10-25 per cent graded cost-sharing by the states for the NDRF and NDMF. Though, this is not accepted by the states.

15^th FC recommendations to strengthen Defence sector

• It recommends for setting up of a dedicated non-lapsable fund and the Modernisation Fund for Defence and Internal Security (MFDIS) for 2021-2026.
• The fund will bridge the gap between projected budgetary requirements and budget allocation for defence and internal security. It will also provide greater predictability to critical defence related to capital expenditure.
• It has recommended the following four specific sources from where the funds for defence can be sourced.
  1. Transfers from the Consolidated Fund of India.
  2. Disinvestment proceeds of DPSEs.
  3. Proceeds from the monetisation of surplus defence land.
  4. Proceeds of receipts from defence land, which is likely to be transferred to state governments.
• Furthermore, It recommends an allocation of Rs 1,000 crore per annum for the welfare of families of the defence and CAPF personnel who sacrifice their lives in frontline duties.