15th Finance Commission: Terms of reference and its issues

Context:

• After the introduction of 15^th Finance Commission, there have been a slew of arguments against its Terms of Reference (ToR).

Background:

1951:

• The first Finance Commission was established by the President of India in 1951 under Article 280of the Indian Constitution.
• It was formed to define the financial relations between the central government of India and the individual state governments.

November, 2017:

• The Government of India, with the approval President of India, has constituted Fifteenth Finance Commission.
• Please note: It is in pursuance of clause (1) of article 280 of the Constitution, read with the provisions of the Finance Commission (Miscellaneous Provisions) Act, 1951e.f. 27^thNovember, 2017.

Duration:

• Five years

Commence on:

• April 1^st, 2020

Report:

• Available by 30th October, 2019

Composition:

• Head: N.K.Singh, former Member of Parliament and former Secretary to the Government of India
• Secretary to the Commission: Shri Arvind Mehta
• Members of the Commission: Shri Shaktikanta Das, former Secretary to the Government of India and Dr. Anoop Singh, Adjunct Professor, Georgetown University
• Part time members of the Commission: Ashok Lahiri, Chairman (Non-executive, part time), Bandhan Bank and Dr. Ramesh Chand, Member, NITI Aayog.

The 15^th Finance Commission’s terms of reference are as follows:  

• Review the current status of:
  • finance,
  • deficit,
  • debt levels, and
  • cash balances and fiscal discipline efforts of the Union and the States.
• Recommend a fiscal consolidation roadmap for sound fiscal management.
• Take into account the responsibility of the Central Government and State Governments to adhere to appropriate levels of general and consolidated government debt and deficit levels.
• Foster higher inclusive growth in the country, guided by the principles of equity, efficiency and transparency.
• Examine whether revenue deficit grants be provided at all.
• Review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon.
• Other key issues for consideration by the commission are as under:
  • Impact on the fiscal situation of the Union Government of substantially enhanced tax devolution to States following recommendations of the 14th Finance Commission, coupled with the continuing imperative of the national development programme including New India – 2022;
  • Impact of the GST, including payment of compensation for possible loss of revenues for 5 years, and abolition of a number of cesses, earmarking thereof for compensation and other structural reforms programme, on the finances of Centre and States.
  • Efforts made by the States in expansion and deepening of tax net under GST;
  • Efforts and progress made in moving towards replacement rate of population growth;
  • Progress made in increasing tax/non-tax revenues, promoting savings by adoption of Direct Benefit Transfers and Public Finance Management System, promoting digital economy and removing layers between the government and the beneficiaries;
  • Progress made in sanitation, solid waste management and bringing in behavioural change to end open defecation.

Major issues revolving around 15^th Finance Commission’s Terms of References are as follows:

• While the terms of reference for the 14th Finance Commission were to use the 1971 Census data for determining devolution of taxes, duties and grants-in-aid.
• The Central government asked the 15th Finance Commission’s ToR to use the 2011 data. 
• This move would result in lower resource allocation to the southern States.

Reponses to the concern: (11^th April, 2018)

• Union Finance Minister Arun Jaitley, denied the criticisms.
• According to him:
  • Finance Commissions use both qualitative and quantitative criteria
  • Population figures serve as a good proxy for the needs of the people in a quantitative sense.
  • Income distance captures the relative poverty, to provide a qualitative analysis.
  • The Terms of References of 15^th Finance Commission rightly balance both the “needs” represented by latest population and “progress towards population control”.
  • Also, it recognizes the efforts of all the States which have done well in population control.
• Please note: The next meeting regarding the issue will be held in May, 2018.
• Telangana, Tamil Nadu, Delhi, West Bengal, Odisha and Punjab are also expected to take part.

Conclusion:

The need of the hour is to address the concerns of stakeholders and evolve principles that lead to an equitable distribution of resources between states and between centre and states.