Future of the federal framework

Context- The role of the Finance Commission as a neutral arbiter in the Centre-state relation in achieving the delicate balance.

What are the key highlights of the latest report?

The Fifteenth Finance Commission led by Chairman N. K. Singh submitted its report for the period 2021-2026 to President of India.

Title of the report – ‘Finance Commission in COVID Time’s and the scales are used to represent the balance between the States and the Union.

Significance of report-

1. The report will determine how India’s fiscal architecture is reshaped.
2. And how Centre-state relations are reset as the country attempts to recover from the COVID-19 shock

What are the key points in the report that can impact states revenue share?

1. The 15th Finance Commission, in its interim report had said, ‘There is merit in ensuring funds for defence and internal security and this will receive appropriate consideration in our final report.’

• This had led to speculation that states will have to contribute to such a fund, in turn leading to a drop in their share of central government’s taxes.

2. Southern Indian states complaining their efforts to control population would go against them. This is because the terms of reference of the 15th Finance Commission included using the 2011 census to suggest devolution of taxes to states.

• The 15th FC has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool.

What are the States issues?

Recommendation of 14^th Finance commission– The commission had recommended for an increase in the share of the States in total tax revenues from 32% to 42%. However, states’ share never touched 42 per cent of tax collections due to-

• Dominance of Centre– The Centre is trying to claw back the fiscal space ceded to the states and assert its dominance over the country’s fiscal architecture. Central government spending has risen on items that lie in the state and concurrent lists.
• Shrinking of divisible pool– Centre has reduced the pool of funds to be shared with the States by shifting from taxes to cesses and surcharges, revenue from which is not shared with the states.

Way forward-

• Finance Commission has to play an important role in achieving the delicate balance in the conflicting domain of finance by addressing the concerns of both the players.
• The Centre can reduce States’ fears by tabling the report without delay, and address any apprehensions it may give rise to.

Federal Water Governance Ecosystem