15th Finance Commission – A Roadmap

What is the issue?

15^th Finance commission (FC) which is about to make recommendations for the 5 years (2020-2025). These are some suggestions for them.

What were their problems?

• Dilution of the original mandate of equalising opportunities for every citizen by ensuring uniform public services.
• Reluctant to rock the boat and lose credibility by doing anything very different.
• Average Indian continued to suffer from poor public services.

What had the past FCs’ done?

• The 12^th FC had the most success with a combination of carrots and sticks — debt restructuring conditional on acceptance of State-level Fiscal Responsibility and Budget Management (FRBM) legislation.
• The 13^th FC introduced incentive payments but since capacity constraints prevented some States from utilising them.
• The14^th FCs shifted to payments towards capacity building. Data is required on what worked.

What are the major issues?

• Independence vs. uniformity for States.
• The public services are poor because the facilities tend to cut to match the funds available, rather than raising funds to provide a uniform level of services.
• There are no limitations on imposing conditions on grants in aid of revenue and in CSS.
• States delay giving the final urban status to rapidly growing census towns because of tax and municipal service provision issues.
• Tax share is regarded as a right, so the States resist conditionality in devolution.

What can be solution?

• Richer States or those with competitive own schemes may want to opt out of CSS.
• They could be given the choice, conditional on outcomes being above a threshold which encourages healthy competition in schemes.
• Appropriate compensation in devolution could be on the basis of quality adjusted least cost schemes.
• A rich database is needed, also for other TORs such as 3 and 7 on assessing revenues and needs.
• NITI Aayog has long been ranking States on various criteria which can be used as a database.
• A research suggests that incentives work but intergovernmental transfers, given tax capacity, have a negative association with tax effort of States which should be concentrated on.

What changes can be made to the current system?

• Setting up of Permanent Fiscal Council to make them responsible for conditional data-based fund devolution to States.
• Revival of Inter-State Council to get participation and feedback from States for a vibrant fiscal federation, so that the sanctioning delays may also reduce.
• The taking over of erstwhile Planning Commission functions by central ministries, has created resentment among States.

What changes can be made in the 15th FC?

• Improving the level and uniformity of public services can be a lens to look at the terms of reference (TOR) of the 15th FC.
• It could give funds conditional on implementing devolution to the third tier, with payments made for improvements in rather than for levels of services provided.
• The CSS can be rationalised and clubbed further.
• Money paid could be partly replaced by well-targeted central direct benefit transfer (DBT) to individuals.
• Economies of scale from pooling and coordination efficiencies may reduce costs in health and education.

• Although now there is GST, user charges are a major area where States still have to make efforts.
• Ring fencing productive expenditure could also raise revenue effort.
• An award in line with broad principles of justice would generate less resistance.

How to reduce the States’ debt (TOR 2)?

• Safeguarding of expenditure that creates future income.
• Encouraging higher growth brings down debt ratios as growth rates normally exceed interest rates on catch-up growth paths.
• Rise in revenue deficit decreases growth and therefore slows reduction in debt ratios.
• There are plans to increase the market discipline on States further by releasing more high frequency data on State finances to enhance rating.
• Expenditures are cut (often developmental and capital expenditures).
• Incentives must also protect the quality of expenditure.

Source: Business Line