Finance Commission Recommendations : Issues

The 15th FC report recommendations have been criticised on the basis of two grounds:

The Commission has recommended a total devolution of 41% of the divisible pool of taxes to states.

It also recommended for revenue deficit grants of Rs 1.18 lakh crore to the states.

It recommended a non-lapsable defence fund. The grants component of the states has been reduced by 1 per cent (from 42% to 41%). It will be used to set up special funds for defence.

The 1% cut in the devolution is for special funding on defence. It means states are paying Rs 7,000 crore for defence and internal security. But, Defence and National Security are the centre’s responsibility as per the 7th Schedule of the Constitution. This use of funds from states to finance the Centre’s expenditure is against the spirit of cooperative federalism.

The issues in the horizontal distribution of funds. Successive finance commissions have used the criteria of need, equity for devolving 92.5 per cent of funds to a state. Whereas 15th FC has reduced this to 75%. And the remaining 25% will be based on efficiency and performance. This is the lowest weightage for equity, making the 15th FC transfers the least progressive.

15th FC recommendations do not depict the changed fiscal conditions. For example, after GST, the tax collection method has changed from a production-based tax system to a consumption-based tax system. This structural change has a significant impact on the interstate distribution of tax.  It is not taken into account by the 15th FC report.

The approach for distributing revenue deficit grants has not changed. The 15th FC could have recommended a minimum-guaranteed revenue of 14 per cent to every state.

This unchanged policy approach has resulted in an increase of statutory and non-statutory grants to almost 55 per cent of the total transfers. Whereas the aggregate transfers have dropped to 45 per cent. This makes the devolution process more discretionary.