Focus on Six Pillars, Finance Commission (March 2021) (Download PDF)

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Focus on Six Pillars

  • Health and Well-Being.
  • Physical and Financial Capital and Infrastructure.
  • Inclusive Development for Aspirational India.
  • Reinvigorating Human Capital.
  • Innovation and R&D.
  • Minimum Government and Maximum Governance.

Finance Commission

  • First Finance Commission was constituted on November 22,1951 being chaired by K. C. Niyogi.
  • Constitution is governed by Article 280.
  • Manner and modality for the management of the finances of the Union and the States on principles for governing the divisible resources.
  • Transfers are made under Articles 270,275 and 280 of the Constitution which provides a mechanism for sharing of taxes and revenues vertically between the center and the states.
  • Considered as the balancing wheel of the Constitution because it is designed to correct the structural and inherent imbalances between the resources and the expenditure of the Union and the States.

Fifteenth Finance Commission

  • Constituted by the President under the Article 280 of the Constitution on November 27,2017.
  • ‘Finance Commission in Covid Times’ is the title of the report submitted to the President for the period 2021 - 26.
  • Tasked with reviewing and commenting on the design of fiscal principles for various grants that are typically provided alongside revenue shares.
  • To consider performance-based incentives.
  • To support and motivate the efforts of State and/or local governments- “the appropriate level of government” in a variety of policy areas.
  • Recommending funding mechanism for defence and internal security.
  • Tried to harmonize the principles of expenditure needs, equity, and performance.
  • Determining the criteria for horizontal sharing.
  • Broadly assigning appropriate weightages.

Challenges

  • Difference in opinion on the use of the population census of 2011 to allay the fears of certain efficient states that would be penalized for efficient demographic management.
  • Non-lapsable defence fund.
  • Use of certain parameters for performance incentives.

Vertical Transfer Approach and Logic

  • To raise revenues from both the Union and the States from different sources of taxation.
  • Assigned responsibilities to incur expenditure through subjects in three lists-Union List, State List and Concurrent List in the Seventh Schedule.
  • The Union Govt. in 2018 - 19 raised 62.7 % of the aggregate resources raised by both the Union and the States.
  • The States spent 62.4 % of the aggregate expenditure of the Union and the States.
  • Imbalance between revenues and expenditure responsibilities forms the basis of a fair vertical devolution.
  • Recommended 41 % devolution by the Fifteenth Finance Commission.
  • The Fifteenth Finance Commission as compared to the Fourteenth Finance Commission made the required adjustment of about 1 % due to the changed status of the erstwhile State of Jammu and Kashmir into the new Union Territories of Ladakh and Jammu and Kashmir.
  • The level of vertical transfers will allow appropriate fiscal space for the Union as well to meet its demands as well as maintain an adequate level of unconditional resources to the States.

Horizontal Distribution

  • Horizontal devolution of taxes is mainly driven by considerations of need, equity, and performance.
  • The diverse nature of this country with States at different levels of development and having complex characteristics related to their history, geography, economy, and sociology impact their revenues and expenditures.

Horizontal Distribution of Taxes (Recommended by Fifteenth Finance Commission)

Horizontal Distribution of Taxes
CriteriaWeight (Percent)
Population15.0
Area15.0
Forest & Ecology10.0
Income Distance45.0
Tax & Fiscal Efforts2.5
Demographic Performance12.5
100

States with Per Capita GsDP and Per Capita Devolution

States with Per Capita GsDP and Per Capita Devolution

Making Recommendations

Making Recommendations-The Commission Went through

Five Different Categories of Grants

  • Revenue deficit grants
  • Grants for local governments
  • Grants for disaster management
  • Sector-specific grants
  • State-specific grants
Summary of Grants Recommended by the Commission
S. NO.Grant Components2021 - 26
1.Revenue Deficit Grants294514
2.Local Government Grants436361
3.Disaster Management Grants122601
4.Sector-Specific Grants129987
iSectoral grants for Health31755
iiSchool Education4800
iiiHigher Education6143
ivImplementation of Agricultural Reforms45000
vMaintenance of PMGSY Roads27539
viJudiciary10425
viiStatistics1175
viiiAspirational Districts and Blocks3150
5State-specific49599
Total1033062

Revenue Deficit Grants

  • No formula based horizontal devolution can meet the needs of each of the 28 States whose cost disabilities and fiscal capabilities are so vastly different from each other.
  • The commission has recommended an allocation of 1.92 % of the gross revenue receipts.
  • The revenue deficit grants aggregate to ₹ 2,94, 514 crore with gradual tapering off during the award period.

Local Government Grants

  • Urban local bodies have been categorized into two groups, based on population, and different norms have been used for flow of grants to each, based on specific needs and aspirations.
  • Basic grants are proposed only for cities/towns having a population of less than a million.
  • For Million-Plus cities, 100 % of the grants are performance-linked through the Million-Plus Cities Challenge Fund (MCF) .
  • Local grants focus on national priorities.
  • For rural local bodies, the FC-XV allocations cover village, block, and district as well as the Excluded areas exempted from the purview of Part IX and Part IX-A of the Constitution.
  • The grants to local bodies both rural and urban (less than a million category) contain a mix of basic, tied as well as performance grants such as sanitation, solid waste management and ease of breathing in the metro cities.
Obstructions in the Efficient Smooth Functioning and Accountability of Local Bodies
  • Absence of Timely recommendations of State Finance Commissions and suitable actions thereon.
  • Lack of readily accessible and timely accounts.
  • Inadequate mobilization of property tax revenues.

Disaster Management Grants

  • The Commission recommended Mitigation of Funds To be set up at both the national and state levels, in line with the provisions of the Disaster Management Act.
  • The Mitigation fund should be used for local level and community-based interventions which reduce risks and promote environment-friendly settlements and livelihood practices.

Other Sector-Specific and State-Specific Grants

  • Recommendation of performance-based grants and incentives for sectors like health, education, agriculture, PMGSY roads, judiciary, statistics, aspirational districts, and blocks.
  • Challenges in the health sector:
    • Low investment
    • Sharp inter-state variations in the availability of health infrastructure.
    • Health outcomes and supply side problems of doctors, paramedics.
    • Inadequate number of healthcare centres.

Defence Fund

  • The Commission recalibrated the relative shares of Union and States in gross revenue receipts by reducing grants component by 1 % .
  • The Union Govt. may constitute in the Public Account of India, a dedicated non-lapsable fund, Modernization Fund for Defence and Internal Security (MFDIS) .
  • The total indicative size of the proposed MFDIS over the period 2021 - 26 is ₹ 2,38, 354 crore.
  • Non-lapsable fund will make a significant difference in addressing the issue of adequacy of capital expenditure both for defence and internal security.
Formula Given by the Finance Commission

- Published/Last Modified on: June 13, 2021

Yojana

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