Finance Commission – Issues related to devolution of resources

For the sake of sound fiscal federalism

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FRBM Act

Mains level : Paper 2- Issue of devolution to state under the recommendations of 14th finance commission.

Faultlines in the Centre-State fiscal relations have widened due to Covid. This article examines how States are not getting what they should as per the 14th Finance Commission report.

Centre-state tussle

  • The tussle for the rights of States has been focused on Article 356.
  • Partial behaviour by the Governors, regional party governments were politically destabilised.
  • Little was done to implement the report of  Justice R.S. Sarkaria Commission on Centre-State relations.
  • The new faultline in the Centre-State relation could be over the way report of 14th Finance Commission is being implemented.
  • This began well before COVID-19, but the pandemic and its economic disruption have brought things to an edge.

Issues over the implementation of 14th Finance Commission report

  • The 14th Finance Commission report in 2015 promised devolution of more finances to the States.
  • As part of the process, States would have new responsibilities, especially in the social sector.
  •  The Goods and Services Tax (GST) regime was also justified as a grand bargain that would eventually leave all States better off.
  • In reality, tax devolution to States has been consistently below 14th Finance Commission projections.
  • One reason for this has been the economic slowdown, and lower-than-expected GST collections.
  • The shortfall in GST collection for 2018-2019 was 22% when compared to projections.
  • Payments to the States have been delayed as well.
  • There is a ₹6.84 lakh crore gap between what the 14th Finance Commission promised to States and what they have received.
  • States undertook programmes and projects spending 46% more than the Central Government; today the figure is 64%.
  • Despite spending less than the states the Centre’s fiscal deficit exceeds the consolidated State deficit by 14%.

Need to revisit the FRBM provisions

  • Due to pandemic, the fiscal deficit for States, collectively, is inevitably going to breach the projection of 2.04%.
  • As per provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, the GSDP can actually accommodate a fiscal deficit of 3%.
  • Now, post-pandemic, this limit will be crossed.
  • The FRBM has an “escape clause” that allows for a one-time relaxation of the fiscal deficit threshold upto 0.5% in a time of exigency.
  • The escape clause has been utilised by the Centre but it has proven woefully insufficient in addressing the current crisis.
  • Fiscal policymakers and technocrats agree that the rigidity of the FRBM has to be revisited.
  • It should allow for greater flexibility and consultation as to when and how the “escape clause” can be applied.
  • The Centre has gone in for subjective interpretation, imposing conditions that are outside the scope of the FRBM.

Consider the question “Fiscal tensions have emerged as  a new front in the Centre-State relations. Suggest the steps the Centre should take to address it.”

Conclusion

Centre government needs to be more considerate of the financial woes of the State and try to deliver on the recommendations of the 14th Finance Commission report.

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