The Fourteenth Finance Commission has recently been constituted under Article 280 of the Constitution, with a former Governor of the Reserve Bank of India, Y.V. Reddy, as its chairman. The primary task of the FFC is the same as that of its predecessors: to make recommendations regarding the sharing of Union taxes, the principles governing grants-in-aid to States and transfer of resources to the States. Its period of reference is five years commencing April 1, 2015 and it is expected to submit its report by October 31, 2014. Over the recent past, successive Finance Commissions have been saddled with a large, onerous agenda that has gone well beyond their main tasks of correcting fiscal imbalances between the Centre and the States on the one hand, and among States on the other. The Thirteenth Finance Commission was given the important, but still out of the way, job of preparing a fiscal consolidation road map. The FFC will look into the deficit of the States keeping in view its predecessor’s report. It has also been asked to suggest measures to raise the tax to GDP ratios of both the Centre and the States, tackle challenges in ecology, environment and climate change.
The FFC’s other terms of reference include such omnibus items as the need for making public sector enterprises competitive, divestment, and listing and relinquishing ownership of non-priority enterprises. A few other tasks such as calculating the level of subsidies needed and figuring out how to insulate the pricing of public utilities from policy fluctuations can be contentious. Most of these issues do impact public finance but the FFC need not be burdened with some of these lest its primary function is diluted. Recently, after much delay and protracted discussions among State finance ministers at Bhubaneswar, a breakthrough in terms of compensating States for possible revenue losses post the implementation of the Goods and Services Tax appears to have been made. The FFC might still have a say in the final GST format, which however is not expected to roll out until April 2014 at the earliest. Two other core issues need to be addressed by the FFC. The widening inequality in growth and consequently, in per capita income across States have increased inequalities in fiscal capacity. Second, the uniform fiscal deficit targets that States have opted for under their fiscal responsibility legislations have most probably resulted in — and the FFC will confirm this — compressed development expenditure. It is hoped that the FFC will recommend steps to safeguard the autonomy of States in fiscal matters and specifically suggest ways to overcome the restrictions imposed by stiff fiscal targets without, of course, sacrificing fiscal prudence.