The Fifteenth Finance Commission, in its interim report tabled in Parliament on Saturday, has recommended maintaining States’ share in the divisible pool of tax collections at virtually the same level of 42% set by its predecessor, for 2020-21.
To factor in the changed status of the erstwhile State of Jammu and Kashmir, the rate at which funds may be shared with the States has been reset to 41%. This is after ‘adjusting one percentage point for the needs, including special ones of the two new union territories of J&K and Ladakh,’ the Commission noted in its report.
An official said that the actual pool of funds available to States will be equivalent to what they were receiving from the 42% share granted by the Fourteenth Finance Commission, as the number of States are now 28 instead of 29. The one percentage point reduction is what would have been earmarked for J&K as a State.
“In the spirit of co-operative federalism, I am pleased to announce that we have, in substantial measure, accepted the recommendations of the Commission,” said Finance Minister Nirmala Sitharaman in her Budget speech.
Having missed its original deadline of November 2019, the Commission attributed the delay to new developments that took place when its work was at an advanced stage, such as the enactment of the J&K Reorganisation Act to create two new union territories, the unpredictable and slowing global economy, and India’s own sluggish economy that made revenue projections tricky.
The current slowdown in the Indian economy coincides with major ‘structural reforms’ such as demonetisation and GST taken over the past five years, the Commission noted.
“Short-term transitional difficulties in implementing these structural reforms can create a pessimistic view on the medium term prospects of economic growth and revenue collections,” it said, stressing that all these changes will ‘take time to filter through the economy’ so forecasting efforts based on current trends could be misplaced.
An expert group comprising officials from the Finance, Defence and Home Ministries will examine and propose alternative mechanisms so as to ensure predictable and stable flow of funds for defence and internal security, which was added as term of reference for the Commission.
The Defence Ministry, in its submissions to the Commission, has proposed some radical steps to ensure capital outlays are fully funded so as to ensure ‘complete defence preparedness.’
Arguing that current provisions are inadequate for big defence acquisitions, the Ministry has mooted disinvestment of defence public sector enterprises, levying of a cess, monetisation of surplus land and other assets, as well as the issuance of tax-free defence bonds and the creation of a non-lapsable fund.
“The defence capital outlay was less than the Budgetary provision for five years from 2011-12 to 2015-16. We have noticed a reversal in this trend during 2016-17 to 2018-19,” the Commission noted in its interim report.
The Defence Ministry said that though India is currently not engaged in any conflict, the nature of threats it faces demands complete defence preparedness. The expert group to be constituted by the Commission would consider the detailed modalities and implementation plan for an alternative mechanism such as the proposed non-lapsable fund.
The Commission would submit its final report to the President during the latter part of the year, that would include the devolution formula proposed between the Centre and the States for the five-year period from 2021-2022 till 2025-2026. The interim report was submitted to provide a formula for 2020-21 alone.
