On Monday, the Fifteenth Finance Commission submitted its report with recommendations on the formula for sharing the divisible pool of tax revenues between the Centre and the States for the next five years to the President. The panel’s proposed fiscal road map, up to 2025-26, will only come into the public domain once it is tabled in Parliament, if not in the winter session, at least before the Union Budget for 2021-22 is presented. An action taken report would reveal the government’s acceptance or rejection of the panel’s prescriptions. When the Fourteenth Finance Commission recommended a sharp increase in their take-home cut from 32% to 42% of the divisible pool of revenues and the Centre accepted it, States had obvious cause to be upbeat. However, their actual shares of total taxes mopped up have turned out to be far lower as the Centre deployed more cesses and surcharges to garner additional revenues in recent years.
There are fresh reasons for the States to be anxious about the Commission’s revenue sharing recommendations, not in the least because of their recent stand-off with the Centre on how their GST compensation dues will be paid this year. While 22 States have now come on board with a solution conjured up by the Centre, there are still loose ends as more dues pile up over the next two years. Second, the Centre had tasked the Commission with assessing a few unusual ideas, including the creation of a non-lapsable fund for defence and security spending, and incentivising States for performance on reforms considered desirable by the Centre such as adoption of direct benefits transfer. Southern States are worried that the use of 2011 population data, instead of 1971, will penalise them for managing population growth better. All these have the potential to impact States’ actual share. The RBI’s assessment of State finances reveals they were already hurting from the slowing economy. The pandemic and the lockdowns have made things worse. Last year, this Finance panel had tabled an interim report for 2020-21 by saying a five-year forecast is tough when the economy is slowing down due to the effects of reforms like demonetisation and GST. Its final report comes at an even more uncertain time, with the pandemic throwing the global economy into a tailspin. That the panel has dedicated a volume entirely to States, analysing the development needs of each, is heartening. The Centre can allay States’ fears further by tabling the report soon so that any anxieties can be debated and laid to rest, and States can also plan upcoming Budgets with less uncertainty. Being receptive to States’ concerns can help forge a fresh cohesive federal compact for the coming years — a double engine that can hasten India’s return to high growth.