G R Reddy

The appointment of the Fifteenth Finance Commission has come at a time of momentous changes in Indian fiscal federalism. The XV-FC has a challenging task in addressing these developments. A number of considerations in the terms of reference of the XV-FC, however, point to a bias in theToR towards the union government.

The restructuring of central plan assistance to states proposed in the Union Budget for 2015-16 will result in neutralising the benefi t of an increase in unconditional tax devolution proposed by the Fourteenth Finance Commission, by imposing higher burden on states in funding centrallysponsored schemes. This issue can be addressed through a reduction in the number of CSSs, grouping them into core and non-core categories and giving states the option to select schemes based on their priorities within the core category.

In the current uncertain fiscal situation following the global downturn, the Thirteenth Finance Commission is constrained in making a realistic assessment of the resources and expenditure needs of the centre and the states. Past experience clearly indicates that in a fiscal crisis resource transfers to states will witness a contraction and it would be unfair to bind the states to such a dispensation for five years. In view of the current uncertainties, the THFC should be asked to give its recommendations for two instead of five years. Such a course of action will also result in the synchronisation of the term of the Finance Commission and the period of the five-year plans, and will help address the uncertainty arising from the proposed introduction of Goods and Services Tax from 2010.

The terms of reference of the recently constituted Thirteenth Finance Commission are heavily loaded in favour of the central government. It is, perhaps, for the first time that a finance commission has been explicitly asked to take into account the gross budgetary support to the central and state plans as a demand on the resources of the centre. This may result in making the finance commission transfers residual flows.

The recommendations of the Twelfth Finance Commission particularly for backward states - allowing them to directly access the market, placing borrowing limits consistent with fiscal responsibility legislation and transferring external assistance to states on a back-to-back basis - have far-reaching implications. Fixing borrowing limits based on capacity to service debts and uniform targets for fiscal deficit reduction will further accentuate regional imbalances. Debt-stressed and backward states may find it difficult to raise loans from the market because of their lower creditworthiness and higher risk perception among lending agencies. The scheme of debt write-off linked to revenue deficit reduction recommended by the commission favours states with a low base year revenue deficit. A more realistic approach would be to allow a relatively longer timeframe for backward states to effect fiscal correction, while ensuring that states as a whole bring down their fiscal deficit to 3 per cent of GDP by 2009-10.