ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles By G R Reddy

Fifteenth Finance Commission’s Recommendations on Local Bodies

The Fifteenth Finance Commission recommendations on local bodies, particularly those relating to urban local bodies, are a dampener. The recommendations lead to an anomalous situation of a least urbanised state getting higher per capita urban grants. Similarly, the segmentation of urban grants into too many components and very rigid conditions leaves a big question mark on grants utilisation.

 

Finance Commission Report for 2020–21

The action taken by the union on some of the recommendations of the Fifteenth Finance Commission for 2020–21 is indicative of a major departure from the established practices followed so far. Asking the Finance Commission to review its recommendations on special grants to three states, and grants for nutrition to all the states is totally unprecedented and undermines the stature of the institution of the Finance Commission.

Global Downturn and the Thirteenth Finance Commission

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.

Imbalance in Agenda of Finance Commission

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.

Twelfth Finance Commission and Backward States

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.