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

Articles By Finance Commission

The Role of Finance Commissions in Intergovernmental Fiscal Management

Fiscal imbalances, both vertical and horizontal, are common to federations and India is no exception. The Indian Constitution provides for instruments—shared taxes and grants-in-aid—to address such imbalances and an institutional mechanism—the finance commissions with specified terms of reference—to negotiate such imbalances. The paper addresses how 14 different FCs have dealt with their constitutionally assigned roles and strengthened the fabric of fiscal federalism in India. It further examines how the role of FCs were enlarged with additional terms in the interest of sound finance. It discusses, as an illustration, how FCs have addressed one of the major fiscal concerns, restoring budgetary balance and maintaining macroeconomic stability in the economy.

 

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.

 

Budget 2021–22 on Health

The budget speech on 1 February 2021 announced an allocation of over `2.2 lakh crore to health and well-being, at 137% higher compared to BE 2020–21. The Fifteenth Finance Commission emphasised the need for strengthening the COVID-19-ravaged health sector by recommending sector-specific grants. The government did not accept the recommendation and, if we discount the health component in the local government grants, the budget allocation for the sector has increased by hardly 10% compared to the 2019–20 actuals.

The State of State Finances

Only a generous award by the Fifteenth Finance Commission can restore fiscal balance.

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Fiscal Federalism and Regional Inequality in India

In all federal structures, the composing units are not self-sufficient financially. But, in India, the economic dependence of states on the centre is rather high because of widespread disparities in their levels of economic development. The federal transfers to the states through the Finance Commission, Planning Commission and centrally-sponsored schemes are investigated. The role of the union government in equitable direct investment, subsidy, and private investment policy for unbiased regional development is also underlined . The data proves that although the Finance Commission’s transfers are progressive, the share of devolution for low-income states is gradually decreasing. Unfortunately, all other transfers and efforts by the centre are regressive to address the regional inequality issues.

Should States Target a 3% Fiscal Deficit?

India’s current fiscal rules target a 3% fiscal deficit for the central and state governments. Though states have largely adhered to their borrowing ceilings, subnational debt is proliferating. A significant reduction in subnational borrowing is required to stabilise the states’ debt around the desired level of 20% of gross domestic product. Symmetry should not be forced on central and state borrowing flows, given their widely divergent levels of debt stocks.

Karnataka's Changing Fiscal Landscape

Analysing the second Karnataka budget since the Fourteenth Finance Commission award, it is noted that, as assured, more fiscal space is made available to the state government. With greater untied funds, the state has budgeted for higher capital expenditure in some key areas--urban development, police, and tribal welfare--even as it failed to build capacity for power generation, and has introduced too many schemes with too little funds allocated to each.