Walking the tightrope

The recently released 15th Finance Commission report has been quite conservative in not suggesting major changes in the vertical and horizontal devolution of finances from the Centre to States. However, it moots a high ratio of incentive-linked grants (rightly linked to agriculture reform and health spend) to untied aid; at about 25 per cent, this amounts to a transfer of over ₹10.3-lakh crore over five years till 2025-26. The untied transfers to States over this period, at 41 per cent of the divisible pool of tax revenues which excludes cess and surcharge, are estimated to account for ₹42.2-lakh crore. Significantly, the divisible pool for 2021-26 shrinks from ₹135.2-lakh crore to ₹103-lakh crore when cess, surcharge and cost of collection are left out. Disappointingly, the panel sidesteps the contentious issue of cess and surcharge, merely suggesting that they should be transparently accounted for in the Budget.

The key task before any finance panel is to strike the right balance between promoting nationwide reforms and honouring the fiscal autonomy of the States. The States account for 60 per cent of total government expenditure of over ₹60-lakh crore annually, for which it relies on central transfers through taxes and grants to the extent of 35 per cent or more (about ₹11-lakh crore annually), a share that has been climbing in view of the States’ inability to mop up own revenues. With committed expenditures accounting for half the States’ budgets (PRS Research), States end up borrowing to meet over 20 per cent of their needs. The 15th Finance Panel report has been released in unprecedented, pandemic times, with Central transfers to States coming under strain. In order to relieve the squeeze on States, the Finance panel has done well to continue with revenue deficit grants. The roadmap to bring revenue and fiscal deficit under control can be reset, as suggested by the panel and the Budget. Revenue expenditures are necessary to keep social sector schemes going. However, the panel lays down a stringent fiscal roadmap for States.

States should curb frivolous expenditure, such as loan waivers. They can step up revenues from stamp duty and registration of property. The Economic Survey 2020-21 points to a “decline in actual capital spending relative to BE observed in the States for the last three years”. This should be checked to ensure a return on higher levels of spending in these times. Interestingly, the panel report moots two new criteria for horizontal devolution, even as income and population weights have been tinkered with — these being ‘demographic performance’ or fertility reduction and ‘tax effort’. If this is an effort to reward governance in southern States, it has not worked so far; transfers to them did not improve in 2020-21. A persistent north-south divide will not serve the cause of cooperative federalism.