THE GIST of Editorial for UPSC Exams : 05 February 2020 (Continuity and fiscal follow-through (The Hindu))

Continuity and fiscal follow-through (The Hindu)

Mains Paper 3: Economy
Prelims level: Finance Commission
Mains level: Key objective of the 15th finance commission


  • The appointment of the Fifteenth Finance Commission by the President of India under Article 280 of the Constitution was notified on November 27, 2017.
  • The first report submitted by the Commission was placed in Parliament by the Union Finance Minister before presenting the Union Budget on February 1, 2019.

Basis for extension:

  • There were good reasons for extending the tenure of the Finance Commission as making medium-term projections in the current scenario would have entailed serious risks.
  • The abolition of Statehood to Jammu and Kashmir required the Commission to make an estimation excluding the Union Territory.
  • The deceleration in growth and low inflation has substantially slowed down the nominal GDP growth which is the main tax base proxy; making projections of tax revenues and expenditures based on this for the medium term could have posed serious risks.
  • The poor revenue performance of tax collection and more particularly Goods and Services Tax combined with the fact that the compensation agreement to the loss of revenue to the States was effective only two years of the period covered by the Commission’s recommendations posed uncertainties.

On projections:

  • The Commission has continued with the approach and methodology adopted by the previous Commissions for tax devolution and revenue-gap grants.
  • It has made projections of revenues and revenue expenditures of the Union and individual States, applied selective norms to the latter, recommended devolution of taxes to the States from the divisible pool, and recommended revenue deficit grants for the States which had post-devolution gaps.
  • Although there were apprehensions that it may deviate from past practice as the terms of reference of the Commission had indicated, “The Commission may also examine whether revenue deficit grants be provided at all”, it continued with the past practice.

Addressing States’ concerns:

  • In addition to income distance, population and area and forest cover, it has used two additional factors — demographic performance and tax effort.
  • It has assigned 15% weight to the 2011 population, reduced the weight of income distance to 45%, increased the weight to forest cover and ecology to 10% and 12.5% weight to demographic performance and 2.5 weight to tax effort.
  • There was considerable controversy over the terms of reference of the Commission requiring it to use 2011 population in its formula by the States that had taken initiatives to arrest population growth.
  • By keeping the weight of 2011 population at 15% and giving an additional 12.5% to demographic performance which is the inverse of fertility rate, the Commission has shown sensitivity to the concerns of these States.

Local body grants:

  • The recommended grants for local bodies amount to ₹90,000 crore comprising ₹60,750 crore for panchayats and the remaining ₹29,250 crore for municipal bodies.
  • All the three layers of panchayats will receive the grant and 50% of the grant is tied to improving sanitation and supply of drinking water; the remaining is untied.
  • In the case of municipal bodies, ₹9,229 crore is allocated to cities with a million-plus population and the remaining ₹20,021 is allocated to other towns. \
  • In the case of disaster relief, the Commission has recommended the creation of disaster mitigation fund at the Central and State levels.
  • For disaster management, a total of ₹28,183 crore has been determined of which the Central contribution will be ₹22,184 crore. \
  • Inter-State allocation is made based on past expenditures, area and population and disaster risk index.
  • The Commission has worked out a framework for giving some sectoral grants as well. For 2020-21, it has recommended ₹7,735 crore for improving nutrition based on the numbers of children in the 0-6 age group and lactating mothers.
  • In the main report, it has proposed to give grants for police training, modernisation and housing, railway projects in States taken on a cost-sharing basis, maintenance of the Pradhan Mantri Gram Sadak Yojana roads, strengthening the judicial system, and improving the statistical system.

Way forward:

  • The States are required to prepare the necessary grounds.
  • It has also presented a broad framework for recommending monitorable performance grants for agricultural reform, development of aspirational districts and blocks, power sector reform, and incentives to enhance trade including exports and pre-primary education.
  • The challenge, however, will be to design and dovetail sectoral and performance grants with the existing plethora of central sector and centrally sponsored schemes.

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Prelims Questions:

Q.1) With reference to the Customs & Excise duty, consider the following statements:
1. The budget proposed to impose a nominal health cess (at the rate of 5%), by way of a duty of customs, on the imports of medical equipment keeping.
2. The Union Budget proposed to abolish anti-dumping duty on PTA (Purified Terephthalic Acid).

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both
(d) None

Answer: C
Mains Questions:
Q.1) What are the key objectives of the 15th Finance Commission?