Limits of centralized approach, Finance Commission must reset the balance (Indian Express)

Mains Paper 2: Polity
Prelims level: 15th Finance Commission
Mains level: Issues relating to devolution of resources

Context:

• The fiscal stress that has been building up at various levels of the government has been aggravated by the COVID-19 pandemic.
• The collapse in general government revenues, and the consequent rise in the deficit levels has not only disrupted the glide path of fiscal consolidation, but has also deepened the faultlines in Centre-state fiscal relations.

Against this backdrop:

• The 15th Finance Commission is expected to submit its report in about four months from now.
• The terms of reference of the Commission were contentious to begin with is beyond debate.
• Attempts by the Centre to claw back the fiscal space ceded to the states and assert its dominance over the country’s fiscal architecture, now coupled with the fiscal constraints exposed by the pandemic have made it harder to maintain the delicate balance needed to manage the contesting claims of the Centre and the states.
• It will be ironic if the ongoing health crisis that has ended up exposing the limitations of a centralised approach, ends up reversing the trend towards fiscal decentralisation.

The Commission’s report will be critical on two counts:

• First, it will determine how India’s fiscal architecture is reshaped, and
• second, how Centre-state relations are reset as the country attempts to recover from the COVID-19 shock.

Glide path of fiscal consolidation:

• To begin with, the glide path of fiscal consolidation laid out by the FRBM review committee had envisaged bringing down general government debt to 60 per cent of GDP by 2022 — this is unlikely to materialise now.
• Factoring in the additional borrowings, ....................................

CLICK HERE FOR FULL EDITORIAL (Only for Course Members)

Issue of state borrowings:

• Recently, the Centre eased the states’ budget constraint, allowing them to borrow more this year, conditional upon them implementing reforms in line with the Centre’s priorities.
• Despite protests, most states are likely to comply with the conditions, to varying degrees. But the issue is: As the hit from the ongoing crisis spreads over multiple years, state governments may want to maintain their expansionary fiscal stance next year as well.
• The Finance Commission, in line with its terms of reference, go along with the Centre’s stance and recommend imposing conditions on additional borrowing and formalise this arrangement?
• It is difficult to see such an arrangement being rolled back once formalised.
  Issue of the GST compensation cess:
• The GST council is yet to clearly spell out its views on the extension of the compensation cess to offset states losses beyond the five-year period. The Commission will have to weigh in on this too.
• At a time when the Centre is struggling to fulfil its promise of assuring states their GST revenues, will the Commission argue in favour of extending the compensation period, as states desire, but, perhaps, lowering the assured 14 per cent growth in compensation and linking it to nominal GDP growth?
• As GST revenue accounts for a significant share of states’ income, how this plays out will also have a bearing on their ability to bring down their debt levels.

The issue of tax devolution to states:

• Accepting the recommendations of the 14th Finance Commission was a fait accompli.
• However, the present dispensation’s unease with extending greater fiscal autonomy to states is apparent in the framing of the terms of reference of the 15th Finance Commission. But is clawing back fiscal space now a prudent approach?
• A cash-strapped Centre will surely welcome greater say over the diminished resources. And not only is there a strong argument for the Centre to have far greater fiscal space than it currently enjoys — the fiscal multiplier of central government capital spending is greater than that by the states — but the nature of politics may well push in that direction. .....................................

CLICK HERE FOR FULL EDITORIAL (Only for Course Members)

Way ahead:

• The fiscal stress at various levels of the government necessitates a realistic assessment of the country’s macro-economic situation, the preparation of a medium-term roadmap, as well as careful calibration of the framework that governs Centre-state relations.

Conclusion:

• At this critical juncture, the Finance Commission should present the broad contours of the roadmap.
• Though it could request for another year’s extension to present its full five-year report citing the prevailing uncertainty.

  Online Coaching for UPSC PRE Exam

  E-Books Download for UPSC IAS Exams

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q1.  With reference to the Airborne Rescue Pod for Isolated Transportation (ARPIT), consider the following statements:
1. It has been designed, developed and manufactured by DRDO.
2. The ARPIT utilises High Efficiency Particulate Air (HEPA) H-13 class filters and supports invasive ventilation using Transport Ventilator.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: ...........................................

CLICK HERE FOR FULL EDITORIAL (Only for Course Members)

Mains Questions:
Q1.  Why fifteenth finance commission report .......................................................?