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The Fifteenth Finance Commission has filed its interim report for 2020-21. The Government of India has agreed to its major recommendations of the 15th Finance Commission to Local Bodies. The Commission has calculated that the overall award for FY 2020-21 will be Rs.60,750 crore, the highest ever allocation given by the Finance Commission in a single year. In 28 States, the Commission has recommended Grants-in-Aid to all tiers of the Panchayati Raj, in two parts: a Basic Grant and (ii) a Tied Grant. The Basic Grant will make up half of the grant, while the Tied Grant will make up the other half.
Devolutionary criteria
The income distance is the gap between a state’s income and the state with the highest income. The average per capita GSDP for the three years between 2016-17 and 2018-19 was used to calculate a state’s income. A state with a lower per capita income will have a bigger share to preserve parity across states.
The Commission’s Terms of Reference mandated it to provide major recommendations of the 15th Finance Commission based on 2011 demographic figures. As a result, the Commission’s major recommendations of the 15th Finance Commission were based on demographic figures from 2011. The demographic performance criterion has been used to recognise states for their efforts in population management. On this criterion, states with a lower fertility ratio will be given a higher score.
This criterion was determined by measuring the proportion of each state’s thick forest in the overall dense forest of all states.
This criterion has been used to reward more efficient states in collecting taxes. During the three years between 2016-17 and 2018-19, it is calculated as the ratio of average per capita own tax revenue to average per capita state GDP.
Grants
Sector Specific Grants
States will receive Rs 1.3 lakh crore in sector-specific funds for the following eight sectors: I health, (ii) school education, (iii) higher education, (iv) agricultural reforms, (v) PMGSY road maintenance, (vi) judiciary, (vii) statistics, and (viii) aspirational districts and blocks. A part of these awards will be conditional on performance.
State Specific Grants
The Commission suggested Rs 49,599 crore in state-specific grants. These will be allocated to the following areas: social needs, (ii) administrative governance and infrastructure, (iii) water and sanitation, (iv) cultural and historical monument preservation, (v) high-cost physical infrastructure, and (vi) tourism. The Commission proposed that each state form a high-level committee to examine and supervise the use of state-specific and sector-specific funding.
Grants to Local Bodies
The general funds to local bodies will be Rs 4.36 lakh crore (with a portion of the grants being performance-linked), divided as follows: I Rs 2.4 lakh crore for rural local bodies, (ii) Rs 1.2 lakh crore for urban local bodies, and (iii) Rs 70,051 crore for health grants via local governments. All three tiers of Panchayat, village, block, and district, will be eligible for grants to local authorities. The health grants will be used to support the conversion of rural sub-centres and primary healthcare centres (PHCs) to health and wellness centres (HWCs), (ii) diagnostic infrastructure support for primary healthcare activities, and (iii) support for urban HWCs, sub-centres, PHCs, and public health units at the block level.
Other than health funds, grants to local authorities will be divided among states based on population and area, with 90 percent and 10% weightings, respectively. The Commission has set forth several requirements for receiving these funds (except health grants). The entry-level criteria include the publication of preliminary and audited accounts in the public domain, (ii) the establishment of minimum property tax floor rates by states, and improvements in property tax collection (an additional requirement after 2021-22 for urban bodies). If a state does not form a State Finance Commission and execute its major recommendations of the 15th Finance Commission by March 2024, no grants will be provided to local governments.
Disaster Risk Management
The Commission suggested maintaining the existing cost-sharing mechanisms between the centre and states for disaster management monies. The cost-sharing structure between the centre and the states is 90:10 for the north-eastern and Himalayan states and (ii) 75:25 for the rest. The state disaster management funds would have a corpus of Rs 1.6 lakh crore (Rs 1.2 lakh crore in the centre’s portion).
Conclusion
It was necessary to establish a body like the Finance Commission of India to define financial relations between the central government and state governments. The Fifteenth Finance Commission was established on November 27, 2017, after the Planning Commission’s demise and implementation of the goods and services tax (GST), profoundly altering federal fiscal ties. Equalisation technique, similar to that used in Australia and Canada, in which financial resources are allocated to guarantee that services are delivered at equivalent levels in each state if the states undertake comparable revenue-raising efforts. In India, the financial institutions use a gap-filling strategy based on historical expenditure and revenue trends.
