Finance minister Nirmala Sitharaman accepted the 15th Finance Commission ’s recommendations while presenting the Union budget 2021-22.
15th Finance Commission:
Finance Commissions generally submit their reports for a five-year duration. The 15th Finance Commission, however, was given an extension of a year due to uncertainties in key macro areas (new monetary policy framework, GST, bankruptcy code, demonetisation, etc.). Its interim report for FY 2020-21 was, therefore, tabled in Parliament along with Budget 2020-21 and their final report for FY 2021-22 to FY 2025-26 was tabled along with the Budget 2021-22.
Terms of Reference of XVFC
XVFC is mandated to give recommendations regarding
- The distribution between the Union and the States of the net proceeds of taxes which are to be divided between them.
- The allocation between the States of the respective shares of such proceeds.
- The principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India.
- The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State based on the recommendations made by the Finance Commission of the State.
The Commission shall review the current fiscal status of the Union and the States, and recommend a fiscal consolidation roadmap. The Commission may also examine whether revenue deficit grants be provided at all.
While making the recommendations, the XV-FC may consider
- Resources of Central and State governments and their potential and fiscal capacity.
- Demand on the resources of respective governments.
- Impact of the enhanced devolution following 14th FC on the fiscal situation.
- Impact of GST and compensation for the losses in revenues for 5 years.
The Commission considered proposing performance-based incentives to the States based on:
1.Income Distance
2.Area
3.Population in 2011
4.Forest and Ecology
5.Demographic Performance
5.Tax Effort
The 14th FC used the additional criterion of forest cover and population in 1971.
- Income distance: Income distance is the distance of the state’s income from the state with the highest income. The income of a state has been computed as average per capita GSDP during the three-year period between 2015-16 and 2017-18. States with lower per capita income would be given a higher share to maintain equity among states.
- Demographic performance: The Terms of Reference (ToR) of the Commission required it to use the population data of 2011 while making recommendations. Accordingly, the Commission used only 2011 population data for its recommendations.
- The Demographic Performance criterion has been introduced to reward efforts made by states in controlling their population. It will be computed by using the reciprocal of the total fertility ratio of each state, scaled by 1971 population data. States with a lower fertility ratio will be scored higher on this criterion. The total fertility ratio in a specific year is defined as the total number of children that would be born to each woman if she were to live to the end of her child-bearing years and give birth to children in alignment with the prevailing age-specific fertility rates.
- Forest and ecology: This criterion has been arrived at by calculating the share of dense forest of each state in the aggregate dense forest of all the states.
- Tax effort: This criterion has been used to reward states with higher tax collection efficiency. It has been computed as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three-year period between 2014-15 and 2016-17.
Key Recommendations
- In total, main report has 117 core recommendations. Vol-III and IV has numerous suggested reforms for the Union ministries and State governments respectively.
Vertical devolution:
- In order to maintain predictability and stability of resources, especially during the pandemic, XVFC has recommended maintaining the vertical devolution at 41 per cent – the same as in our report for 2020-21. It is at the same level of 42 per cent of the divisible pool as recommended by FC-XIV. However, it has made the required adjustment of about 1 per cent due to the changed status of the erstwhile State of Jammu and Kashmir into the new Union Territories of Ladakh and Jammu and Kashmir.
Horizontal devolution:
- Based on principles of need, equity and performance, overall devolution formula is as follows.
| Criteria | Weight (%) |
| Population | 15.0 |
| Area | 15.0 |
| Forest & ecology | 10.0 |
| Income distance | 45.0 |
| Tax & fiscal efforts | 2.5 |
| Demographic performance | 12.5 |
| Total | 100 |
- On horizontal devolution, while XVFC agreed that the Census 2011 population data better represents the present need of States, to be fair to, as well as reward, the States which have done better on the demographic front, XVFC has assigned a 12.5 per cent weight to the demographic performance criterion.
Defence and Internal Security
- Keeping in view the extant strategic requirements for national defence in the global context, XVFC has, in its approach, re-calibrated the relative shares of Union and States in gross revenue receipts. This will enable the Union to set aside resources for the special funding mechanism that XVFC has proposed.
- The Union Government may constitute in the Public Account of India, a dedicated non-lapsable fund, Modernisation Fund for Defence and Internal Security (MFDIS). The total indicative size of the proposed MFDIS over the period 2021-26 is Rs. 2,38,354 crore.
Health:
- XVFC has recommend that health spending by States should be increased to more than 8 per cent of their budget by 2022.
- Given the inter-State disparity in the availability of medical doctors, it is essential to constitute an All India Medical and Health Service as is envisaged under Section 2A of the All-India Services Act, 1951.
The government has accepted the Fifteenth Finance Commission recommendation to maintain the States’ share in the divisible pool of taxes to 41% for the five-year period starting 2021-22, and given an ‘in-principle’ nod to the panel’s suggestion to set up a separate non-lapsable fund for defence and internal security modernisation.