If the shares of the government are actually transferred to a holding company, then decisions regarding appointments could be taken by the board of the new company on the recommendation of the board of the bank. Instead of using its 52% share to spend on defence, the present government wants to palm off this expenditure to all the States. State finance commissions would need to emulate the XV FC and its predecessors, and emerge as credible institutions. The Laffer Curve describes how changes in tax rates affect government revenues in two ways. In other words, there has to be continuity and change between finance commissions. Leveraging of state plan guide and value chain deep dives. were also used in 14th FC recommendation. The Commission used the per capita GSDP of Haryana as the reference for calculating the income distance, and gave it a weight of 45%, down from the 50% assigned by the 14th FC. Lenders may also choose to initiate legal proceedings for insolvency or recovery. To recommend grants to all tiers of the Panchayati Raj to enable pooling of resources to create durable community assets and improve their functional viability. Centre gained an entry through the GST into the territory of taxation powers of States. The recommendations made by the Finance Commission are only advisory in nature and hence, not binding on the government. Various cesses and surcharges are becoming disproportionate proportion of overall divisible revenue. The combined population of the Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan and Jharkhand is 47.8 crore. Revenue Deficit Grants: 14 states are estimated to face a revenue deficit post-devolution. Solve Value Chain Clusters (VCC) holistically with a focus on value addition. They are presently in their final phase The Commission shall use the population data of 2011 while making its recommendations. Hopefully, over the next five years, through a partnership among the Union, states, and local governments, in the spirit of cooperative federalism, these recommendations and innovations will catalyse progress in the accountability and effectiveness of local governments in India. The federal organisation of powers under the Constitution’s Seventh Schedule needs review. Over the past decades, there has been a substantial increase in the, This, as some have pointed out, effectively means that the, Any attempt to shift the uneasy balance in favour of the Centre will strengthen the argument that this government’s talk of, This may well require giveaways especially if states are to be, The fiscal stress at various levels of the government necessitates a realistic assessment of the country’s, At this critical juncture, the Finance Commission should present the. In parallel, aspirations of people and the country as a whole have required that the government spends more on developmental programmes. escrowing such a large amount from its resources will constrain the GoI’s budgetary management. On the other hand, Andhra Pradesh, Kerala, Karnataka, and West Bengal’s shares have fallen, even though their fertility rates are also low. The fund will have four specific sources: (a). Read to know…. Development of Aspirational Districts and Aspirational Blocks, 6. Article 280 of the Constitution requires that a Finance Commission be constituted to recommend the distribution of the net proceeds of taxes between the Centre and states, and among the states. It will lead to higher farm productivity and farmer income. How these conditions could benefit the states?”. It contains three lists; i.e. Similarly, the Atmanirbhar Bharat Abhiyan links Rs 50,000 crore of additional borrowing limits for states to. This mock test of UPSC CSE Prelims Paper 1 (GS) Mock Test - 21 (June 4, 2021) for UPSC helps you for every UPSC entrance exam. It laid down rules for the qualification and disqualification of members of the commission, and for their appointment, term, eligibility and powers. Since larger cities will tend to grow faster with the agglomeration effect, the fifty Million-Plus cities in the country need differentiated treatment, with special emphasis on meeting the challenges of bad ambient air quality, groundwater depletion and sanitation. There is a need, particularly, to address legitimate concerns of states about increasing encroachment by the Centre. Of course, it is not a ‘silver bullet’; if there is no political will, the institution would be less effective, and if there is political will, there is no need for such an institution. This happened despite the land being on the concurrent list in the Constitution. There is vertical asymmetry in the distribution of resources (revenues) and responsibilities between the centre and states. It revealed that only 15 states have set up their fifth or sixth SFCs, whereas several states have not moved beyond their second or third SFC. Horizontal devolution formula A/C No: xxxxxxxxxx2695 The NK Singh-led 15th Finance Commission (FC) presented its final report for the five fiscal years from 2021-22 to 2025-26 to President Ram Nath Kovind on 9 November 2020. Some state governments have complained about its perceived inequities to the President. Vertical Devolution. Thus it is necessary that the government must return to a credible fiscal consolidation path once the crisis gets over. The Central government must provide national public goods that render services to the entire population. The Fifteenth Finance Commission report is not aligned with the new landscape of federalism and does not address the key issues. Based upon global best practices and as per the guidelines in the companies act, separate post of Chairman and Managing Director and the CEO will get the designation of MD & CEO and there would be another person who would be appointed as non-Executive Chairman of PSBs. Much has changed since the First Commission was set up in November 1951 under the Chairmanship of K C Neogy, a former member of the Constituent Assembly and diwan of a princely state. An appropriate balancing of criteria is needed particularly in the context of the rise in unconditional transfers. The principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India. Elected State governments and leaders cannot be made dummies without any fiscal powers for long. To provide for tied grants in the critical sectors of sanitation and drinking water to ensure additional funds to the local bodies over and above the funds allocated for these purposes under the centrally sponsored schemes (CSS), Swachh Bharat and Jal Jeevan Missions. There is huge economic and cultural diversity among the various States. It is time we have an alternative institutional mechanism like Fiscal Council to enforce fiscal rules and keep a check on Centre’s fiscal consolidation. It is a terrible mistake to presume that all of India can be governed from Delhi. Uniformity is not an essential condition for unity. Even if it is the Centre or the states, for an unsustainable debt burden, market penalises. I bought it and found it to be the best available online." So it is the horizontal devolution formula, or how this 41% is distributed among states, that can leave some wanting more. It has now proposed that there should be a permanent expenditure fund created for defence spending out of the total tax revenue pool. The XV-FC also agrees with this view but reduced the States’ share to 41% because of the re-organization of the State of Jammu & Kashmir into UTs of Ladakh and Jammu & Kashmir through the Jammu & Kashmir Re-organization Act, 2019. Prelims level : Finance Commission and its role. Under the ICA, any decision agreed to by the lenders representing 75 per cent of total outstanding credit facilities by value and 60 per cent by number will be binding upon all the lenders. Fiscal federalism is the economic counterpart to political federalism. Parliament may by law determine the requisite qualifications for appointment as members of the commission and the procedure of selection. The Commission has recommended a total grant of Rs 10,33,062 crore during 2021-26. The basic task as per the present requirements by the Commission is to address the matters specified under Article 280 (3 a, b, bb, and c) which specify tax devolution, giving grants in aid of revenues, and measures needed to augment the consolidated funds of the states to supplement the resources of rural and urban local bodies. Much of the economic policy control stayed with the Centre. Achievements in the implementation of flagship schemes of Government of India, disaster-resilient infrastructure, and. The Commission’s recommendation for setting up the state and national level, For the first time, the Finance Commission has introduced a 10-25 per cent. It requires the President to “make a reference to the 15th Finance Commission to include the UT of J&K in its ToR and make an award for the successor UT of Jammu and Kashmir. PSBs and strengthening risk control measures and NPAs disclosure. In the World Bank’s Ease of Doing Business index released last month, India ranked 63. The ensuing drop in grants, combined with the tapering of the front-loaded revenue deficit grants is likely to leave a big gap in some states’ revenues. And there a strong argument for the Centre to have far greater fiscal space than it currently enjoys. That is also true of the FRBM Act. The 15th Finance Commission proposed recommendations for both vertical and horizontal devolution. The problem is that a Council created by the Finance Ministry and reporting to it can hardly be expected to be independent. This imbalance is that the central government enjoy some important and fast-growing tax revenues like corporate income tax and personal income tax. Private Sector should play an anchor role. requires the FFC to examine “whether a separate mechanism for funding of defence and internal security ought to be set up and how such a mechanism should be operationalised”. Mains level : Paper 2-Why it is said that there is a paradox in the federal system of India? Distribution of net proceeds of taxes between Center and the States, to be divided as per their respective contributions to the taxes. The article analyses the various recommendations of the Fifteenth Finance Commission and their impact. Including total grants of Rs. The Commission recommended the creation of funds for disaster mitigation along with disaster response, which will now together be called as National Disaster Risk Management Fund (NDRMF) and State Disaster Risk Management Funds (SDRMF). But revenue from these sources does not form part of the divisible tax pool, it is not shared with states —, Stressing on the need to have uniform rules for fiscal consolidation of States and Centre 15. Incidentally, Karnataka, the biggest loser in this exercise, also had the highest tax-GSDP ratio in 2017-18, as per an RBI report on state finances. This was aimed to create employment and public assets, to counter the fallout of the global slowdown. The inability of the Centre to ramp up its spending on defence indicates the limited fiscal space available to it. First, an unbiased report to Parliament helps to raise the level of debate and brings in greater transparency and accountability. This was done through the centrally-sponsored schemes, but at least the, Now, with this move of earmarking and financing of funds for sectors, it is the. Fiscal federalism is concerned with the assignment on the one hand of functions to different levels of government, and with appropriate fiscal instruments for carrying out these functions on the other. In the less than ₹1,500 crore category, the RBI will announce the reference date in due course. Planning Commission is no more. Finance Commission must be relieved from the dual task of dealing with the provision of basic public goods and services and capital deficits. Select the correct answer using the codes given below: Q. estimates suggest that the Centre collects about 60% of the combined revenue, but gets to spend only about 40% of the combined expenditure. The tussle for the rights of States has been focused on Article 356. What has changed dramatically since the 1950s, when the First Commission presented its recommendations on the transfer of resources between the Centre and the states, is the scale of distribution of tax proceeds. Suggest the steps the Centre should take to address it.”. There is a disincentive for banks if they delay implementing a viable resolution plan. The Commission has recommended revenue deficit grants worth Rs 74,341 crore to these 14 states. Two levels: What is manifest from a reading of the Constitution is that it creates two distinct levels of government: But the responsibilities vested with the States are no less important, Significantly, this bicameralism is not achieved through, A House of the People [Lok Sabha] comprising, Therefore, while the Centre, for example, was accorded the power to. In the case of non-implementation, lenders were required to file an insolvency application. History- Important places, persons in news, Legislative Council in States: Issues & Way Forward, Finance Commission – Issues related to devolution of resources. The total area of states, area under forest cover, and “income distance” were also used by the FC to arrive at the tax-sharing formula. This debate is recently in the news which is about the idea of a Public Asset Reconstruction Companies (ARC) fully funded and administered by the government as mooted by this year’s Economic Survey Vs. the private ARC as advocated by the deputy governor of RBI Mr. But there is no such restriction on the Centre. Investing in human capital through interventions in nutrition, health, and education is critical for sustainable growth. In the World Bank’s Human Capital Index, the country ranked 116th. Plans should be collaboratively prepared with private sector players and Commodity Boards. – The use of the words “internal security” creates ambiguity. Further, several policy issues like streamlining GST, Direct Tax Code, improving expenditure outcomes, etc. That means assigning weights to things like population, the fiscal distance between the top ranked states and the others, etc. The deal could not be finalised until the Centre guaranteed to fill the revenue gap of states according to an agreed formula. If ever there was an opportune moment for a big push on cooperative federalism, it is now. We cannot continue to regard the intricate niceties of our federal structure as a nettlesome trifle. In that respect, a Fiscal Council is an important institution needed to complement the rule-based fiscal policy. , if necessary through an Act of Parliament. Mains level : Paper 2- Fiscal decentralisation. The allocation for the National Disaster Risk Management Fund is Rs 12,390 crore. Resources of Central and State governments and their potential and fiscal capacity. It is well known that the efficiency of a government depends on, among other factors, its structure. This is well-founded, based on the pattern of urbanisation in India, where 53 million-plus urban agglomerations comprising. In large part, this is due to an increase in spending on items in the state and concurrent list, and a corresponding decline in spending on items in the Union list. 5 1. This will ease to 3.5 per cent by 2022-23, thereafter reverting to the erstwhile 3 per cent limit till 2025-26. Three trends have shifted the economic centre of gravity from the Centre to the states. A “camel’s nose” is a metaphor to describe a situation where one permits a small entry to an outsider into one’s territory, only to be soon pushed out entirely. In the years following the reforms of the 1990s, Commissions have been headed by reputed economists and administrators — from A M Khusro, who headed the Eleventh Finance Commission, to Chakravarthi Rangarajan, Vijay Kelkar, and Y V Reddy, who were Chairmen of subsequent Commissions. The reaction to central dominance came in the early 1980s when strong regional leaders started agitating against “the hegemony of the Centre”. Apart from the vertical and horizontal tax devolution, local government grants, disaster management grant, the Commission also examined whether a separate mechanism for funding of defence and internal security ought to be set up. The Fourteenth Finance Commission has broken new ground in terms of allocation of resources. it illustrates the increased clout of the states in driving reforms more than the GST negotiations. , also talks about the formation of a bad bank which will take all the stressed loans and it will tackle it according to flexible rules and mechanism. What is tax buoyancy? Provision of grants in aid to local bodies for basic services and implementation of a performance grant system in improving the delivery of services. The market will penalise the mismanagement of public finances. The report starts with the famous quote of Mahatma Gandhi: “The future depends on what we do in the present”. Of these, grants for nutrition, to augment the efforts of the States towards reducing and ultimately eliminating malnutrition, is specifically recommended even in 2020-21. : Six broad areas are identified to provide performance-based incentives to States. The ongoing pandemic could be considered as a national calamity. According to Das, finance commissions have over the past several decades adopted different approaches with regard to principles of tax devolution, grants to be given to states and fiscal consolidation issues. Demand on the resources of respective governments. To expedite resolution, more such. The National Family Health Survey-5 for 2019-20 shows that malnutrition indicators stagnated or declined in most States. Faultlines in the Centre-State fiscal relations have widened due to Covid. Efforts made in expansion and deepening of tax net under GST. The Finance Commission (FC) was established by the President of India in 1951 under Article 280 of the Indian Constitution. The weight assigned to state area was unchanged at 15%, and that of forest cover was increased from 7.5% to 10%. The terms of reference of the 15th Finance Commission points to the present government’s desire to claw back the fiscal space offered to the states. The Laffer Curve is a theory that states lower tax rates boost economic growth. For Example, Gyan Sangam, a conclave of PSBs and financial institutions. The FFC has emphasised the need to focus on the. Not only did States lose their taxation powers but with this idea, they will lose its sole spending powers too. The President will constitute a finance commission within two years from the commencement of the Constitution and thereafter at the end of every fifth year or earlier, as the deemed necessary by him/her, which shall include a chairman and four other members. There is an attempt to palm off the Centre’s expenditure obligation to the States and there is talk of even limiting expenditure powers of the States. It is a list of 98 (Originally 97) numbered items as provided in the Seventh Schedule. 268 and art. Horizontal devolution is the devolution or sharing of resources between the different components of a single entity. Public order and police are part of the state’s responsibility. (A) The HLEG has made its recommendations, major among which are: The Group has recommended a State-led Export Plan – a business plan for a crop value chain cluster. The Fifteenth Finance Commission was constituted by a Presidential Order in November, 2017 under the Chairmanship of Shri N. K. Singh to decide the formula for devolution of revenue between Centre and States, for a period of 5 years – April, 2020 to March, 2025. On the contrary, in India, income tax is levied only by the Central government though shared with the States. Determine factors governing Grants-in-Aid to the states and the magnitude of the same. Article 280 of the Constitution of India provides for a quasi-judicial body, the Finance Commission. The Constitution should be amended and the proportion of. The Fifteenth Finance Commission (XV-FC) was constituted in November 2017 to give recommendations for vertical and horizontal devolution of taxes for five fiscal years, commencing 1 April 2020. This article examines how States are not getting what they should as per the 14th Finance Commission report. For all urban bodies, the distribution of grants for 2020-21 is based on population. But the bulk of this spending is routed through. From 10% of the total tax receipts of the Centre in 1950, it rose to a record 42% after the recommendations of the Fourteenth FC headed by Y V Reddy — a share that made previous awards look conservative, and sat well with the spirit of cooperative federalism. from Section 83 of the Jammu and Kashmir Reorganisation Act 2019. GOI has said there will be no interference from Government and Banks are encouraged to take independent decisions keeping in mind the commercial the organizational interests. The Commission has recommended revenue deficit grants worth Rs 74,341 crore to these 14 states. The Commission may also examine whether revenue deficit grants be provided at all. The Commission can function as a leaner entity in the intervening period till the next Finance Commission is set up in a full-fledged manner. It will ease the balance sheet of PSBs giving them the space to fund new projects and continue the funding of development projects. In light of this, examine the problems faced by the distribution and suggest the challenge the review would face. This means that the terms decided by the Commission are loaded against the more progressive (and prosperous) southern states. government attempted to reform the land acquisition law by tweaking the balance in favour of investors many states objected to this. Kerala’s current fiscal position means that it can borrow about ₹25,000 crore during the financial year 2020-21. In which clause and where should it be included remains a question. For the current year, even without any additional fiscal stimulus, the deficit is estimated at about 7% of GDP as against 3.5% estimated in the Budget due to a sharp decline in revenues. Horizontal imbalances among state governments result from differing historical backgrounds or resource endowments and can widen over time. The total area of states, the area under forest cover, and “income distance” were also used by the FC to arrive at the tax-sharing formula. These will necessitate several additional demands for allocations to be made in the coming years. Regarding the shift to Census 2011 numbers, it was mentioned that efforts made towards reducing population growth rate towards replacement rate were also included which balances the equation. On the other hand, the southern states of Tamil Nadu, Kerala, Karnataka and undivided Andhra Pradesh are home to only 20.75% of the population living in 19.34% of the area, with a 13.89% share of the taxes. Progress made in promoting ease of doing business and promoting labour-intensive growth. While the commission is yet to spell out its views on the subject, this request raises fundamental questions over the s. The Seventh Schedule of the Indian Constitution specifies the separate as well as concurrent responsibilities of the Centre and state governments, with defence falling in the Union list. It catapulted Tamil Nadu’s literacy rate from 54% in 1981 to 83% in 2011. The fiscal relationship between the Centre and the States is fast turning into a “camel’s nose” syndrome for the States. Q.In India, which of the following reviews the independent regulators in sectors like telecommunications, insurance, electricity, etc.? Even as States have taken up positions of leadership in the pandemic response, federal limitations are becoming hurdles. The 14th Finance Commission report in 2015 promised devolution of more finances to the States. What is the news: The interim report of the 15th Finance Commission (FC) has been tabled in Parliament this budget session.
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