The 15th Finance panel has pushed conditional grants, but left thorny issues untouched
The recently released 15th Finance Commission report has been quite conservative in not suggesting major changes in the vertical and horizontal devolution of finances from the Centre to States. However, it moots a high ratio of incentive-linked grants (rightly linked to agriculture reform and health spend) to untied aid; at about 25 per cent, this amounts to a transfer of over ₹10.3-lakh crore over five years till 2025-26. The untied transfers to States over this period, at 41 per cent of the divisible pool of tax revenues which excludes cess and surcharge, are estimated to account for ₹42.2-lakh crore. Significantly, the divisible pool for 2021-26 shrinks from ₹135.2-lakh crore to ₹103-lakh crore when cess, surcharge and cost of collection are left out. Disappointingly, the panel sidesteps the contentious issue of cess and surcharge, merely suggesting that they should be transparently accounted for in the Budget.
States should curb frivolous expenditure, such as loan waivers. They can step up revenues from stamp duty and registration of property. The Economic Survey 2020-21 points to a “decline in actual capital spending relative to BE observed in the States for the last three years”. This should be checked to ensure a return on higher levels of spending in these times. Interestingly, the panel report moots two new criteria for horizontal devolution, even as income and population weights have been tinkered with — these being ‘demographic performance’ or fertility reduction and ‘tax effort’. If this is an effort to reward governance in southern States, it has not worked so far; transfers to them did not improve in 2020-21. A persistent north-south divide will not serve the cause of cooperative federalism.