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LATEST NEWS UPDATES | Why states are demanding more from the 15th Finance Commission - Nikita Kwatra and Pramit Bhattacharya

Why states are demanding more from the 15th Finance Commission - Nikita Kwatra and Pramit Bhattacharya

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published Published on Jul 24, 2019   modified Modified on Jul 24, 2019
-Livemint.com

Transfers to states are stagnating at a time when developmental demands on state governments are rising

Five years ago, when the 14th finance commission recommended an increase in devolution of funds to state governments and a hike in the share of untied funds they received, it was heralded as a new era for fiscal federalism in the country, and one that would significantly empower state governments at a time when they were facing rising developmental demands.

Five years later, the reality is more sobering. The share of Union transfers to states (as a proportion of gross tax revenues) has actually declined over the past few years as compared to the earlier era (13th finance commission period). This holds true even if we exclude the budget estimates for fiscal 2020, which appears extraordinarily low because of the denominator effect (the unrealistic expansion in gross tax revenues baked into the budget estimates).

It is not surprising therefore that states are demanding a higher share in revenues from the 15th Finance Commission, whose recommendations will determine revenue sharing for the next five years.

One big reason why states’ share in gross tax revenues has not risen (despite the increase in their share in the divisible pool recommended by the 14th finance commission) lies in the rise of cesses and surcharges. As these pages have pointed out earlier, cesses and surcharges have increased sharply in recent years. While they add to the Union government’s tax kitty, they are not part of the divisible pool that needs to be shared with states. As a result, while the share of states in the divisible pool grew, their share in overall tax revenues stagnated since the non-divisible pool of cesses and surcharges grew faster.

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Livemint.com, 23 July, 2019, https://www.livemint.com/news/india/why-states-are-demanding-more-from-the-15th-finance-commission-1563870011645.html


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