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Why in news?

The Fifteenth Finance Commission (XVFC) had online meetings with its Advisory Council on 23-24 April, 2020 and discussed various issues confronting the Commission now.

What transpired in the meeting?

  • In the meeting all of them were unanimous to suggest that the projections of real GDP growth made before March 2020 need to be relooked into entirely, and, revised downwards considerably.
  • Once the lockdown of the economy is released, the recovery can only be expected to be gradual, depending on the ability of the workforce to get back to work soon, restoration of supplies of intermediates and cash flows and, of course, the demand for output.
  • Therefore, the full magnitude of the economic impact of COVID will only be clear only over a course of time.
  • The Advisory Council also felt that the magnitude of the impact of these developments on public finances is uncertain, but will certainly be significant. Governments will have substantial expenditure burden on account of health, support to poor and other economic agents.
  • The Council Members felt that the shortfall in tax and other revenues will be large due to subdued economic activity.
  • Hence, fiscal response to the crisis should be much more nuanced. It is important not just to look at the size of fiscal response but also carefully at its design.
  • The Council apprised the Finance Commission of the different suggestions floating around in terms of public expenditure support to the economy.

Important considerations:

  1. Small scale enterprises were cash-starved even prior to the onset of COVID. As their activity levels and cash flows are affected, it is important that a support mechanism be devised to help them overcome this problem.
  2. Non-banking financial companies are also affected by the slowdown. In order to avoid bankruptcies and deepening of NPAs in the financial sector, measures should be appropriately designed. Measures like partial loan guarantee may help. The Reserve Bank of India will have a key role in ensuring that financial institutions are well-capitalized.
  3. The finances of the Central and State Governments need to be watched carefully. As of now, adequate provision for ways and means advances can largely help governments to manage cash-flow mismatches. As we move ahead, we need to think of options for financing the additional deficit. It is important to ensure that the State governments get access to adequate funds to undertake their fight against the pandemic.
  4. The Council also felt that it is likely that different States may come out of the severity of the impact of the pandemic in different stages. Hence, the revival of activity in different States will be at varied pace.

Finance Commission

  • The Finance Commission (FC) is constituted by the President of India every fifth year under Article 280 of the Constitution.
  • Finance Commission is a constitutional body.
  • It was formed to define the financial relations between the central government of India and the individual state governments.
  • FC determines the method and formula for distributing the tax proceeds between the Centre and states, and among the states.
  • The Finance Commission also decides the share of taxes and grants to be given to the local bodies in states. This part of tax proceeds is called Finance Commission Grants, which is a part of the Union budget.
  • The Finance Commission (Miscellaneous Provisions) Act, 1951 additionally defines the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission.
  • The Finance Commission consists of a chairman and four other members, who are appointed by the President of India.
  • There have been fifteen commissions to date, the most recent was constituted in 2017.

Fifteenth Finance Commission

  • The Fifteenth Finance Commission (XV-FC or 15-FC) is an Indian Finance Commission constituted in November 2017 and is to give recommendations for devolution of taxes and other fiscal matters for five fiscal years, commencing 2020-04-01.
  • The main tasks of the commission were to “strengthen cooperative federalism, improve the quality of public spending and help protect fiscal stability”.
December 2023