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PANDEMIC AND RECONSIDERING 42% DEVOLUTION

Focus: GS-III Indian Economy

Why in news?

The Fifteenth Finance Commission (FFC) will submit its report containing recommendations on the sharing of tax revenues between the Centre and States for the period 2021-22 to 2025-26 to the President on October 31, 2020.

Details

  • The Fifteenth Finance Commission (XV-FC) is of the view that 2020 cannot be treated as a non-year and setting back the base to 2019-20 is not an option.
  • Whatever award the XV-FC had to give for 2020-21 that was already in the report submitted to the President for 2020-21, and it was accepted by the government and also placed in Parliament with Action Taken Report on recommendations.
  • Therefore, 2020-21 doesn’t matter from the point of view of the award, but it is relevant because of the need to make projections.

The Impact

  • Unlike in the past, the XV-FC may not have the luxury of assuming constant rates of growth throughout the period — both in nominal and real GDP numbers, hence, a judgement call will be necessary.
  • The XV-FC will have to adopt tax buoyancy numbers which may vary during the award period due to the variability in the revenue assumptions.
  • On the issue of fiscal numbers and the path of fiscal consolidation and the path of debt — for the Central Government, the State Government, as well as both the governments in general – The XV-FC will have to select a path which recognises the fact the arrangement which earlier existed may have to be re-adapted taking into account the issue of the pandemic.
  • Under the Terms of Reference (ToR), the XV-FC will have to look at the issue of performance-based criterion and in appropriate cases sector-specific considerations.

On Devolution

  • Almost all the States have emphasised that 41 or 42% was too low; the sharing should be on the basis of fifty-fifty.
  • Not only on account of the States’ own normal committed liabilities and committed revenue expenditure but more so on account of the shortfall of revenues triggered both by the decline in the State GST (Goods & Services Tax) and by the fact that other sources of State revenues are proving to be somewhat inelastic.
  • Their revenue numbers have fallen. The central government’s own revenue projections are below expectations in the BE (Budget Estimates) and the medium-term policy framework document which accompanies every Budget.

-Source: The Hindu

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