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The Finance Commission is a constitutional body formed by the President of India to give suggestions on centre-state financial relations. The 15th Finance Commission is required to submit two reports. The first report will consist of recommendations for the financial year 2020-21. The final report with recommendations for the 2021-26 period will be submitted by October 30, 2020. In this post, we explain the key recommendations of the report.
What is the amount of tax devolution to the states, and how is it being calculated?
The Finance Commission uses certain criteria when deciding the devolution to states. For example, income distance criterion has been used by the 14th and 15th Finance Commissions. Under this criterion, states with lower per capita income would be given a higher share to maintain equity among states. Another example is Demographic Performance criterion which has been introduced by the 15th Finance Commission. The Demographic Performance criterion is to reward efforts made by states in controlling their population.
The 15th Finance Commission used the following criteria while determining the share of states: (i) 45% for the income distance, (ii) 15% for the population in 2011, (iii) 15% for the area, (iv) 10% for forest and ecology, (v) 12.5% for demographic performance, and (vi) 2.5% for tax effort. For 2020-21, the Commission has recommended a total devolution of Rs 8,55,176 crore to the states, which is 41% of the divisible pool of taxes. This is 1% lower than the percentage recommended by the 14th Finance Commission.
Table 1 below compares the new criteria with the criteria recommended by the 14th Finance Commission.
Table 1: Criteria for devolution (2020-21)
Criteria |
14th FC 2015-20 |
15th FC 2020-21 |
Income Distance |
50.0 |
45.0 |
Population 1971 |
17.5 |
- |
Population 2011 |
10.0 |
15.0 |
Area |
15.0 |
15.0 |
Forest Cover |
7.5 |
- |
Forest and Ecology |
- |
10.0 |
Demographic Performance |
- |
12.5 |
Tax Effort |
- |
2.5 |
Total |
100 |
100 |
Sources: Report for the year 2020-21, 15th Finance Commission; PRS.
Uttar Pradesh and Bihar have received the largest devolutions for 2020-21, receiving Rs 1,53,342 crore, and Rs 86,039 crore respectively. Karnataka and Kerala saw the largest decreases in the share of the divisible pool with a decrease of 0.49% and 0.25% respectively. Table 2 below displays the state-wise breakdown of the share in the divisible pool and the total devolution.
Table 3: Share of states in the centre’s taxes
State |
14th Finance Commission |
15th Finance Commission |
Devolution for FY 2020-2021 |
||
Share out of 42% |
Share in divisible pool |
Share out of 41% |
Share in divisible pool |
(In Rs crore) |
|
Andhra Pradesh |
1.81 |
4.31 |
1.69 |
4.11 |
35,156 |
Arunachal Pradesh |
0.58 |
1.38 |
0.72 |
1.76 |
15,051 |
Assam |
1.39 |
3.31 |
1.28 |
3.13 |
26,776 |
Bihar |
4.06 |
9.67 |
4.13 |
10.06 |
86,039 |
Chhattisgarh |
1.29 |
3.07 |
1.4 |
3.42 |
29,230 |
Goa |
0.16 |
0.38 |
0.16 |
0.39 |
3,301 |
Gujarat |
1.3 |
3.1 |
1.39 |
3.4 |
29,059 |
Haryana |
0.46 |
1.1 |
0.44 |
1.08 |
9,253 |
Himachal Pradesh |
0.3 |
0.71 |
0.33 |
0.8 |
6,833 |
Jammu and Kashmir |
0.78 |
1.86 |
- |
- |
- |
Jharkhand |
1.32 |
3.14 |
1.36 |
3.31 |
28,332 |
Karnataka |
1.98 |
4.71 |
1.49 |
3.65 |
31,180 |
Kerala |
1.05 |
2.5 |
0.8 |
1.94 |
16,616 |
Madhya Pradesh |
3.17 |
7.55 |
3.23 |
7.89 |
67,439 |
Maharashtra |
2.32 |
5.52 |
2.52 |
6.14 |
52,465 |
Manipur |
0.26 |
0.62 |
0.29 |
0.72 |
6,140 |
Meghalaya |
0.27 |
0.64 |
0.31 |
0.77 |
6,542 |
Mizoram |
0.19 |
0.45 |
0.21 |
0.51 |
4,327 |
Nagaland |
0.21 |
0.5 |
0.23 |
0.57 |
4,900 |
Odisha |
1.95 |
4.64 |
1.9 |
4.63 |
39,586 |
Punjab |
0.66 |
1.57 |
0.73 |
1.79 |
15,291 |
Rajasthan |
2.31 |
5.5 |
2.45 |
5.98 |
51,131 |
Sikkim |
0.15 |
0.36 |
0.16 |
0.39 |
3,318 |
Tamil Nadu |
1.69 |
4.02 |
1.72 |
4.19 |
35,823 |
Telangana |
1.02 |
2.43 |
0.87 |
2.13 |
18,241 |
Tripura |
0.27 |
0.64 |
0.29 |
0.71 |
6,063 |
Uttar Pradesh |
7.54 |
17.95 |
7.35 |
17.93 |
1,53,342 |
Uttarakhand |
0.44 |
1.05 |
0.45 |
1.1 |
9,441 |
West Bengal |
3.08 |
7.33 |
3.08 |
7.52 |
64,301 |
Total |
42 |
100 |
41 |
100 |
8,55,176 |
Sources: Reports of 14th and 15th Finance Commission; PRS.
What are the various grants recommended by the 15th Finance Commission?
The Terms of Reference of the Finance Commission require it to recommend grants-in-aid to the States. These grants include: (i) revenue deficit grants, (ii) grants to local bodies, and (iii) disaster management grants.
14 states are estimated to face a revenue deficit post-devolution. To make up for this deficit, the Commission has recommended revenue deficit grants worth Rs 74,341 crore to these 14 states. Additionally, three states (Karnataka, Mizoram, and Telangana) have received special grants worth Rs 6,674 crore. The special grants are being given to compensate for a decline in the sum of tax devolution and revenue deficit grants in 2020-21 as compared to 2019-20.
The Commission has recommended a total of Rs 90,000 crore for grants to the local bodies in 2020-21. This amounts to an increase over the Rs 87,352 crore allocated for 2019-20 for the same. The new allocation is 4.31% of the divisible pool. Of this sum, Rs 60,750 crore has been recommended for rural local bodies, and Rs 29,250 crore for urban local bodies. These grants will be made available to all three tiers of Panchayat- village, block, and district.
To promote local-level mitigation activities, the Commission has recommended the setting up of National and State Disaster Management Funds. Recommended grants for the State Disaster Risk Management Fund is Rs 28,983 crore, while the allocation for the National Disaster Risk Management Fund is Rs 12,390 crore.
Apart from these, guidelines for performance-based grants and sector-specific grants have been outlined. The Commission has recommended a grant of Rs 7,375 crore for nutrition in 2020-21. Sectors for which sector-specific grants will be provided in the final report include: (i) nutrition, (ii) health, (iii) pre-primary education, (iv) judiciary, and (v) railways.
For more details, please see our summary of the report.
Last week, the Departmentally Related Standing Committees were reconstituted for the first year of the 17th Lok Sabha. In this context, we discuss the functioning and role of Standing Committees.
The visible part of Parliament’s work takes place on the floor of the House. Parliament meets for three sessions a year i.e., the Budget, Monsoon, and Winter Sessions. This part of Parliament’s work is televised and closely watched. However, Parliament has another forum through which a considerable amount of its work gets done. These are known as Parliamentary Committees. These Committees are smaller units of MPs from both Houses, across political parties and they function throughout the year. These smaller groups of MPs study and deliberate on a range of subject matters, Bills, and budgets of all the ministries.
During the recently concluded first Session of the 17th Lok Sabha, Parliament sat for 37 days. In the last 10 years, Parliament met for 67 days per year, on average. This is a short of amount of time for MPs to be able to get into the depth of matters being discussed in the House. Since Committees meet throughout the year, they help make up for this lack of time available on the floor of the House.
Parliament deliberates on matters that are complex, and therefore needs technical expertise to understand such matters better. Committees help with this by providing a forum where Members can engage with domain experts and government officials during the course of their study. For example, the Committee on Health and Family Welfare studied the Surrogacy (Regulation) Bill, 2016 which prohibits commercial surrogacy, but allows altruistic surrogacy. As MPs come from varying backgrounds, they may not have had the expertise to understand the details around surrogacy such as fertility issues, abortion, and regulation of surrogacy clinics, among others. The Committee called upon a range of stakeholders including the National Commission for Women, doctors, and government officials to better their understanding of the issues, before finalising their report.
Committees also provide a forum for building consensus across political parties. The proceedings of the House during sessions are televised, and MPs are likely to stick to their party positions on most matters. Committees have closed door meetings, which allows them to freely question and discuss issues and arrive at a consensus.
After a Committee completes its study, it publishes its report which is laid in Parliament. These recommendations are not binding, however, they hold a lot of weight. For example, the Standing Committee on Health made several recommendations to the National Medical Commission Bill in 2017. Many of these were incorporated in the recently passed 2019 Bill, including removing the provision for allowing a bridge course for AYUSH practitioners.
There are 24 such Departmentally Related Standing Committees (DRSCs), each of which oversees a set of Ministries. DRSCs were set up first in 1993, to ensure Parliament could keep with the growing complexity of governance. These are permanent Committees that are reconstituted every year. They consist of 21 Members from Lok Sabha, and 10 Members from Rajya Sabha, and are headed by a Chairperson. The DRSCs primarily look at three things: (i) Bills, (ii) budgets, and (iii) subject specific issues for examination. Other types of Standing Committees include Financial Committees which facilitate Parliament’s scrutiny over government expenditure. Besides these, Parliament can also form ad hoc Committees for a specific purpose such as addressing administrative issues, examining a Bill, or examining an issue.
To ensure that a Bill is scrutinised properly before it is passed, our law making procedure has a provision for Bills to be referred to a DRSC for detailed examination. Any Bill introduced in Lok Sabha or Rajya Sabha can be referred to a DRSC by either the Speaker of the Lok Sabha or Chairman of the Rajya Sabha. Over the years, the Committees have immensely contributed to strengthen the laws passed by Parliament. For example, the Consumer Protection Act, 2019, overhauling the 1986 law, was recently passed during the Budget Session. An earlier version of the Bill had been examined by the Committee on Food and Consumer Affairs, which suggested several amendments such as increasing penalties for misleading advertisements, making certain definitions clearer. The government accepted most of these recommendations and incorporated them in the 2019 Act.
Besides Bills, the DRSCs also examine the budget. The detailed estimates of expenditure of all ministries, called Demand for Grants are sent for examination to the DRCSs. They study the demands to examine the trends in allocations, spending by the ministries, utilisation levels, and the policy priorities of each ministry. However, only a limited proportion of the budget is usually discussed on the floor of the House. In the recently dissolved16th Lok Sabha, 17% of the budget was discussed in the House.
Committees also examine policy issues in their respective Ministries, and make suggestions to the government. The government has to report back on whether these recommendations have been accepted or not. Based on this, the Committees then table an Action Taken Report, which shows status of the government’s action on each recommendation.
While Committees have substantially impacted Parliament’s efficacy in discharging its roles, there is still scope for strengthening the Committee system. In the 16th Lok Sabha, DRSCs examined 41 Bills, 331 Demands for Grants, 197 issues, and published 503 Action Taken Reports.
However, the rules do not require that all Bills be examined by a Committee. This leads to some Bills being passed without the advantage of a Committee scrutinising its technical details. Recently, there has been a declining trend in the percentage of Bills being referred to a Committee. In the 15th LS, 71% of the Bills introduced were referred to Committees for examination, as compared to 27% in the 16th Lok Sabha. |
With the DRSCs now constituted for the first year of the 17th Lok Sabha, they will soon begin their meetings to select the subjects they are going to examine. Some Committees already have Bills to examine that were referred to them during the 16th Lok Sabha. Some of these Bills are: (i) the Cinematograph (Amendment) Bill, 2019, (ii) the Allied and Healthcare Professions Bill, 2018, and (iii) the Registration of Marriage of Non- Resident Indian Bill, 2019. So far in the 17th Lok Sabha no Bill has been referred to a Committee yet.