The recent assembly of the 15th Finance Commission (FC), led by N K Singh, featured comprehensive discussions with the Reserve Bank of India (RBI) regarding several key fiscal issues facing the nation. Amongst the matters deliberated were the continuity of the Finance Commission, State Finance Commissions (SFCs), expenditure codes, the Public Sector Borrowing Requirement (PSBR), the role of states in the economy, and factors driving fiscal slippage.
The Imperative of a Permanent Finance Commission
Given the fiscal management demands of the various Indian states, particularly due to the absence of mid-term reviews of awards granted by the FC, there is a pressing need for the Commission to be made permanent. A secure and robust system for expenditure planning was underscored as a critical requirement.
State Finance Commissions: A Necessary Step
Despite the 73rd Constitutional Amendment Act mandating the establishment of SFCs every five years, states have largely neglected this obligation. The assembly emphasized the need for SFCs which could rationalize and organize State/sub-state fiscal relations in India.
Consistent Expenditure Norms
With the varying expenditure norms across states, the discussion pointed toward the necessity to establish consistent expenditure codes throughout the country. This standardization would facilitate better financial management on a national level.
Public Sector Borrowing Requirement: An Overview
Defined as borrowing not only by Central and State governments but also by all public sector corporations and agencies, PSBR is a vital part of overall fiscal health. A consolidated figure of PSBR could curtail the manipulation of the fiscal deficit by the government. In the meeting, the increasing inclination of State governments’ borrowing from the markets, improving secondary market liquidity, and cash management were the main topics of conversation.
An HTML Table of Some Key Facts
| Finance Commission | Date Constituted | Headed by |
|---|---|---|
| 15th FC | November 27, 2017 | N.K. Singh |
The Growing Role of States in the Economy
The importance of states in expanding the Indian economy has escalated. This is evident from a ‘shift in composition of government finances’ and states receiving a larger share of transfer (devolution of 42%) from the Centre, as recommended by the 15th FC.
Factors Affecting Fiscal Slippage
The discussion also focused on factors causing fiscal slippage. These elements include UDA, farm loan waivers, and income support schemes; a rising outstanding debt as a percentage of GDP despite moderation in interest payments as a percentage of revenue receipts.
15th Finance Commission
The FC is a constitutional entity under Article 280 that is created every five years to recommend financial resource transfers from the Centre to the States. The Commission also determines the principles guiding the provision of grants-in-aid to the States. The 15th FC was constituted on November 27, 2017, and is headed by Mr. N.K. Singh. Its recommendations will be effective for five years starting April 1, 2020.
State Finance Commissions
SFCs were instituted by the 73rd and 74th Constitutional Amendments to rationalize and organize State/sub-State-level fiscal relations in India. As per Article 243I of the Constitution, the State Governor should establish a Finance Commission every five years. Article 243Y asserts that the Finance Commission constituted under article 243I is also tasked with reviewing the financial status of the Municipalities and making recommendations to the Governor. However, states have frequently ignored setting up their SFCs, often failing to submit reports in a timely manner due to lack of proficiency.
