13-02-2021 | 16:00 PM
15th Finance Commission Report for 2021-26
Context
The Finance Commission is a constitutional body formed by the President of India to give suggestions on centre-state financial relations. Under Article 280 of the Constitution, the President of India is required to constitute a Finance Commission at an interval of five years or earlier. The 15th Finance Commission headed by Shri N.K.Singh, was constituted by the President of India in Nov 2017. The recommendations of the 15th Finance Commission will cover a period of five years starting from 1st April 2020. The commission was required to submit two reports, one for 2020-21 and the second covering the period of five years from 2021-22 to 2025-26
Key Highlights
Devolution of Taxes of the Union to States
The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.
This is less than the 42% share recommended by the 14th Finance Commission for 2015-20 period.
The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the centre.
States’ share at 41% of the divisible pool comes to 42.2 lakh crores for 2021-26 period.
Including total grants of Rs. 10.33 lakh crores and tax devolution of Rs. 42.2 lakh crore, aggregate transfers to States is estimated to remain at around 50.9 % of the divisible pool during 2021-26 period.
Allocation Between the States
For horizontal devolution, 15th Finance Commission has suggested 12.5% weightage to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology and 2.5% to tax and fiscal efforts.
15th Finance Commission has re-introduced tax effort criterion to reward fiscal performance
Performance Based Grants and Incentives to States: These grants revolve around four main themes.
The first is the social sector, where it has focused on health and education.
Second is the rural economy, where it has focused on agriculture and the maintenance of rural roads. The rural economy plays a significant role in the country as it encompasses two-thirds of the country’s population, 70% of the total workforce and 46% of national income.
Third is governance and administrative reforms under which it has recommended grants for judiciary, statistics and aspirational districts and blocks.
Finally, it has developed a performance-based incentive system for the power sector, which is not linked to grants but provides an important additional borrowing window for States.
Fiscal Space for Centre: Total 15th Finance Commission transfers (devolution + grants) constitutes about 34% of estimated Gross Revenue Receipts to the Union, leaving adequate fiscal space to meet its resource requirements and spending obligations on national development priorities.
Grants to Local Governments: The total size of the grant to local governments should be Rs. 4.3 lakh crores for the period 2021-26.
Of these total grants, Rs. 8,000 crores are performance-based grants for incubation of new cities and Rs. 450 crores are for shared municipal services.
A sum of Rs. 2.3 lakh crore is earmarked for rural local bodies, Rs.1.2 lakh crore for urban local bodies and Rs. 70,051 crores for health grants through local governments.
The 15th Finance Commission has recommended that health spending by States should be increased to more than 8 % of their budget by 2022.
It has recommended the total corpus of Rs.1.6 lakh crores for States for disaster management for the duration of 2021-26, of which the Union’s share is Rs. 1.2 lakh crores and States’ share is Rs. 37,552 crores.
