Question: Consider the following statements:
(1) The 15th Finance Commission recommends reduction of centre’s fund to states by 1% in FY21.
(2) Income distance is the distance of the state’s income from the state with the highest income.
Of the above correct statement/ is/are
(a) Only (1)
(b) Only (2)
(c) Both (1) and (2)
(d) None of the above
Answer: (c)
Related facts:
- 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 (Chair: Mr N. K. Singh) was required to submit two reports.
- The first report, consisting of recommendations for the financial year 2020-21, was tabled in Parliament on February 1, 2020. It is the interim report.
- The final report with recommendations for the period 2021-26 will be submitted by October 30th, 2020.
Key recommendations in the first report (2020-21 period) include:
- Devolution of taxes to states: The share of states in the centre’s taxes is recommended to be decreased from 42% during the 2015-20 period to 41% for 2020-21.
- The 1% decrease is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the central government.
- Income distance: Income distance is the distance of the state’s income from the state with the highest income. The income of a state has been computed as average per capita GSDP during the three-year period between 2015-16 and 2017-18. States with lower per capita income would be given a higher share to maintain equity among states.
- Demographic performance: The Terms of Reference (ToR) of the Commission required it to use the population data of 2011 while making recommendations.
- Accordingly, the Commission used only 2011 population data for its recommendations.
- The Demographic Performance criterion has been introduced to reward efforts made by states in controlling their population.
- It will be computed by using the reciprocal of the total fertility ratio of each state, scaled by 1971 population data.
- States with a lower fertility ratio will be scored higher on this criterion. The total fertility ratio in a specific year is defined as the total number of children that would be born to each woman if she were to live to the end of her child-bearing years and give birth to children in alignment with the prevailing age-specific fertility rates.
- Forest and ecology: This criterion has been arrived at by calculating the share of dense forest of each state in the aggregate dense forest of all the states.
- Tax effort: This criterion has been used to reward states with higher tax collection efficiency.
- It has been computed as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three-year period between 2014-15 and 2016-17.
Grants-in-aid
- In 2020-21, the following grants will be provided to states: (i) Revenue deficit grants, (ii) Grants to local bodies, and (iii) Disaster management grants. The Commission has also proposed a framework for sector-specific and performance-based grants. State-specific grants will be provided in the final report.
- Revenue deficit grants: In 2020-21, 14 states are estimated to have an aggregate revenue deficit of Rs 74,340 crore post-devolution. The Commission recommended revenue deficit grants for these states (see Table 4 in the annexure).
- Special grants: In case of three states, the sum of devolution and revenue deficit grants is estimated to decline in 2020-21 as compared to 2019-20. These states are Karnataka, Mizoram, and Telangana. The Commission has recommended special grants to these states aggregating to Rs 6,764 crore.
- Sector-specific grants: The Commission has recommended a grant of Rs 7,375 crore for nutrition in 2020-21. Sector-specific grants for the following sectors will be provided in the final report: (i) nutrition, (ii) health, (iii) pre-primary education, (iv) judiciary, (v) rural connectivity, (vi) railways, (vii) police training, and (viii) housing.
- Performance-based grants: Guidelines for performance-based grants include: (i) implementation of agricultural reforms, (ii) development of aspirational districts and blocks, (iii) power sector reforms, (iv) enhancing trade including exports, (v) incentives for education, and (vi) promotion of domestic and international tourism. The grant amount will be provided in the final report.
- Grants to local bodies: The total grants to local bodies for 2020-21 has been fixed at Rs 90,000 crore, of which Rs 60,750 crore is recommended for rural local bodies (67.5%) and Rs 29,250 crore for urban local bodies (32.5%).
- This allocation is 4.31% of the divisible pool. This is an increase over the grants for local bodies in 2019-20, which amounted to 3.54% of the divisible pool (Rs 87,352 crore). The grants will be divided between states based on population and area in the ratio 90:10. The grants will be made available to all three tiers of Panchayat- village, block, and district.
- Disaster risk management: The Commission recommended setting up National and State Disaster Management Funds (NDMF and SDMF) for the promotion of local-level mitigation activities. The Commission has recommended retaining the existing cost-sharing patterns between the centre and states to fund the SDMF (new) and the SDRF (existing). The cost-sharing pattern between centre and states is (i) 75:25 for all states, and (ii) 90:10 for north-eastern and Himalayan states.
- For 2020-21, State Disaster Risk Management Funds have been allocated Rs 28,983 crore, out of which the share of the union is Rs 22,184 crore.
- The National Disaster Risk Management Funds has been allocated Rs 12,390 crore.
Links:
https://www.prsindia.org/report-summaries/report-15th-finance-commission-fy-2020-21
https://economictimes.indiatimes.com/news/economy/finance/15th-finance-commission-recommends-reduction-of-centres-fund-to-states-by-1-in-fy21/articleshow/73836964.cms