The Finance Commission has tried to balance need, equity and efficiency: NK Singh

The 15th Finance Commission’s (FC’s) final report, which will cover the period between 2021 and 2026, was released along with the Union Budget. The FC has stuck to the existing devolution formula providing for transfer of 41% of the divisible pool of central taxes to states. The FC’s chairman NK Singh explains the rationale and thinking behind the recommendations and the institution’s legacy of trust to Sidhartha:


What is the feedback from the states and the Centre?
This is not a one day match. It’s a five year report, a regular Test match. Trickle down effect will come with some lag. I have received phone calls from some of the chief ministers to generally thank the Commission and the central government, which accepted the core recommendations. There are one or two states which felt the formula adopted has brought down their share, somewhat marginally.


We have tried to balance the three criteria of need, equity and efficiency. Need in terms of population, equity in terms of per capita income, and efficiency in terms of having attached a weight to the fiscal parameter plus other criteria. We have done this keeping in mind the legacy – the formula has by-and-large remained unchanged from the last FC except for the fact that the census used is 2011. We have sought to mitigate the consequences of this by having a new criterion of demographic performance, which rewards efficiency. The effort of this Commission has been to retain, sustain and invigorate the legacy of trust. The FC represents this legacy of trust from its inception, which goes back to before the Constitution was adopted.

How tough is that given that there are competing demands from the Centre and states?
From the viewpoint of the Union government, it’s quite understandable that given the national priorities, several new initiatives have also been taken. On the other hand, states have felt that every successive FC has only increased their share of devolution. Second, centrally sponsored schemes are a Catch 22. It’s always balancing calibration. FC is not a Gogia Pasha or [PC] Sorcar to pull rabbits out of a hat or conjure resources that don’t exist.

Even in the Budget there have been cesses and states believe their share is taken away. Is there a way to deal with it?
Based on the modelling, over five years, the gross tax receipts are Rs 134 lakh crore. The divisible pool is around Rs 101 lakh crore. States will get around 41% of the divisible pool, around Rs 40 lakh crore, in addition to grants. So, a sizeable pool goes into the non-divisible category. The principle of proliferating of cesses, reducing the divisible pool, is not in accordance with the spirit of the devolution formula. In fact, C Rangarajan, a former FC chairman, argued in The Times of India that the 41% is alright and should be regarded as a ceiling, but should not be used as the pretext for taking more resources out of the divisible pool. Rationalisation of cess and surcharge is a priority that deserves greater detail and debate.

What is the road map for fiscal consolidation given that the Budget has spoken of a 4.5% target by 2025-26?
We have given a different fiscal deficit and debt trajectory for each state, suited to their needs. Plus, states have greater fiscal range for manoeuvre. We had given a trajectory [earlier]. Over the medium term, the borrowing requirement will be somewhat higher to meet the fiscal deficit and the debt trajectory. That’s why the Centre has accepted that they will consider our recommendation that we need a major restructuring of the FRBM Act by a high-powered group.

As far as debt is concerned, today’s numbers are totally misaligned for understandable and justifiable reasons that I had given in the FRBM committee report. Our expectation is that some degree of fiscal consolidation road map is adhered to, [and] by the terminal year, the needle of debt will point southwards rather than northwards. This will be no mean achievement given the overhang of uncertainty. A departure from the fiscal road map is understandable and, in the present case, laudable. What the rating agencies and investors will watch is, have we got back to a road map that guarantees macroeconomic stability?

You have suggested incentives to states linked to a model land law, steps on water use for farming and agricultural exports. How feasible is it now given the massive protests over farm law amendments?
We had said so in our report in 2021. We have endorsed what has been done with regard to the changes. But it is in recognition of the fact that if you want to improve on productivity and incomes in the long run, you need to go on issues that have a much broader relevance such as diversifying cropping patterns and conserving groundwater aquifers.