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Continuity with Change
The two latest finance commissions—the Fourteenth Finance Commission and the Fifteenth Finance Commission—mark a break from the past. The paper explores the structural shift in federal finances with the abolition of the Planning Commission and contemporaneous circumstances that shaped the approach of the Fifteenth Finance Commission and examines the intersections and divergence, continuity and change with the Fourteenth Finance Commission in terms of its treatment of and approach to the three core issues of vertical and horizontal devolution, grants-in-aid to the states and transfers to local governments. It argues that the pervasive impact of the pandemic has shaped the recommendations of the Fifteenth Finance Commission in several ways without compromising on the constitutional principles and retaining the balance in federal transfers between the union and the states and amongst the states. At a time when the growth prospects of the economy are uncertain, the innovative use of targeted grants linked to performance-based criteria for specified sectors through the states and local governments addresses glaring gaps in public services and potentially trigger reform in critical sectors.
The author wishes to thank Pinaki Chakraborty and Seetha Parthasarthy for their insightful comments and suggestions.
India’s federal fiscal framework is characterised by a remarkable stability across time, notwithstanding a fragmented transfer system.1 A major reason for this has been the broad continuity in the approach of the fifteen finance commissions, which have been constituted since the adoption of the Constitution. With finance commissions being the single largest source of transfers from the union government to the states, this continuity has resulted in the relatively consistent post-transfer shares of the union and the states in the combined revenue and expenditure of general government.2 While the Constitution has defined the basic role and tasks for the finance commissions in intergovernmental transfers, contemporary challenges as well as the macro-fiscal environment have been addressed by each commission, to serve the evolving development objectives of the nation.
Each finance commission is expected to ensure a certain amount of continuity in the basic framework, while introducing changes as necessary, to reflect the evolving circumstances. A recent study on fiscal federalism has identified five consistent strands in the approach and recommendations of the fourteen finance commission.3 These are: (i) focus on revenue account, with emphasis on assessment and recommendations relating to revenue resources and revenue expenditure; (ii) attempt to reduce inequalities amongst states by balancing the recommendation between provision of uniform standards of public service and ensuring or enabling minimum standards of such service; (iii) giving overwhelming primacy to tax devolution over grants as the preferred mode of transfer; (iv) providing revenue gap-filling grants (revenue deficit grants) with no conditions attached, but prescribing conditions and performance criteria for other type of sector-specific or state-specific grants; and (v) use of the exogenously imposed 1971 population from the Sixth Finance Commission onwards with the intent of not penalising states that had performed well on the demographic front. These broad principles have been found to be consistent with the constitutional intent and spirit and done justice to both the union and the states as well as amongst the states. There has been universal acceptability of the recommendations, and barring a few exceptions, the recommendations of each of the commissions have been accepted by the President.
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