15th Finance Commission may propose performance-based incentives for states

No changes in terms of reference in spite of opposition by states

The Fifteenth Finance Commission is likely to propose bringing back performance-based incentives for states, according to sources.

States will be assessed on certain parameters, including how well they implement the Centre’s flagship schemes, efforts made by them in deepening the goods and service taxes (GST), progress made through direct benefit transfers and their work in promoting the ease of doing business. States have been opposing some of these parameters.

Performance-based incentives were recommended by the 13th Finance Commission, but omitted by the 14th Finance Commission.

In spite of pressure by state governments to amend some of these terms of reference, there are unlikely to be major changes. While some of the more controversial parameters like those on populist schemes and implementing the Centre’s schemes could be left out, the 15th Finance Commission is likely to advise the Centre to reward states based on other parameters, including effectiveness of capital spending, progress in increasing revenues, progress made in achieving replacement rate of population growth, and achievements in infrastructure and social sector schemes, according to officials aware of the developments.

The 15th Finance Commission has the freedom to not consider some of the terms when it recommends devolution of taxes between the Centre and states.

In May, governments of seven states and Union Territories had written to President Ram Nath Kovind, seeking amendments to some of the contentious terms. A memorandum, signed by chief ministers or finance ministers of Andhra Pradesh, Puducherry, Karnataka, Delhi, West Bengal, Kerala, and Punjab said the terms were disruptive.

Their biggest concern was the use of the 2011 Census, which they said would benefit northern states that had not adequately worked on population control. Till the 14th Finance Commission, the 1971 Census was used.

During a meeting of the governing council of the Niti Aayog last Sunday, Prime Minister Narendra Modi made it clear that the 2011 Census should be one of the parameters for devolving funds to states. He, however, urged states to identify parameters or indices through which performance in other fields could be rewarded.

“There is not much of a precedent for such wide-scale amendments to the terms of reference, as the states are suggesting. Some new terms have been added for previous Finance Commissions for issues such as the formation of a new state. But states want almost all the terms to be changed and some deleted. There will be no such action,” said an official.

The 15th Finance Commission is likely to play safe on some of the more contentious terms of reference, and not factor in some of them while deciding the devolution of the divisible tax pool between the Centre and states.

The only terms it was required to act on are those mandated by the Constitution: To recommend the distribution between the Centre and states of the net proceeds of the divisible pool of taxes and the allocation between states; the principles that should govern grants-in-aid of revenues of states out of the Consolidated Fund of India; and the measures needed to augment the funds of a state to supplement the resources of panchayats and urban local bodies.