Statsguru: The Fifteenth Finance Commission lays down fiscal road map

The recommendations of the Fifteenth Finance Commission (15th FC) of India were released by the Union government, along with the Budget last week. The constitutional body, generally reconstituted every five years, lays down the formula to distribute tax revenues between (a) the Centre and states, and (b) among states. 

The 15th FC has given leeway to the government with an expanded fiscal space — not just in the pandemic year, but also for the medium term. It has suggested a liberal glide path for fiscal consolidation, allowing a fiscal deficit of 4.5 per cent of gross domestic product (GDP) five years down the line, shows chart 1.

States have been given a comparatively stricter glide path. Thus, the overall government borrowing will rise, and the 15th FC expects the general government (Centre plus states) debt to remain elevated, chart 2 reveals.

A big problem lies in India’s revenue mobilisation. Revenue of Centre and states is just 19 per cent of GDP, according to the International Monetary Fund. Official data also shows that this ratio has largely remained unchanged over the last decade. Most emerging-market governments perform better on this parameter, shows chart 3. The report highlights very specifically that the government is facing a shortfall as massive as 2 per cent of GDP, owing to the goods and services tax.

Although the Commission bats for a fund specifically to address the shortfall in defence capital expenditure, the size of the fund, about Rs 2.4 trillion, may not be sufficient. The difference between the Ministry of Defence plan and estimated annual allocations in coming years is likely to widen, the report shows (chart 4). 

The 15th FC has continued the legacy of previous Commissions to raise financial flows directly to local bodies, such as municipal corporations and district panchayats, from close to 1 per cent of the divisible pool of central taxes two decades ago to more than 4 per cent in the coming five years, shows chart 5. 

Finally, heeding to the new demands created by the pandemic, the report has recommended funds for health and wellness centres in rural areas, training of healthcare workers, and critical care (chart 6).

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines; Source: Report of the 15th Finance Commission, International Monetary Fund, Union Budget of India