Cabinet note soon on next Finance Commission

The finance ministry will seek cabinet approval within the next two weeks to set up the 14th Finance Commission, to advise on the financial relations between Centre and states for the 2015-20 period.

Former Reserve Bank governor Y V Reddy is considered likely to be its chairman. And, among those likely to be appointed members are the finance minister’s former advisor, Parthasarthi Shome, and former finance secretary Sushma Nath.

“The terms of reference will be sent to the cabinet in a fortnight. It may be asked to suggest the fiscal consolidation road map, sustainability of states' debt and devolution of revenues to states,” a ministry official told Business Standard.

 

The Finance Commission might also look at the issue of giving a moratorium to debt-ridden states. West Bengal has been asking for a moratorium on its interest and repayments of about Rs 22,000 crore for the next three years. The Centre’s dilemma is that the 13th Finance Commission had identified West Bengal, Kerala and Punjab as revenue-deficit states in 2007 and a moratorium to one state would mean extending the same benefit to the others, too.

The Commission might also look at the impact of the proposed Goods & Services Tax (GST). Though the 13th Finance Commission had also looked at the issue, the delay in the new indirect tax regime might call for a fresh look, especially in the light of issues raised by the states with regard to Central Sales Tax compensation and loss of flexibility in a GST.

An Officer on Special Duty has been appointed to help finalise the terms of reference and decide on a place for the Commission’s secretariat, along with other administrative issues. Once the cabinet nod is received on the terms of reference, the Prime Minister’s Office would approve the names of people who would form part of the Commission, said the official. The Commission will have about two years to give its report, valid for the period 2015-2020. The recommendations, to be given around October 2014, would form part of Budget 2015-16.

Over the years there has been considerable expansion in the role of the Commissions, from mainly being an arbitrator between the Centre and the states to being an architect of fiscal restructuring. The 13th Finance commission, headed by Vijay Kelkar, had suggested steps to deal with growing off-budget expenditure, especially oil bonds, implications of environment and climate change, and ways to improve outcomes and outputs of public expenditure. It covered the period between 2010 and 2015.

Its terms of reference had included the measures needed to augment the consolidated fund of a state to supplement the resources of panchayats and municipalities, on the basis of recommendations made by the Finance Commission of each state.