The Fifteenth Finance Commission (FC) took the Centre and states to task on a number of issues, as the deepest economic slowdown in 26 quarters and delay in stabilising key reforms led to uncertainties on revenue, growth and fiscal projections.
Because of such uncertainties as well as changes such as the division of the erstwhile state of Jammu and Kashmir, the 15th FC will now use the coming months to address a number of issues for its second report due in October.
These are issues that it did not tackle in the first report, including more parameters for performance-based incentives for state, a separate non-lapsable fund for defence and national security, a closer examination of two new Union Territories, and a fresh economic assessment for the coming years.
“The short-term transitional difficulties in implementing structural reforms can create a pessimistic view on the medium-term prospects of economic growth and revenue collections,” the report stated.
The report said that making assessments for the coming five years is a difficult exercise in light of the slowdown and structural changes in the economy, as any assessments now would either be too hopeful or too pessimistic. It said that the 15th FC would study data over the coming few quarters to firm up its assessment and forecast for 2021-22 and 2025-26 for its next report.
In its report, the 15th FC said that while the Centre and the Reserve Bank of India had taken steps to address the slowdown, “weak revenue collections, driven by slowing activity as well as teething problems in implementing some of the newly introduced structural reforms, have elevated fiscal risks.”
The "teething problems" to which the Commission referred was the Goods and Service Tax (GST), especially in the backdrop of a number of states complaining that the centre hadn’t paid their full compensation dues to make up for GST shortfall.
“The implementation of GST continues to be work in progress, and it still needs many systemic and structural improvements to expand its scope, stabilise its operations and finally deliver its stated objectives,” the report said adding that there is also need to move towards the implementation of the Direct Tax Code.
The 15th FC forecast nominal gross domestic product (GDP) growth for 2020-21 at 11 per cent, but said the projection came with a "downward bias". In fact, this assessment was more optimistic than that of the finance ministry, which projected a nominal GDP growth of 10 per cent for next year. This meant that the report forecast a gross revenue growth of 12.5 per cent for the coming year, compared to 12 per cent forecast by the Union Budget.
On the expenditure front, the 15th FC report made it clear that based on the assessment of the Comptroller and Auditor General of India, the full impact of subsidies was not absorbed in subsequent budgets. “Our view is that accumulated off-budget liabilities relating to insufficient provision for subsidies should be clearly identified and not increase further, and that the outstanding balance should be eliminated in a time-bound manner.
A similar suggestion was made on off-budget financing, most of which is used to pay-off items like pending subsidy payments and other administrative spending. “The Commission has noted the tendency of the union and state governments to borrow outside the Consolidated fund, leading to accumulation of extra-budgetary liabilities. We recommend that in the interest of transparency, both the centre and states need to make full disclosure of extra-budgetary borrowings and take steps to eliminate them in a time-bound manner,” it said. The report also noted that in spite of past Finance Commissions recommending a rationalisation of various central schemes, the centre had not taken concrete steps. While there are 30 centrally sponsored schemes, they are all actually umbrella schemes under which exist 100s of sub-schemes.
“We have noted the proliferation of centrally sponsored schemes and central sector schemes and the tendency to continue with them without the evaluation of their outcomes. It is or expectation that the union government will utilise 2020-21 to complete the review of such schemes and thereafter prune and rationalise the list to focus on certain key sectors and interventions with nation-wide externalities,” the report said.