15th Finance Commission Recommendations (2021-26)

Introduction

The Government of India, with the approval of the President of India, has constituted the Fifteenth Finance Commission in pursuance of Article 280 of the Constitution, The Commission has made recommendations for the five years commencing on April 1, 2020. This Commission was headed by Shri. N.K.Singh.

15th Finance Commission Recommendations (2021-26):

• Vertical Devolution:

• • Share of Central Taxes for States: States are recommended to receive 41% of the divisible pool of Central taxes.
    • Less than the 42% share recommended by the 14th FC.
    • Adjustment of 1%: It is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh. 
  • Exclusions from Divisible Pool: The pool excludes costs such as tax collection expenses, cess and surcharge, revenue from Union Territories, and National Calamity Contingent Duty.

• Horizontal Distribution Parameters:

Grants-in-Aid (Article 275): Charged on Consolidated Fund of India and tied grants.

• Revenue Deficit Grants

• • After allocating 41% of funds, certain states face revenue deficits.
  • The Finance Commission suggests grants to offset these post-devolution revenue gaps.
  • The recommendations are designed to correct fiscal capacity issues, avoiding incentives for insufficient revenue collection or overspending.
  • For 2021-22, the 15th FC recommended such grants for 17 states.
  • By 2025-26, the number of states eligible for these grants is projected to reduce to six.

• Local Body Grants

• • Total Allocation: An aggregate of Rs. 4,36,361 crores has been recommended for local governments over a five-year period.
  • Utilization: 60% of these funds are earmarked for priorities like drinking water and sanitation, while 40% is untied for use at the discretion of local bodies.
  • Shift in Urban-Rural Distribution: The distribution ratio between urban and rural bodies is set to change from 67.5 : 32.5 to 65 : 35 over the period.
  • State-Level Distribution Criteria: The funds are allocated based on 90% population and 10% area of the states.

• Disaster Management Grants

• • Centre-State Contribution Ratio: The recommended contribution ratio is 75% by the Centre and 25% by the States. For Northeastern states, this ratio is 90:10.
  • Fund Allocation: The total allocation to states is divided into the State Disaster Response Fund (SDRF) with 80% and the State Disaster Mitigation Fund (SDMF) receiving 20%.

• Sector-Specific Grants

• • These grants are primarily performance-based incentives linked to specific benchmarks. 
    • Health Sector Grants: Allocated for improvements in the health sector.
    • School Education Grants: Focused on enhancing school education systems.
    • Higher Education Grants: Aimed at advancing the quality and infrastructure
    • Agricultural Reforms Implementation: These incentives cover four key areas: Land lease reforms, Sustainable and efficient water use in agriculture, Export promotion, Contributions to the Atma Nirbhar Bharat initiative, specifically in oilseeds, pulses, and wood-based products.

• PMGSY Road Maintenance

• • • Judiciary Grants: 
    • Statistics Improvement Grants: 
    • Aspirational Districts and Blocks: 
    • Power Sector: 

• State-Specific Grants

• • Designed to meet specific needs and financial shortcomings of states, beyond what is covered by the formula-based 41% allocation and other sector-specific grants.
  • Intended for all 28 states.
  • Focus areas include:
    • Addressing various social welfare needs.
    • Improving administrative governance and related infrastructure.
    • Promoting conservation and sustainable use of water resources
    • Protecting and preserving cultural heritage and historical monuments.
    • Developing and maintaining high-cost physical infrastructure projects.
    • Enhancing the tourism industry within the states.

Different Ways of Fund transfer from Union to State government in India

Additional Transfers from Central to State Governments:

• Beyond the regular transfers, states receive various other forms of financial support from the Central Government. 
• This includes Special Assistance Grants, Additional Central Assistance in both grants and loans, and financial aid from the National Disaster Response Fund (NDRF).

Other recommendations

• Health: States should increase spending on health to more than 8% of their budget by 2022
  • primary healthcare expenditure should be two-thirds of the total health expenditure by 2022. 
• All India Medical and Health Service should be established.
• Funding of Defence and Internal Security: Modernisation Fund for Defence and Internal Security (MFDIS) will be constituted to primarily bridge the gap between budgetary requirements and allocation for capital outlay in defence and internal security.
• Centrally-sponsored Schemes (CSS): A threshold should be fixed for annual allocation to CSS below which the funding for a CSS should be stopped.

Conclusion

• The 15th Finance Commission serves as a cornerstone in fostering cooperative federalism and advancing inclusive growth, thereby contributing significantly to India’s socio-economic development. 
• Its recommendations impact fiscal policies as well as influence the overall trajectory of the nation’s progress, reflecting a commitment to balanced and sustainable development for all states and Union Territories.