15th FC's Awards and Assam

Udayan Hazarika

(The writer can be reached at udayanhazarika@hotmail.com)

The Government of India has recently (1st February 2021) issued Exploratory Memorandum on the recommendations submitted by the 15th Finance Commission in the form of its report to the President in November 2020. The report contains inter alia the recommendations of the Commission in respect of devolution fund to the States from the divisible pool of resources and various other grants for the period from 2020-21 to 2025-26. It may be recalled that the Commission had earlier submitted its interim report for the period 2020-21 only. In its interim report the Commission did not pay much attention to the behaviour of economic variables and the economic forecasts by various agencies including IMF. The economy was not in a good shape right from the beginning of the first quarter of the last fiscal and at the time of preparation of their interim report, the available trends adequately showed the downturn of the economy almost in every sphere e.g. inflation was up, tax collection was low, production in manufacturing sector was falling like anything while employment was also shrinking. Despite these, the Commission preferred to assume the GDP growth rate at 10 per cent as against the budgetary assessment of 11 per cent, volume of tax collection for the year 2019-20 was also assumed at the level of 2018 and gross revenue expenditure required for 2020-21 was estimated by the Commission at an average of 9.5% higher than that of the 2017-18 on yearly basis. After almost ten months (February- November/20) when the Commission finally prepared the final report we have before us the assessment that the economy will contract by about 7.7 per cent.

The Commission has recommended various transfers and grants to the States in their report. These are namely i) sharing of net proceeds of Union taxes, ii) Grants-in-aid of Revenues of States under Article 275 of the Constitution, iii) Revenue Deficit Grants, iv) Local Bodies Grants , v) Disaster-related Grants vi) Grants to States for Specific Sectors, vii) State Specific Grants viii) Modernization Fund for Defence and Internal Security ix) Fiscal Roadmap, x) other recommendations. But all these recommendations have not been accepted by the Government in toto. Government have kept a few of the recommendations for further examination and a few are accepted only in principle.

The Commission has taken the six criteria framework to work out States' appropriate share in the divisible pool of resources. The criteria are Population (15.0), Area of the State (15.0), Forest and ecology (10.0) Income distance (45.0) Tax and fiscal efforts (2.5) Demographic performance (12.5). On the basis of the score in the above criteria, the Commission decided the States' share of divisible pool at 42 per cent which also includes one percentage point earmarked for newly created UTs of Jammu and Kashmir (0.5 per cent each). This size is equivalent to the size maintained by the 14th Finance Commission. The Commission has earmarked an amount of Rs 855176 lakh crore for the States as share of central taxes and duties. Based on the findings, in respect of each State as per the worked-out percentage, depending on the six criteria principle, the highest share goes to Uttar Pradesh with 17.931 per cent followed by Bihar (10.61%), Madhya Pradesh (07.886%) and West Bengal with 07.519%. The share of Assam is fixed at 03.131 per cent which will yield the State an amount of Rs 1.35 lakh crore in five years from 2021 to 2026. The Commission has recommended transfer of an amount of Rs 42.24 lakh crore to the States in five years. For 2020-21 the Commission recommended devolution of Rs 8.55 lakh crore to the States out of which government have so far transferred only Rs 5.49 lakh crore. Similarly, the budget 2021-22 has incorporated an amount of Rs 6.66 lakh crore only as share of States in central taxes and duties while budgetary estimates for gross tax revenue is assessed at Rs 22.17 lakh crore. Usually, more of 65 per cent of the gross tax revenue is assessed for transfer which comes to around Rs 14.41 lakh crore. Thus, there will be a shortfall in the budgetary allocation if not made additional provision by way of Supplementary demand at a later stage.

The Commission has also recommended revenue deficit grants to those States which could not neutralize their revenue deficit with the amount recommended as share of Central taxes and duties. There are 14 such States including Assam against which the Commission has recommended post-devolution revenue deficit grants which is Rs 74,341 crore in the financial year 2020-21. Out of this, an amount of Rs. 68,145.91 crore (91.66%) has been released so far. The share of Assam is recommended as Rs 7579 crore for 2021-22, of which that State has so far received a total of Rs 6947.41 crore till February 2021.

As per terms of reference, the Commission was supposed to indicate the size of the grants to be transferred to the rural and urban local bodies. The Commission has recommended Rs 4,36,361 crore as grants to the duly constituted local governments for the period 2021-26. Out of this, Rs 8,000 crore is allocated as performance based grants for incubation of new cities and Rs 450 crore is for shared municipal services. Moreover, an amount of Rs 79,051 crore has been allocated to plug the critical gaps in the health care system at primary health care level. The remaining Rs 3,57,860 crore is recommended for rural and urban local bodies at the ratio that varies between 67:33 and 65: 35 in five years. Assam has been allocated an amount of Rs 10934 crore for the purpose.

In respect of the disaster management, the Commission after detailed study has recommended for creation of two new funds namely National Disaster Mitigation Funds and the State Disaster Mitigation Funds in tune with the direction of the Apex Court. These two funds together with the existing NDRF and SDRF will henceforth be known as National Disaster Risk Management Fund (NDRMF) and State Disaster Risk Management Fund (SDRMF). 20 per cent of both the corpuses shall be utilised for mitigation of disaster while 80 per cent shall be utilised for disaster response. The Commission also fixed the ratio at which the response fund shall be utilised. Of the total 80 per cent, 40 per cent is earmarked for response and relief, 30 per cent for recovery and reconstruction and 10 per cent for capacity building. Total Central fund earmarked for SDRMF is Rs 122601 crore for the year 2021-26 of which Maharashtra has been allocated the highest amount (Rs 17803 as central share) followed by Uttar Pradesh (Rs 10685 crore). The central share for Assam is fixed at Rs 4268 crore for the whole award period. The allocation has been fixed as per the factor arrived at after combining the capacity of utilisation, risk exposure and disaster risk index.

The commission on demand from various States and Central Government also examined certain specific areas where it felt that additional intervention is necessary in addition to ongoing incentives. Accordingly the Commission has recommended specific sectors grants to eight different sectors, namely health, school education, higher education, agriculture, maintenance of PMGSY roads, aspirational districts and blocks, judiciary, statistics amounting to Rs 130 crore during the five year period. Similarly, the Commission also recommended State Specific Grants amounting to Rs'49,599 crore over the award period of the Commission. However, Government of India is yet to accept both these recommendations.

Since the first year of the award of the Commission is coming to an end, it is time that we make careful handling of the 15th Finance Commission funds received so far. Available statistics show that gross tax collection position is not encouraging. The economic uncertainty generated by the Covid-19 has marred the development scenario totally and the damage caused would take longer time to repair and reach the pre-Covid position. It is necessary that we keep in mind a situation where further fund in the same magnitude may not be available.