News Update

Treat Finance Commission Report as Deck for Robust Vikas

NOVEMBER 10, 2020

By TIOL Edit Team

INDIA would soon get comprehensive opportunity to launch its growth satellite from a re-engineered financial-cum-fiscal deck. The deck would come in the form of 15th Finance Commission's (15th FC) final report. 15thFC led by its Chairman N.K. Singh presented the Report to President of India on 9th November.

The Report has acquired special importance for certain reasons. First, it would contain the first credible, official picture of slowdown that started with demonetisation in 2016-17 and accelerated by covid-19 pandemic and lockdowns in 2020-21.

No wonder the report is aptly titled 'Finance Commission in Covid Times'. According to an official release, the Report has been organised in four volumes. Volume I and II, as in the past, contain the main report and the accompanying annexes. Volume III is devoted to the Union Government and examines key departments in greater depth, with the medium-term challenges and the roadmap ahead. Volume IV is entirely devoted to the States.

The Commission has analysed the finances of each State in great depth and has come up with State-specific considerations to address the key challenges that individual States face.

In its interim/1st report submitted in November 2019, 15th FC observed: "Given the uncertainties of some key macro areas, our recommendations in the final report would undergo changes and adjustments as appropriate, in the light of subsequent data and analysis".

At that time, the Covid-19 had not emerged. Since March 2020, the pandemic and the resulting lockdowns altered all the fundamentals. The Governments' subsequent projection of fundamentals would be disclosed in detail in the Report.

We can safely assume that the 15th FC has drawn a comprehensive picture of unfolding crisis and its lingering impact on GDP, poverty and unemployment.

It would have, accordingly, mooted the roadmap for rebooting growth after getting exhaustive inputs from the Centre, States and other stakeholders of the economy. This is evident from detailed questionnaire it sent to the Centre, States and local governance bodies. The report would obviously factor in analysis and findings of over sixty studies it commissioned.

The Report would be packed with tax and non-tax revenue forecasts for next five years. It would have plenty of data on expenditure trends and forecasts for three tiers of governance. All such data is essential for businesses to take appropriate investment and operational decisions.

Second, the report is expected to suggest how to re-engineer Goods and Services tax (GST) to make it stable and simple tax to implement. Third, it would have recommendations pertaining to national security, which might alter the Government expenditure. It might offer enhanced business opportunities in the defence sector.

The report would be a mix of both binding and non-binding recommendations. The binding one relating to devolution of sharable central taxes between the Centre and the States would be applicable for next five financial years beginning 2021-22. Some of the binding recommendations might not be liked by the Centre and/or States.

Such concern should be eclipsed by acknowledging the report as package of reforms and initiatives that revive and sustain robust, inclusive growth. The Report would help remove uncertainty about existing Central and centrally sponsored schemes whose tenure ends on 31st March 2021.

The Report would also help open new stream of expenditure in form of revival of suspended new, proposed schemes and sub-schemes. In June 2020, the Finance Ministry had suspended implementation of the proposed schemes. It also asked all ministries to stop submitting new scheme proposals for in-principle approval.

The Report should thus be viewed as harbinger of new cycle of Government expenditure, which is crucial for revival of demand in different sectors.

We would thus urge all stakeholders to accept 15th FC's report in toto. It should be taken as the light at the end of uncertainty tunnel created by complex interplay of regional, national, global and pandemic factors.

We would urge the Centre to take a lead in this direction. All previous regimes successfully derailed non-binding recommendations of successive FCs by stating that it would take decisions on them in due course. The 'due course' hardly ever yielded any decision on non-binding recommendations.

We hope 15th FC would comment on such indifference towards non-binding recommendations. Some of these would have been path-breaking, had they been acted upon.

In normal course, the Government would have released the report along with its decisions on binding recommendations in the Budget session during January-end 2021.

It would be great if the Government could fast-track its decision on the Report. The sooner it makes the report and the accompanying explanatory memorandum public, the better it would be for the economy. After all, the Report is key to removing uncertainty and contributing to slowdown in capital investments.

The Government has been extremely stingy in releasing data on impact of downturn on poverty, job losses, etc. Certain written questions on such issues drew blank in last session of Parliament. The Government has so far shied away from projecting decline in gross domestic product (GDP), rise in unemployment and poverty.

The public has so far been forced to rely on startling data released by reputed rating, consultancy and lending entities including the World Bank and International Monetary Fund (IMF).

The Government should now end this data deficit by setting aside the convention of keeping FC's report secret till it is presented to Parliament. The 15th FC's report, along with the Government's action taken report, should be released in November. Its availability in public domain would go a long way in minimizing economic uncertainty. Let 15th FC's recipe serve as the real fiscal stimulus.