Need to set up State Finance Commission

• 09 May 2019

The 15^th Finance Commission (headed by N K Singh) recently held a detailed meeting with RBI.

Key issues that were discussed

• Continuity of the Finance Commission: A permanent status to Finance Commission and a robust expenditure planning is the need of the hour. This is required, in view of the fiscal management requirements of the States, especially given the absence of mid-term reviews of awards granted by the Finance Commission.
• State Finance Commissions (SFCs): States have not been setting up their State Finance Commissions every five years as mandated by 73^rd Constitutional Amendment Act. Therefore, they discussed the necessity of SFCs to rationalize and systematize State/sub-state fiscal relations in India.
• Expenditure codes: Expenditure norms vary from state to state; therefore there is a need of uniform standard expenditure codes across the country.
• Public Sector Borrowing Requirement (PSBR): It is defined as borrowing by not just Central and State governments but also by all public sector corporations and agencies. This consolidated figure will more or less put an end to the manipulation the fiscal deficit by the government. The main issues discussed are the increasing orientation of State governments’ borrowing from markets, improving secondary market liquidity and cash management.
• Importance of States in the economy: The role of states in the growth of Indian economy has increased given the ‘shift in composition of government finances’. States are now getting much higher share of transfer (devolution of 42%) from Centre, on the recommendation of 15^th FC.
• Factors driving fiscal slippage: These factors include UDA, farm loan waivers and income support schemes; rising outstanding debt as a percentage of GDP despite moderation in interest payments as a percentage of revenue receipts.

15^th Finance Commission (FC)

• Finance Commission is a constitutional body under Article 280 created every five years to recommend the transfer of financial resources from the Centre to the States.
• The Commission also decides the principles on which grants-in-aid will be given to the States.
• The 15th FC was constituted on November 27, 2017 and is headed by Mr. N.K. Singh.
• The recommendations, to be observed for a period of five years, will kick in from April 1, 2020.

State Finance Commissions (SFCs)

The State Finance Commission (SFC) is an institution created by the 73rd and 74th Constitutional Amendments (CAs) to rationalize and systematize State/sub-State-level fiscal relations in India.

• Article 243I of the Constitution mandated the State Governor to constitute a Finance Commission every five years.
• Article 243Y of the Constitution states that the Finance Commission constituted under article 243 I shall also review the financial position of the Municipalities and make recommendations to the Governor.
• Concerns:
  
  • States have not been setting up their SFCs regularly as mandated.
  • They are not submitting the reports in time, lacking the proficiency.
  • They have huge task of considering large number of local governments.
  • They face a crucial problem of reliable data.
  • SFCs and local governments are seen to be of inferior constitutional status than the Union FC.