ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Implications for the States

Fifteenth Finance Commission Award for 2020–21

The first report of the Fifteenth Finance Commission has allayed many fears that arose after the notification of the terms of reference of the commission. The main report for the period 2021–22 to 2025–26 will have to factor in the devastating impact of COVID-19 on the economy and provide adequate fiscal space to the states for socio-economic response and recovery.

The Fifteenth Finance Commission’s report was due on 31 Dece­mber 2019. Due to a variety of reasons, it was decided to extend the ­period of the commission and to have two separate reports; first for 2020–21 and then for the five-year period 2021–22 to 2025–26. Accordingly, the commission has submitted its recommendations for 2020–21 and is expected to submit another report recommending award for the period from 2021–22 to 2025–26 in early November 2020. The Fifteenth Finance Commi­ssion award thus will cover a six-year period instead of five years. The fiscal year 2020–21 award is not an interim award and gives a fair understanding of the thinking of the commission and its approach to the union–state fiscal ­relations.

The extension of the commission’s term by almost a year is a bit unusual. Probably, this had to be done due to various uncertainties which were beyond the control of the commission. The most critical one is the macroeconomic uncertainty characterised by a steady decline in investment and savings rates, increasing unemployment, stressed banking sector assets and declining revenue res­ources to finance development spending, especially in the social sector at both the ­union and the state level. Second, goods and services tax (GST) revenues have been subdued and the information technology infrastructure to enable its smooth transition has not yet stabilised leading to revenue uncertainties. With the GST being the main source of revenue collection of the states and the ­union, its realistic assessment is key to make realistic assessment of resources of both levels of government. Third, ­the bifurcation of Jammu and Kashmir (J&K) into two union territories on 5 August 2019 required the commission to treat this development in a way that required detailed review and extra time. Fourth, the commission was given an additional point in its terms of reference (ToR) to examine whether a separate non-lapsable fund can be created for defence and internal security. Finally, the election code of conduct due to the Lok Sabha election in May 2019 also affected the commission’s work. The report of the commission for 2020–21 is significant and is ­indicative of what may emerge when the main report is submitted in early Nove­mber 2020 covering the period 2021–22 to 2025–26.

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Updated On : 10th Nov, 2020

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