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

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Fiscal Transfers in Pandemic Times

The Fifteenth Finance Commission has trodden carefully in dealing with the controversial terms of reference issued to it in the presidential order. The commission had the challenging task of dividing fiscal resources between the union and the states due to the serious uncertainty posed by the pandemic. In many ways, the recommendations of the commission marks continuity. Devolution of 41% in the divisible pool of taxes to the states, despite the nudging of the centre in the terms of reference to review it and the continuation of revenue deficit grants, are some examples. The phasing out of the revenue deficit grants to the states in the next five years is likely to pose challenges to the fiscally weak states. The conditionalities mandated for availing local body grants may deny the much-needed money for them as the states may not have the incentive to undertake the reforms unless the public pressure builds up. On the whole, the report of the commission is on expected lines; it does not disappoint but all the same, like the previous commissions, it is a work in progress.

 

Finance Commission in Covid Times” is the title of the Fifteenth Finance Commission’s (FFC) report. The report was written when the first wave of COVID-19 was getting under control and no one had predicted the dramatic devastation caused by the second wave. Even as the economy was on the recovery mode, the sudden spread of the virus in the second wave has cast severe uncertainties on the economic and fiscal landscape of the country. It is not clear how both the union and the state governments will cope with the challenges of saving lives and livelihoods with their eroded fiscal situation. Surely, there will be massive increases in both deficits and debt, and the fiscal consolidation plan will have to be reworked from the one that was recommended by the finance commission. The state governments will have to reprioritise their expenditure allocations towards creating better and more responsive health systems and correct the historical neglect of the sector, besides providing for accelerated vaccination. More importantly, the medium- and long-term economic and fiscal impact of the second wave of the pandemic and how it will impact states’ finances in the next five years remains uncertain.

It is not the fault of the commission that it did not foresee the catastrophic second wave which has exposed the poor governance capacity of the union and state governments in dealing with the pandemic even after learning lessons from the first wave. The finance commission’s report was placed in Parliament on 1 February 2021, along with the explanatory memorandum by the union government as required under Article 281 of the Constitution. The report covers the period from 2021–22 to 2025–26. It has four volumes with the detailed analysis of macroeconomic and federal fiscal issues and recommendations in volume 1 and the relevant annexures in volume 2. Volume 3 is devoted to analysing the key departments of the union government to identify their challenges and road map for meeting them, and volume 4 analyses the finances of each state and identifies the state-specific challenges. The report is rich in analysis and should be useful to students of fiscal federalism as well as policymakers.

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Updated On : 10th Sep, 2021
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