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

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Balancing Fiscal Need and Macroeconomic Stability

COVID-19 Context and the Fifteenth Finance Commission

The objective of this paper is to understand the core recommendations of the Fifteenth Finance Commission in the context of COVID-19 pandemic. Given the macroeconomic uncertainties and rising fiscal needs, the commission focused on fiscal stability, equity and enhancement of fiscal space through higher borrowing with a fiscal exit plan for both union and states.

 

Although constitutionally, the core mandate of any fin­ance commission is the division of resources bet­ween the union and states, while making recommendations, the commission needs to take into consideration the prevailing macroeconomic situation, fiscal trends, and expen­diture needs of all levels of governments. The COVID-19-­induced macroeconomic uncertainties made the assessment and quantification of fiscal needs a challenging task for the Fifteenth Finance Commission. The revenue uncertainty made assessment of resource envelope of the general government extremely difficult.1 The Fifteenth Finance Commission provided alternative fiscal and macroeconomic scenarios and adopted a specific path for the quantification of need and availability of resources, for the purpose of division of resources ­between the union and states. Apart from its core task of division of resources, the commission made important recom­mendations on fiscal management at all levels of government, inc­luding the framework of fiscal responsibility in the future.

Past finance commissions had introduced changes in both vertical and horizontal sharing of resources, and provided ­innovative recommendations, be it fiscal responsibility, local level fiscal decentralisation, or environment and climate change. What makes the Fifteenth Finance Commission award different from the awards of past finance commissions? What has the commission done differently to factor in the impact of COVID-19? What can be the implications of some of these recommendations on federal fiscal transfers? These are the issues that are discussed in this special issue. Apart from this paper, five other papers cover various aspects of the Fifteenth Finance Commission award. The major observations made in these papers provide important insights into the issues and approach of the Fifteenth Finance Commission (Ajay Narayan Jha, p 40), vertical and horizontal devolution (M Govinda Rao, p 56), fiscal responsibility and budget management (D K Srivastava, p 48), implications of transfers on climate change (Lekha Chakra­borty, p 62) and what the commission award means for north-eastern states (J Dennis Rajakumar, p 69). The observations made in these papers have been used to substantiate some of the arguments I wish to make, as the guest editor of this special issue. The idea of my paper is to give a perspective on what the Fifteenth Finance Commission did vis-à-vis the mandated task defined in the terms of reference (TOR), keeping in view the uncertainties posed by the COVID-19 pandemic. This paper focuses on the core recommendations of the Fifteenth Finance Commission related to vertical and horizontal imbalance, and the fiscal ­responsibility framework.

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Updated On : 17th Aug, 2021
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