Fifteenth Finance Commission in bind as Centre, states clamour for bigger revenue share

Singh told CNBCTV18 that the previous FC had sharply increased the share of states from 32 percent to 42 percent. Prior to that, FCs would increase the states' share only incrementally.

Given the fiscal pressure in the wake of the COVID pandemic, the Centre wants the states' share to be 'recalibrated,' Singh said. He also said that the Centre is bearing a huge part of the cost of Contribution To Schemes Sponsored For States (CSSS). He has therefore recommended rationalising Centrally Sponsored Schemes. Reading between lines, it appears the states will have to brace for a reduced kitty, setting the stage for another showdown with the Centre.

The Indian Constitution divides power between the Centre and state governments. But many of the high revenue yielding subjects, such as income tax and customs fall in the central list. Likewise, many of the high expenditure items such as education, health, and rural development fall in the states' list since these subjects are highly local in nature.

The Constitution, therefore, recognises these high revenue items as shared resources between the Centre and states and provides for a Finance Commission every five years to draw up the formula for sharing the revenue. It may be noted these revenues are not Central revenues; they are national revenues, in which states are given a rightful share. The sharing formula is thus the most important number watched by the Centre and states when the Commission presents its recommendations.

Chairman Singh also said the commission doesn’t have the luxury of assuming a stable GDP growth rate, given the damage to businesses and livelihoods from the pandemic. It has assumed nominal GDP growth of 9-10 percent as a pessimistic case, 10-11 percent as the base case, and 12 percent as the exuberant case, The Chairman also pointed out that there are varying guesstimates about the current year GDP.

Some members of the PMEAC expect a double-digit contraction while the Chief Economic Advisor expects the contraction to be milder. This divergence is seen in market circles too. For instance, economists at Deutsche Bank expect a positive growth in the last quarter of this fiscal, while their counterparts at Nomura expect the GDP to contract over 5 percent in the last quarter.

The greater the contraction this year, higher will be the rebound next year, Singh said.

He also conceded that the fiscal deficit and the government debt were way out of line with the Fiscal Responsibility and Budgetary Management targets because of the pandemic and had to be lowered.

He said the FRBM committee which he had headed,  recommended a debt to GDP of 60 percent(40 percent for the central Govt and 20 percent for states). However, given the rise in expenses and the fall in taxes this year, the debt to GDP will rise to around 85 percent this year.