The 15th Finance Commission (15th FC) was a pivotal body in India’s economic landscape, responsible for recommending the distribution of tax revenues between the Centre and States for a specified period. Understanding its tenure, objectives, key recommendations, and implications is crucial for anyone interested in India’s fiscal policy.
Tenure of the 15th Finance Commission
The 15th Finance Commission was constituted on 27th November 2017 and chaired by N.K. Singh. Initially, it was tasked with making recommendations for the period 2020-2025, but due to the COVID-19 pandemic and changing economic conditions, its recommendations were split into two parts:
- Interim Report (2020-21): A one-year report due to economic uncertainty caused by the pandemic.
- Final Report (2021-2026): A comprehensive five-year report covering the broader fiscal roadmap.
Key Recommendations of the 15th Finance Commission
1. Vertical and Horizontal Devolution
- 41% share of the divisible tax pool to be allocated to states (earlier 42%, reduced due to the exclusion of Jammu & Kashmir and Ladakh).
- Horizontal devolution based on criteria like income distance, population, forest cover, and tax effort.
2. Revenue Deficit Grants
- Recommended Rs. 2.94 lakh crore in revenue deficit grants for states facing fiscal stress.
3. Local Body Grants
- Allocation of Rs. 4.36 lakh crore for rural and urban local bodies to improve governance and infrastructure.
4. Performance-Based Incentives
- Additional funds for states improving fiscal discipline, health outcomes, power sector performance, and agricultural reforms.
5. Defence and Internal Security Fund
- Recommended creating a non-lapsable Modernisation Fund for defence and internal security with an allocation of Rs. 2.38 lakh crore over five years.
6. Fiscal Consolidation and Debt Management
- Recommended reducing the fiscal deficit to 4% of GDP by 2025-26.
- Encouraged states to improve debt sustainability by setting clear borrowing limits.
Impact of the 15th Finance Commission
1. Greater Fiscal Responsibility
- By setting clear fiscal deficit targets, the commission aimed at ensuring economic stability and sustainable growth.
2. Balanced Resource Distribution
- Equitable allocation to states based on development indicators helped reduce regional disparities.
3. Strengthened Local Governance
- Increased funds for local bodies enabled better infrastructure and public services at the grassroots level.
4. Defence Modernization
- The recommendation for a dedicated defence fund ensured sustained investment in national security.
Conclusion
The 15th Finance Commission (2020-2026) played a crucial role in shaping India’s fiscal policy by balancing economic growth, equity, and fiscal prudence. Its recommendations helped states navigate economic challenges while ensuring financial discipline at both central and state levels. As India moves towards its next finance commission, lessons from the 15th FC will serve as a foundation for future fiscal planning.
