- The meeting, chaired by Shri N. K. Singh, Chairman XVFC was attended by all members of the Finance Commission and senior officials of the Commission.
- The meeting discussed a wide gamut of issues around GDP growth, tax buoyancy of the Centre and the States, GST compensation and fiscal consolidation.
- Specific issues relating to public expenditure on health, investment revival, recapitalization of the financial system and its impact on public finances, focus on strengthening of defence capabilities, emerging trends in GST collections and its connection with improvements in its technology platform were also discussed.
- The Advisory Council felt that Finance Commission is faced with an unprecedented situation of uncertainties and will have to take a nuanced approach towards tax devolution to the States, other transfers, financing of expenditures in the midst of revenue strains including through borrowings and the path of fiscal consolidation.
- The Members of the Council also felt that the Commission will have to think unconventionally, especially in treating the 5 years at hand from 2021-22 to 2025-26.
- They advised that the base year 2020-21 and the first year of 2021-22 may need to be viewed differently from the remaining four years when the revenue situation is likely to improve gradually.
- Different views were expressed on the GDP growth in the current year in terms of the quarterly built-up, and the growth revival that is likely in the subsequent years.
- The Advisory Council felt that the General government debt relative to GDP is likely to increase steeply in the initial years, however, the purpose should be to endeavour to bring it down in the subsequent years.
- In the initial years, this ratio will be affected by the increased revenue-expenditure imbalance on the numerator and the downward pressure on GDP on the numerator.
- The meeting comes in the backdrop of India’s GDP growth contacting 23.9% in April-June quarter.
- In the corresponding quarter of last financial year, the Indian economy had grown at a rate of 5%.
- Besides, fiscal deficit has already crossed budget estimates at the end of July.
- The Centre’s fiscal deficit during April-July stood at ₹8.21 lakh crore or 103% of 2020-21 budget estimates of ₹7.96 lakh crore.
- The Centre has given two options to the states — to borrow either from a special window facilitated by the RBI or from market — to meet the ₹2.35 lakh crore GST shortfall, and has also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022.
- The compensation due to the states in April-July period stood at ₹1.50 lakh crore.
What is a Finance Commission?
- It is a body set up under Article 280 of the Constitution.
- Its primary job is to recommend measures and methods on how revenues need to be distributed between the Centre and states.
- Besides suggesting the mechanism to share tax revenues, the Commission also lays down the principles for giving out grant-in-aid to states and other local bodies.
- The Finance Commission has a chairman and four members appointed by the President.
- The government of India provides necessary support and manpower including a secretary to the commission to facilitate its work.
- In November 2017, President of India constituted the 15th Finance Commission and appointed former Planning Commission member NK Singh as its chairman.
- While constituting the commission, the central government decides the terms of reference. This includes the reference points to be used for formulating recommendations such as which census will be used as a reference point for factoring in the population of states.
- After holding consultations with all the stakeholders that include the ministries and departments of the Union government, state governments, trade bodies, banks and industry, the Commission finalizes the formula for dividing the tax pie for a period of five years.
- The Finance Commission also decides the share of taxes and grants to be given to the local bodies in states.
- This part of tax proceeds is called Finance Commission Grants, which is a part of the Union budget.