Ahead of the Fifteenth Finance Commission’s (FFC) report containing recommendations on the sharing of tax revenues between the Centre and states to President Ramnath Kovind, Chairman NK Singh said the coronavirus pandemic has necessitated reconsideration of the 42% devolution assigned in the 2020-21 report.
According to a report in The Hindu, Singh said 2020-21 is undoubtedly an unusual year with attended uncertainties and unpredictabilities. “In the Economic Advisory Council (EAC) of the FFC, there are differences of opinion among domain experts on the decline in both the nominal and the real GDP growth. The pandemic will have lasting impact on deficits, consolidation plans and fiscal balance of the Centre and the States,” he said.
Singh said, “Unlike in the past, we may not have the luxury of assuming constant rates of growth throughout the period — both in nominal and real GDP numbers. A judgement call will be necessary.”
On whether there is an option of increasing states’ share in the divisible tax pool beyond 42%, he said, “You will have to wait till you see the report. What all FCs have to do is to recalibrate. Recalibration can be both upwards and downwards. Our report for the first year [2020-21] of the six-year award period had stayed the course with 42%. Taking off Jammu and Kashmir, [it] came to 41%. The caveat in that report is that for all the numbers, the FFC reserves the right to reconsider, re-adapt, modify them in a manner considered appropriate based on the ensuing situation.”
“When we were submitting this report around this time October last year, there was no sign of the pandemic whatsoever. It appeared as a completely exogenous variable from nowhere in February. Therefore, it has necessitated us to go back to the drawing board to reconsider whatever we had assigned in the 2020-21 report,” he added.
Singh said almost all the states have emphasised that 41% or 42% was too low. “The sharing should be on the basis of fifty-fifty. The central government has not told me what number they would be comfortable with on the vertical [devolution] but have emphasised what pressures are going to be on their own finances. It is for the FFC to make up its mind on the demands of the States. Not only on account of the States’ own normal committed liabilities and committed revenue expenditure but more so on account of the shortfall of revenues triggered both by the decline in the State GST and by the fact that other sources of State revenues are proving to be somewhat inelastic. Their revenue numbers have fallen. The central government’s own revenue projections are below expectations in the BE [Budget Estimates] and the medium-term policy framework document which accompanies every Budget,” he added.
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