In November 2017, the 15th Finance Commission (Chair: Mr N. K. Singh) was constituted to give recommendations on the transfer of resources from the centre to states for the five year period between 2020-25. In recent times, there has been some discussion around the role and mandate of the Commission. In this context, we explain the role of the Finance Commission.
What is the Finance Commission?
The Finance Commission is a constitutional body formed every five years to give suggestions on centre-state financial relations. Each Finance Commission is required to make recommendations on: (i) sharing of central taxes with states, (ii) distribution of central grants to states, (iii) measures to improve the finances of states to supplement the resources of panchayats and municipalities, and (iv) any other matter referred to it.
Composition of transfers: The central taxes devolved to states are untied funds, and states can spend them according to their discretion. Over the years, tax devolved to states has constituted over 80% of the total central transfers to states (Figure 1). The centre also provides grants to states and local bodies which must be used for specified purposes. These grants have ranged between 12% to 19% of the total transfers.
Over the years the core mandate of the Commission has remained unchanged, though it has been given the additional responsibility of examining various issues. For instance, the 12th Finance Commission evaluated the fiscal position of states and offered relief to those that enacted their Fiscal Responsibility and Budget Management laws. The 13th and the 14th Finance Commissionassessed the impact of GST on the economy. The 13th Finance Commission also incentivised states to increase forest cover by providing additional grants.
15th Finance Commission: The 15th Finance Commission constituted in November 2017 will recommend central transfers to states. It has also been mandated to: (i) review the impact of the 14th Finance Commission recommendations on the fiscal position of the centre; (ii) review the debt level of the centre and states, and recommend a roadmap; (iii) study the impact of GST on the economy; and (iv) recommend performance-based incentives for states based on their efforts to control population, promote ease of doing business, and control expenditure on populist measures, among others.
Why is there a need for a Finance Commission?
The Indian federal system allows for the division of power and responsibilities between the centre and states. Correspondingly, the taxation powers are also broadly divided between the centre and states (Table 1). State legislatures may devolve some of their taxation powers to local bodies.
The centre collects majority of the tax revenue as it enjoys scale economies in the collection of certain taxes. States have the responsibility of delivering public goods in their areas due to their proximity to local issues and needs.
Sometimes, this leads to states incurring expenditures higher than the revenue generated by them. Further, due to vast regional disparities some states are unable to raise adequate resources as compared to others. To address these imbalances, the Finance Commission recommends the extent of central funds to be shared with states. Prior to 2000, only revenue income tax and union excise duty on certain goods was shared by the centre with states. A Constitution amendment in 2000 allowed for all central taxes to be shared with states.
Several other federal countries, such as Pakistan, Malaysia, and Australia have similar bodies which recommend the manner in which central funds will be shared with states.
Tax devolution to states
The 14th Finance Commission considerably increased the devolution of taxes from the centre to states from 32% to 42%. The Commission had recommended that tax devolution should be the primary source of transfer of funds to states. This would increase the flow of unconditional transfers and give states more flexibility in their spending.
The share in central taxes is distributed among states based on a formula. Previous Finance Commissions have considered various factors to determine the criteria such as the population and income needs of states, their area and infrastructure, etc. Further, the weightage assigned to each criterion has varied with each Finance Commission.
The criteria used by the 11th to 14thFinance Commissions are given in Table 2, along with the weight assigned to them. State level details of the criteria used by the 14th Finance Commission are given in Table 3.
Grants-in-Aid
Besides the taxes devolved to states, another source of transfers from the centre to states is grants-in-aid. As per the recommendations of the 14th Finance Commission, grants-in-aid constitute 12% of the central transfers to states. The 14th Finance Commission had recommended grants to states for three purposes: (i) disaster relief, (ii) local bodies, and (iii) revenue deficit.
On January 17, 2020, the Ministry of Health and Family Welfare acknowledged the emergence of a new coronavirus (COVID-19) that was spreading across China.[1] On March 11, 2020, the World Health Organisation declared the COVID-19 disease to be a global pandemic. As of April 7, 2020, there are 4,421 confirmed cases of COVID-19 in India.[2] Of these, 326 patients have been cured/discharged and 114 have died.1
As the spread increased and more information about the virus was uncovered, the central government announced several policy decisions to contain it. Further, measures were also announced to support citizens and businesses who were affected by such containment measures. In this blog post, we summarise some of the key measures taken by the central government in this regard as of April 7.
Source: Ministry of Health and Family Welfare, PRS.
Movement restrictions
21-day lockdown in the country
The Ministry of Home Affairs announced a 21-day lockdown to contain the spread of COVID-19 from March 25, 2020 to April 14, 2020.[3] During the lockdown, all establishments, other than those providing essential goods and services, and those involved in agricultural operations, have been closed. Essential goods include items such as food, medicine, and electricity. Essential services include banking services, telecommunications, and pharmaceuticals. Transportation of all goods (essential or non-essential) will remain functional. [4],[5],[6],[7],[8]
All state/UT governments have been directed to: (i) arrange for shelter and food for the needy, including migrant workers, (ii) quarantine migrant workers for at least 14 days, (iii) direct employers to pay wages during the lockdown, and (iv) ensure landlords do not demand rent from workers and students for one month.[9]
Financial aid
Pradhan Mantri Garib Kalyan Yojana to provide relief against COVID-19
On March 26, the Finance Minister announced a relief package of 1.7 lakh crore rupees under the Pradhan Mantri Garib Kalyan Yojana for the poor.[10] Key features of the package are:10,[11]
Insurance cover of Rs 50 lakh will be provided to health workers (such as doctors, nurses, paramedics and ASHA workers) who are treating patients of COVID-19.[12]
Five kilograms of wheat or rice and one kilogram of preferred pulses will be provided for free every month to poor families for the next three months.
Women account holders under the Pradhan Mantri Jan Dhan Yojana will get Rs 500 per month between April and June, and poor families will be given three free gas cylinders over the next three months.
Extension and relaxation in payment of taxes
The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 was promulgated on March 31, 2020.10 The Ordinance provides certain relaxations, such as extension of time limits and waivers of penalties, in relation to specified laws. These include the Income Tax Act, 1961 (IT Act), some Finance Acts, and the Prohibition of Benami Property Transactions Act, 1988. Key provisions under the Ordinance include:
Extension of time limits: The Ordinance extends the time limits (for the period between March 20, 2020 to June 29, 2020) for compliance of certain actions such as: (i) issuing notifications, completing proceedings, and passing orders by authorities and tribunals, (ii) filing of appeals, replies, and applications, and furnishing documents, and (iii) making any investment or payment for claiming deductions or allowances under the IT Act.
Interest and penalty: Payment of any tax, made before June 30, 2020 (or any further date specified by the government), will not be liable for prosecution or penalty. Also, the rate of interest payable for the delay in payment will not exceed 0.75% per month.
Donations to PM CARES Fund: Donations made by a person to the PM CARES Fund will be eligible for 100% tax deduction.
GST compliances: The central government may notify extension to time limits for various compliances under the Central Goods and Services Tax Act, 2017.
Measures by RBI to address the financial stress caused by COVID-19
The Reserve Bank of India (RBI) also announced several measures to address the stress in the economy caused by COVID-19.[13],[14],[15] Key measures are detailed below:
Cutting Policy Rates: The repo rate (the rate at which RBI lends money to banks) was reduced from 5.15% to 4.4%. The reverse repo rate (the rate at which RBI borrows money from banks) was reduced from 4.9% to 4.0%.
Liquidity management: Measures are being taken to expand liquidity in the market to ensure that financial markets and institutions can function normally. These measures include the reduction of the Cash Reserve Ratio (CRR) for all banks from 4% to 3% till March 26, 2021. CRR is the amount of liquid cash that banks have to maintain with the RBI, as a percentage of their total deposits. These steps are expected to inject total liquidity of Rs 3.74 lakh crore.
Relief to borrowers in repayment of loans: All banks and financial institutions (including NBFCs) are permitted to grant a moratorium of three months on payment of all term loan instalments (including agricultural, retail and crop loans) and interest on working capital loans (such as overdraft facilities), which are due between March 1, 2020 and May 31, 2020.
Short term credit to states
The Reserve Bank of India (RBI) has constituted an Advisory Committee to review the Ways and Means Advances (WMA) limits for states and UTs. WMA limits refer to temporary loans given by the RBI to state governments. Until the Committee submits its final recommendations, the WMA limit has been increased by 30% from the existing limit, for all states and UTs. The revised limits will be in force between April 1 and September 30, 2020.[16]
PM CARES Fund
The central government has set up a national fund to deal with emergencies like the COVID-19 pandemic. The public charitable trust known as the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) will provide relief to those affected by COVID-19. The trust is chaired by the Prime Minister and includes members such as the Defence Minister, Home Minister, and Finance Minister.[17]
Donations made by a person to the PM CARES Fund are 100% tax deductible.[18] Non-residents can also contribute to the Fund through foreign inward remittances.[19]
Health measures
COVID-19 testing
Currently, government facilities are offering free of cost diagnosis to all individuals with COVID-19 symptoms.[20] Further, the government has approved certain private laboratories to test individuals for COVID-19. The cost of screening in private labs may not exceed Rs 4,500.[21] As of April 7, there are 136 government testing centres for analysing samples of COVID-19 and 3 additional collection centres.[22] Further, there were 59 private labs offering testing in 12 states. These states are Delhi, Maharashtra, Kerala, West Bengal, Uttar Pradesh, Telangana, Tamil Nadu, Odisha, Karnataka, Haryana, Uttarakhand and Gujarat.[23]
The Ministry of Health and Family Welfare has also laid down guidelines for those who may be tested at these laboratories. These include: (i) symptomatic contacts of those who have tested positive for COVID-19, and (ii) symptomatic persons with a travel history to COVID-19 affected countries, (iii) symptomatic healthcare workers, and (iv) persons with severe respiratory diseases.21
Containment plan for large outbreaks
The Ministry of Health and Family Welfare has created a plan to contain the spread of the COVID-19 disease. Some of the measures suggested in the plan include:[24]
Geographic quarantine: This strategy requires the restriction of movement of people to and from a defined geographic area where there is a large outbreak.
Cluster Containment: This strategy will contain the disease within a defined geographic area by early detection of cases. Cluster containment will include geographic quarantine, social distancing, testing all suspected cases, and awareness amongst the public.
Restrictions on export of medicines and medical equipment
The central government placed restrictions on the export of certain medical equipment and medication so as to ensure its availability in India. For example, the export of ventilators, surgical masks, diagnostic kits, and medications such as paracetamol and hydroxychloroquine is restricted.[25],[26],[27],[28]
Travel restrictions
Domestic and international travel banned; issue of visas suspended
Civil Aviation: All passenger domestic air travel within the country is banned from March 24 till April 14, 2020.[29],[30] All international commercial passenger travel has been banned till April 14, 2020 (cargo and certain other flights are exempted).[31] All existing visas issued to nationals of any country except those issued to diplomats, officials, UN/international organisations, employment and project visas are suspended from March 13 till April 15, 2020.[32]
Railways: Indian Railways suspended all passenger trains till April 14, 2020.[33] Transportation of essential commodities will continue.[34] Railways has also made parcel vans available for quick transportation for e-commerce companies and other customers including state governments to transport certain goods. These include medical supplies, medical equipment, food, etc. in small parcel sizes.[35]
For a detailed summary of the main policy decisions taken by the central government with regard to COVID-19, please see here.
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.
[1] Novel coronavirus outbreak in China, Ministry of Health and Family Welfare, January 17, 2020, https://www.mohfw.gov.in/pdf/TraveladvisorytotravelersvisitingChina17012020.pdf.
[2] Ministry of Health and Family Welfare website, last accessed on March 31, 2020, https://www.mohfw.gov.in/index.html.
[3] Order No. 1-29/2020-PP, National Disaster Management Authority, March 24, 2020, https://mha.gov.in/sites/default/files/ndma%20order%20copy.pdf.
[4] Order No. 40-3/2020-DM-I(A), Ministry of Home Affairs, March 24, 2020, https://mha.gov.in/sites/default/files/MHAorder%20copy.pdf.
[5] “Guidelines on measures to be taken by Ministries/Department of Government of India, State/Union Territory Governments and State/Union Territory Authorities for containment of COVID-19 Epidemic in the Country”, Ministry of Home Affairs, March 24, 2020, https://mha.gov.in/sites/default/files/Guidelines.pdf.
[6] Second Addendum to Order No. 40-3/2020-DM-I(A), Ministry of Home Affairs, March 24, 2020, https://mha.gov.in/sites/default/files/PR_SecondAddendum_27032020.pdf.
[7] “Consolidated Guidelines on the measures to be taken by Ministries/Departments of Government of India, State/Union Territory Governments and State/Union Territory Authorities for containment of COVID-10 Epidemic in the Country, as notified by the Ministry of Home Affairs on 24.03.2020 and further modified on 25.03.2020 and 27.03.2020”, Ministry of Home Affairs, https://mha.gov.in/sites/default/files/PR_ConsolidatedGuidelinesofMHA_28032020.pdf.
[8] D.O. No. 40-3/2020-DM-I(A), Ministry of Home Affairs, March 29, 2020, http://164.100.117.97/WriteReadData/userfiles/3rd%20Addendum%20to%20Lockdown%20Guidelines%20on%20exempted%20Goods%20and%20Services.pdf.
[9] Order No. 40-3/2020-DM-I(A), Ministry of Home Affairs, March 29, 2020, https://mha.gov.in/sites/default/files/MHA%20Order%20restricting%20movement%20of%20migrants%20and%20strict%20enforement%20of%20lockdown%20measures%20-%2029.03.2020.pdf.
[10] “Finance Minister announces Rs 1.70 Lakh Crore relief package under Pradhan Mantri Garib Kalyan Yojana for the poor to help them fight the battle against Corona Virus”, Press Information Bureau, Ministry of Finance, March 26, 2020.
[11] “Monetary and Fiscal policy response by Government of Indian and Regulators”, Department of Economic Affairs, Ministry of Finance, March 27, 2020, https://dea.gov.in/sites/default/files/India%20economic%20policy%20response%20on%20%20COVID%2019%20Fiscal%20and%20Monetary%20as%20on%2027032020.pdf.
[12] “Pradhan Mantri Garib Kalyan Package: Insurance Scheme for Health Workers Fighting COVID-19”, Press Information Bureau, Ministry of Health and Family Welfare, March 29, 2020.
[13] Seventh Bi-Monthly Policy Statement 2019-20”, Press Release, Reserve Bank of India, March 27, 2020, https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR2129F5E23A447E0F4A00955429716C53F5A2.PDF.
[14] “Statement on Developmental and Regulatory Practices”, Reserve Bank of India, Press Releases, March 27, 2020, https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49582.
[15] “COVID-19 – Regulatory Package”, Notifications, Reserve Bank of India, March 27, 2020, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11835.
[16] RBI announces further measures for dealing with the COVID-19 pandemic, Reserve Bank of India, April 1, 2020, https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR2167BA409AC37FA8460497BA0C9B283E5DD9.PDF.
[17] Appeal to generously donate to ‘Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)’, Press Information Bureau, Prime Minister’s Office, March 28, 2020, https://pib.gov.in/PressReleseDetailm.aspx?PRID=1608851.
[18] The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020, Gazette of India, Ministry of Law and Justice, March 31, 2020, http://www.egazette.nic.in/WriteReadData/2020/218979.pdf.
[19] Rupee Drawing Arrangement – Remittance to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations (PM-CARES) Fund, Reserve Bank of India, April 3, 2020, https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NOT2087A69F5158C174585A46C69B78BD96DBD.PDF.
[20] Strategy for COVID-19 testing in India, India Council for Medical Research, Ministry of Health and Family Welfare, March 17, 2020, https://www.mohfw.gov.in/pdf/LabTestingAdvisory.pdf.
[21] Guidelines for COVID-19 testing in private laboratories in India, Ministry of Health and Family Welfare, March 21, 2002 https://www.mohfw.gov.in/pdf/NotificationofICMguidelinesforCOVID19testinginprivatelaboratoriesiIndia.pdf.
[22] Government Approved Laboratories by ICMR, Ministry of Health and Family Welfare, April 7, 2020. https://icmr.nic.in/sites/default/files/upload_documents/Govt_Labs_functional_for_COVID19_testing_05042020.pdf.
[23] Private Approved Laboratories by ICMR, Ministry of Health and Family Welfare, April 7, 2020. https://icmr.nic.in/sites/default/files/upload_documents/Private_Labs_06042020.pdf.
[24] Containment Plan for Large Outbreaks, Ministry of Health and Family Welfare, April 4, 2020, https://www.mohfw.gov.in/pdf/3ContainmentPlanforLargeOutbreaksofCOVID19Final.pdf.
[25] S.O. 1171(E), Amendment in Export Policy of Masks, Ventilators and textile raw material for masks and coveralls, Ministry of Commerce and Industry, March 19, 2020, http://egazette.nic.in/WriteReadData/2020/218857.pdf.
[26] S.O. 955(E), Amendment in Export Policy of APIs and formulations made from these APIs, Ministry of Commerce and Industry, March 3, 2020, http://egazette.nic.in/WriteReadData/2020/216551.pdf.
[27] Notification no. 01/2015-2020, Amendment in Export Policy of Hydroxychloroquine, Ministry of Commerce and Industry, April 4, 2020, https://prsindia.org/files/covid19/notifications/1492.IND_Export_Restriction_Hydroxychloroquine_Apr_4.pdf.
[28] Notification no. 59/2015-2020, Amendment in Export Policy of Diagnostic Kits, April 4, 2020, https://prsindia.org/files/covid19/notifications/1491.IND_Export_Restriction_Diagnostic_Kits_Apr_4.pdf.
[29] AV. 11011/1/2020-US(AG) Office-MOCA, Ministry of Civil Aviation, March 23, 2020, https://www.civilaviation.gov.in/sites/default/files/Revised-%20COVID-19%20-%20Order%20under%20Section%208B.pdf.
[30] No.4/1/2020-IR, Director General of Civil Aviation, March 27, 2020, https://dgca.gov.in/digigov-portal/Upload?flag=iframeAttachView&attachId=130618666.
[31] No.4/1/2020-IR, Director General of Civil Aviation, March 26, 2020, https://dgca.gov.in/digigov-portal/Upload?flag=iframeAttachView&attachId=130618625.
[32] No.4/1/2020-IR, Director General of Civil Aviation, January 30 to March 17, 2020, https://dgca.gov.in/digigov-portal/Upload?flag=iframeAttachView&attachId=130617742.
[33] “Ministry of Railways extends Cancellation of Passenger Train Services till 2400 hrs of 14th April, 2020”, Press Information Bureau, Ministry of Railways, March 25, 2020.
[34] “Transportation of essential commodities to various parts of the country by Indian Railways continues at full speed”, Press Information Bureau, Ministry of Railways, March 30, 2020.
[35] “Indian Railways to run Special Parcel Trains for carriage of essential items in small parcel sizes during the complete lockdown in fight against COVID-19”, Press Information Bureau, Ministry of Railways, March 29, 2020.
