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Parliament passes an average of 60 Bills a year. Each state legislature also passes a similar volume of legislation addressing an array of complex issues. Bills cover subjects ranging from microfinance, land acquisition, and honour killings to the impact of pesticides on health. Legislative matters have become increasingly more technical and require specialist inputs to be framed as effective public policy. Unlike other large democracies, legislators in India do not have access to institutional research support. Access to formal information channels is normally available only to the Minister drafting the bill or to the select committee if the bill is referred to it. This deprives MLAs from participating in a more informed debate. Towards this end, PRS and the Indian School of Business (ISB) have initiated the first policy workshop of its kind for MLAs in India. There is an emerging breed of proactive MLAs who are willing to seek out information to help them perform their role better. There are over 4000 MLAs in India, and a small group of MLAs in many states are showing this initiative. They use the internet, consult specialists, and use resources like PRS to get updated or further information on issues affecting their state. About the Workshop The India Leadership workshop is for MLAs who want to be more effective legislators and assume positions of greater influence in state and national policymaking. This unique workshop is for rising stars who want to imbibe new approaches to policymaking and build professional networks with MLAs from different states. The programme is led by distinguished faculty from internally reputed institutions including Harvard, IITs and IIMs. The three day workshop for progressive MLAs will be held at the campus of ISB in Hyderabad. Four such sessions will be held during the year, with the maiden edition being launched in January 2011. Over the last five years, PRS has worked with MPs across all political parties to brief them on relevant issues for their work in Parliament. MPs have recommended that MLAs also would benefit from similar research services. Ajit Rangnekar, Dean, Indian School of Business (ISB) says, “The ISB is committed to working with the Industry and the Government to help achieve national goals. We already have had a long track of engaging with public sector enterprises, and more recently with various government departments, in both executive education and research. We are now delighted to partner with the PRS Legislative Research to develop this programme targeted at capacity building among Indian Legislators. We believe that this ongoing interaction between the government and academia will strengthen our collective understanding of national priorities and spur collaboration for greater impact.”
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.
