FC revives performance-linked incentives

To reward states for lower total fertility rate and better tax collection

The 15th Finance Commission (FC) has brought back performance-linked incentives, using the tool to push population control and tax collection efforts among states, in its report for 2020-21.

Armed with data from the 2011 census, the N K Singh-led FC has put its focus on demography management. This comes after all FCS since the sixth one (1974-79) have been mandated to use the 1971 census data to recommend their awards.

But in 2019, southern states complained of having to bankroll their relatively underdeveloped counterparts in the north. Now, the FC has mandated a new performance-based criterion that rewards states with lower Total Fertility Rate (TFR).

Despite studies showing that India's population growth rate may peak earlier than expected, the FC still considers rampant population explosion a major roadblock to growth, and has attached a weight of 12.5 per cent to the efforts of states to regulate population growth.

The other performance-linked incentive of tax performance has managed a relatively small weight of 2.5 per cent, but is meant to placate states that have manged to mop up tax collections in a more efficient manner thereby raising their tax earnings. The FC has calculated a state's tax performance by considering the ratio of average per capita tax revenue of a state over three years, and its per capita Gross State Domestic Product over a similar period.

Overall, performance-linked incentives may soon be the norm for devolution, as the FC may decide to impose them through a variety of parameters over the year, the report has said. These will take into consideration, the measures adopted by states to broaden their tax nets under the Goods and Services Tax regime, increase capital expenditure, improve ease of doing business, eliminate losses in power sector, boost sanitation and solid waste management, and promote savings through adoption of direct benefit transfers, among others.

The 15th FC has also continued to follow its predecessors in considering the needs on population, area and forestry in fixing the devolution to states.

Eyes on October

The 15 FC’S final report, set to be released later this year in October may include recommendations for sectoral grants for education, judiciary, railways, rural connectivity, and housing, among other sectors, the report pointed out. The broad recommendations for 2020-21 suggest the tenor of the final report.

As of now, a revenue deficit grant of ~74,340 core has been provided to 14 states that include Kerala, Tamil Nadu, Punjab, Assam and Andhra Pradesh, among others.

Also, in order to ensure that every state gets more funds than they had received in the previous year, the FC has also provided grants to the tune of ~6764 core to Karnataka, Mizoram and Telangana, which were set to receive a lower sum in 2020-21.

Prioritising the eradication of malnutrition, the FC has released additional grants of ~7,735 crore for the next financial year. India's rank in the Global Hunger Index has fallen to 102 in 2019 from 93 in 2015.

In a related move, the FC has also suggested establishing medical colleges in 247 district hospitals with over 100 beds.

While the national policy on health aspired for 2.5 per cent of Gross Domestic Product to be spent on health, India managed only 0.95 per cent in 2017-18 which was significantly below international standards, the report pointed out.

Also on the list of recommendations are the need to create land for setting up police training and housing, kickstarting power sector reforms and the creation of state specific policies to boost exports and tourism. Local funding rejig

The total funds granted to local bodies nationwide has been pegged at ~90,000 crore which constitutes 4.3 per cent of the entire divisible pool. This was up from ~87,352 crore in the previous year. Focusing on urban India, the latest FC report has announced that 40 per cent of all grants to urban bodies should reach urban bodies in the medium term. Consequently, in 202021, while rural bodies have cornered 67.5 per cent of all funds (~67,650 crore), urban bodies have received 32.5 per cent ( Rs 29,250 crore) of funds. Of these, more than ~9,000 crore has been allocated to million-plus cities.

In rural areas, funds have been distributed to all levels of panchayati raj system to enable pooling of resources. The FC has also tied grants to critical sectors of sanitation and drinking water in many cases.

The FC has also focused on the growing economic and social tolls placed by major disasters that have struck the country and have suggested the setting up of a National Disaster Risk Management Fund along with requisite state funds. These will be over and above the National Disaster Mitigation Fund, established by a Supreme Curt order in 2006. A total allocation of ~28.983 crore has been set aside for these.