DNA Edit: Work cut out

Last week, the Cabinet gave its go-ahead to the setting up of the 15th Finance Commission (FC). Former Planning Commission member NK Singh will be taking over as the chairman of the FC, a body that has been led illustriously by a handful of gifted economists and politicians, and whose decisions have set the course for fiscal relations between the Centre and the state. It was the framers of the Constitution who originally envisaged the need for an FC, and to that end, grafted Article 280, which makes the FC responsible for determining the distribution of the net proceeds of taxes between, firstly, the Centre and the states and secondly, between the states themselves. A key identifier of the mark that the FC has left on the Indian federal landscape has been the dramatic rise in the share of the states in the total tax receipts: A feeble 10 per cent pie of the tax revenues has now soared to a stately 43 per cent.

It was the 14th commission led formidably by the former Reserve Bank of India governor Y V Reddy, who, in substantial measure, levelled the playing field by letting states have a larger helping of the tax income. In the past, the mandate of the FC has often been expanded as well. For instance, the 13th commission was asked to pen a comprehensive report on the internal mechanism that was to govern the implementation of the GST from April 2010.

However, UPA II’s attempt to implement the GST never really took off for the failure of the Congress to stitch together a political consensus. GST aside, it was the 13th commission that conducted a deep dive into the quality of public expenditure by the states; reviewed the quantum of finances accruing to the Centre and gave a slew of recommendations directed at maintaining balanced fiscal ties without compromising on growth. Now, with the onset of the GST, the playing field has been completely altered.

The challenge before the commission will be to establish the new dynamic of tax revenues share between the Centre and the state and amongst the states as well. In the coming days, as the terms of reference for the FC are made public, the gravity of the challenges that lie before the august body will become clear. In the meanwhile, the Finance Ministry has resolutely been waging a battle against the widening fiscal deficit in hopes that it will be able to scotch the deficit from flaring anywhere above the FC-set limit of 3.2 per cent.

While Finance Minister Arun Jaitley has said that the government does not foresee any problems in meeting the 3.2 per cent target this FY, the fiscal deficit limitation might have to be recalibrated in the coming years to make some elbow room for the disruptions that have set in the wake of structural reforms. Already, a front-loading of the expenditure has meant that the government has exhausted 96 per cent of the targeted fiscal deficit. October data from the International Monetary Fund’s Fiscal Monitor seems to suggest that the government might be able to stay within the lines by cutting back on expenditure.