Statsguru: Temporary act in the 15th Finance Commission’s report

States such as Bihar, Maharashtra, and erstwhile state of Jammu & Kashmir stand to gain, compared with the current year’s share, while Karnataka, Telangana, and Kerala stand to lose

The 15th Finance Commission (FC) in its first report has recommended changes in the way taxes should be shared between the Centre and states in 2020-21.

States such as Bihar, Maharashtra, and erstwhile state of Jammu & Kashmir stand to gain, compared with the current year’s share, while Karnataka, Telangana, and Kerala stand to lose. Chart 1 shows the degree of increase (growth) in the share. J&K and Ladakh’s share has been calculated as 1 per cent of the divisible pool.

The 15^th FC has given nearly equal importance to population control (total fertility rate) and population. Another criterion used to arrive at horizontal devolution (among states) is the effort made to improve tax efficiency (Chart 2).

However, the Union Budget for FY21 projected a slower growth in revenues than the FC has envisaged. Worse, the actual amount transferred to states could come down further because of weak revenue collection (Chart 3).

Apart from devolution, the FC also recommends grants to address residual inequality. Chart 4 shows the nature of these grants. However, allocation in the Budget has been lower than the 15th FC recommendation, especially for those compensating revenue deficit after devolution (Chart 5).

Ratings agency ICRA expects that this could result in a higher borrowing by states in FY21 and, for the first time, it could be higher than the Central government borrowing (Chart 6). This has the potential to permanently change government debt market dynamics in the country.

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines: Compiled by BS Research Bureau