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Recommendations of the 15th Finance Commission for 2020-21

The Finance Commission is a constitutional body formed by the President of India to give suggestions on centre-state financial relations.  The 15th Finance Commission is required to submit two reports.  The  first report will consist of recommendations for the financial year 2020-21.  The final report with recommendations for the 2021-26 period will be submitted by October 30, 2020. In this post, we explain the key recommendations of the report.  

What is the amount of tax devolution to the states, and how is it being calculated?

The Finance Commission uses certain criteria when deciding the devolution to states.  For example, income distance criterion has been used by the 14th and 15th Finance Commissions.  Under this criterion, states with lower per capita income would be given a higher share to maintain equity among states.  Another example is Demographic Performance criterion which has been introduced by the 15th Finance Commission.  The Demographic Performance criterion is to reward efforts made by states in controlling their population. 

The 15th Finance Commission used the following criteria while determining the share of states: (i) 45% for the income distance, (ii) 15% for the population in 2011, (iii) 15% for the area, (iv) 10% for forest and ecology, (v) 12.5% for demographic performance, and (vi) 2.5% for tax effort.  For 2020-21, the Commission has recommended a total devolution of Rs 8,55,176 crore to the states, which is 41% of the divisible pool of taxes.  This is 1% lower than the percentage recommended by the 14th Finance Commission.  

Table 1 below compares the new criteria with the criteria recommended by the 14th Finance Commission.

 Table 1: Criteria for devolution (2020-21)

Criteria

14th FC

2015-20

15th FC

2020-21

Income Distance

50.0

45.0

Population 1971

17.5

-

Population 2011

10.0

15.0

Area

15.0

15.0

Forest Cover

7.5

-

Forest and Ecology

-

10.0

Demographic Performance

-

12.5

Tax Effort

-

2.5

Total

100

100

 Sources: Report for the year 2020-21, 15th Finance Commission; PRS.

Uttar Pradesh and Bihar have received the largest devolutions for 2020-21, receiving Rs 1,53,342 crore, and Rs 86,039 crore respectively.   Karnataka and Kerala saw the largest decreases in the share of the divisible pool with a decrease of 0.49% and 0.25% respectively.  Table 2 below displays the state-wise breakdown of the share in the divisible pool and the total devolution.

Table 3: Share of states in the centre’s taxes

State

14th Finance Commission

15th Finance Commission

Devolution for FY 2020-2021

Share out of 42%

Share in divisible pool

Share out of 41%

Share in divisible pool

(In Rs crore)

Andhra Pradesh

1.81

4.31

1.69

4.11

35,156

Arunachal Pradesh

0.58

1.38

0.72

1.76

15,051

Assam

1.39

3.31

1.28

3.13

26,776

Bihar

4.06

9.67

4.13

10.06

86,039

Chhattisgarh

1.29

3.07

1.4

3.42

29,230

Goa

0.16

0.38

0.16

0.39

3,301

Gujarat

1.3

3.1

1.39

3.4

29,059

Haryana

0.46

1.1

0.44

1.08

9,253

Himachal Pradesh

0.3

0.71

0.33

0.8

6,833

Jammu and Kashmir

0.78

1.86

-

-

-

Jharkhand

1.32

3.14

1.36

3.31

28,332

Karnataka

1.98

4.71

1.49

3.65

31,180

Kerala

1.05

2.5

0.8

1.94

16,616

Madhya Pradesh

3.17

7.55

3.23

7.89

67,439

Maharashtra

2.32

5.52

2.52

6.14

52,465

Manipur

0.26

0.62

0.29

0.72

6,140

Meghalaya

0.27

0.64

0.31

0.77

6,542

Mizoram

0.19

0.45

0.21

0.51

4,327

Nagaland

0.21

0.5

0.23

0.57

4,900

Odisha

1.95

4.64

1.9

4.63

39,586

Punjab

0.66

1.57

0.73

1.79

15,291

Rajasthan

2.31

5.5

2.45

5.98

51,131

Sikkim

0.15

0.36

0.16

0.39

3,318

Tamil Nadu

1.69

4.02

1.72

4.19

35,823

Telangana

1.02

2.43

0.87

2.13

18,241

Tripura

0.27

0.64

0.29

0.71

6,063

Uttar Pradesh

7.54

17.95

7.35

17.93

            1,53,342 

Uttarakhand

0.44

1.05

0.45

1.1

9,441

West Bengal

3.08

7.33

3.08

7.52

64,301

Total 

42

100

41

100

            8,55,176 

Sources: Reports of 14th and 15th Finance Commission; PRS.

What are the various grants recommended by the 15th Finance Commission?

The Terms of Reference of the Finance Commission require it to recommend grants-in-aid to the States.  These grants include: (i) revenue deficit grants, (ii) grants to local bodies, and (iii) disaster management grants.

14 states are estimated to face a revenue deficit post-devolution.  To make up for this deficit, the Commission has recommended revenue deficit grants worth Rs 74,341 crore to these 14 states.  Additionally, three states (Karnataka, Mizoram, and Telangana) have received special grants worth Rs 6,674 crore.  The special grants are being given to compensate for a decline in the sum of tax devolution and revenue deficit grants in 2020-21 as compared to 2019-20.

The Commission has recommended a total of Rs 90,000 crore for grants to the local bodies in 2020-21.  This amounts to an increase over the Rs 87,352 crore allocated for 2019-20 for the same.  The new allocation is 4.31% of the divisible pool.  Of this sum, Rs 60,750 crore has been recommended for rural local bodies, and Rs 29,250 crore for urban local bodies.  These grants will be made available to all three tiers of Panchayat- village, block, and district.

To promote local-level mitigation activities, the Commission has recommended the setting up of National and State Disaster Management Funds.  Recommended grants for the State Disaster Risk Management Fund is Rs 28,983 crore, while the allocation for the National Disaster Risk Management Fund is Rs 12,390 crore.

Apart from these, guidelines for performance-based grants and sector-specific grants have been outlined.  The Commission has recommended a grant of Rs 7,375 crore for nutrition in 2020-21.  Sectors for which sector-specific grants will be provided in the final report include: (i) nutrition, (ii) health, (iii) pre-primary education, (iv) judiciary, and (v) railways.  

For more details, please see our  summary of the report.