Editor's Pick: understanding the 15th FC's recommendations

(The Editor's Pick is a new newsletter from The Hindu that provides a snapshot of the most important stories from today's edition of our newspaper, along with a note from our top editors on why we chose to give prominence to these stories.)

Chairman of the 15th Finance Commission N.K. Singh has pushed for the Centre to incentivise States to disinvest in their public sector holdings. In an interview to the The Hindu, Mr. Singh said that the States should have more transparency on the state of their finances, on the lines of the Centre acknowledging that it had a 9.5% fiscal deficit in 2020-21. He said that this, and coming clear on their off-budget borrowings, will boost investor confidence in the country.

The report of 15th Finance Commission for the period from 2021-22 to 2025-26 was tabled in Parliament along with the Budget. The Commission's recommended fiscal deficit target for the country is 4% by 2025-26, though Finance Minister Nirmala Sitharaman said that the government is aiming for 4.5% by that year. She said that the fiscal deficit target for 2021-22 is 6.8%. Considering the pandemic situation, the Commission has recommended a relaxed fiscal deficit target of 4% for States for 2021-22, with a 0.5% addition for undertaking power sector reforms. Even by conservative estimates, States have considerably overshot their fiscal deficit targets in 2021-22.The Commission had also envisaged in its report a Defence and Internal Security Modernisation Fund with an outlay of ₹2.38 lakh in the 2021-26 period. This fund, which will help the defence and internal security departments fill the gap between budget requirements and allocations, have been approved in principle by the Centre. There have been concerns raised by the States that this fund may cause a reduction in the funds allotted to them. In the interview, Mr. Singh explains that the fund will be sourced from the Gross Revenue Receipts of the Centre and not the divisible Gross Tax Revenue.

The 15th Finance Commission was mandated to use the 2011 census data while calculating the fund allocations, instead of the 1971 data used by previous commissions. This had led to criticisms from States that had brought their population under control that they will be penalised for doing so in the demography-based allocations. Mr. Singh explained that the commission had given weightage for demographic management in the allocation.

The wide gap between the fiscal deficit targets set by the Commission for the Centre and the States and their current position makes this story important. So also does Mr. Singh's recommendation of more disinvestment by the States, and his explanations on the defence fund and how the commission has handled the census issue.

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