15th Finance Commission may scrap revenue-deficit grants to states

15th Finance Commission, revenue deficit, Andhra Pradesh, Kerala, Himachal Pradesh,  FY21, FY25, economy news, power sector, tax

Hike in cesses and surcharges, which are not part of the divisible pool, enabled the Centre to increase its net tax receipts at a faster rate.

The 15th Finance Commission (FC), whose award will be valid for the FY21-25 period, may recommend discontinuation of revenue deficit grants to the states, while proposing ince-ntives to the ones that take visible steps to improve fiscal health and the quality of spending.
Taking into account the states’ expenditure requirements, the tax devolution to them and their revenue mobilisation capacity, the 14th FC had recommended ‘post-devolution revenue deficit grants’ of a total of Rs 1,94,821 crore for 11 states during its award period (FY16-FY20).

“Revenue deficit will unlikely be a permanent feature. (Remedy for it) will be subsumed in the vertical and horizontal devolution pattern itself,” an official told FE.

Of the 11 states, Andhra Pradesh, Kerala and Himachal Pradesh have not yet eliminated revenue deficits (The 14th FC had mandated that the 11 states wipe out the deficits by FY20). Besides these three states, five more (Rajasthan, Punjab, Maharashtra, Tamil Nadu and Hary-ana) have also projected revenue deficits, varying from 0.2% to 2.6% of their GSDPs for FY20.

Discontinuation of revenue deficit grants could raise borrowing requirements by deficit states to meet their recurring, non-asset-creating expenses and further constrain their capital expenditures. The 13th FC, which had awarded revenue deficit grants to eight special category states, had recommended that all states should eliminate revenue deficit by FY15. But that was not to be.

One of the Terms of Reference (ToR) of the 15th FC, which will submit its report in November, is to examine whether revenue deficit grants are required to be provided to states to finance their revenue expenditure. Revenue deficit is the excess of revenue expenditure (such as spending on salary, interest payments and pension) over revenue receipts of the government.

Also, the ToR has mandated the FC to consider proposing measurable performance-based incentives for states on efforts made by them in expansion and deepening of tax net and progress made in increasing capital expenditure, eliminating losses of power sector, and improving the quality of such expenditure in generating future income streams.

While the Centre is said to be constrained due to the 14th FC-induced increase in states’ share in the divisible tax pool by 10 percentage points, the total transfers from the Centre to states grew only 34.78% between FY17 and FY20BE compared with 41.06% for the Union Budget and 49.77% for the Centre’s next tax revenue. Hike in cesses and surcharges, which are not part of the divisible pool, enabled the Centre to increase its net tax receipts at a faster rate.