The fifteenth Finance Commission

The Centre has set up the 15th Finance Commission to determine the ratio of the distribution of the divisible tax pool of the Centre between the Centre and the States. The Commission will have to submit its report by April 1, 2020, and its formula for distribution will remain in force for the next five years beginning April 1, 2020. A problem that is outside the remit of the Finance Commission(s) but very relevant for the States is the mounting debt burden of the States to the Centre. Even if the share of the States is increased – there is an obvious limit to it – the problem of rising debt burden will continue. The amount of repayment to the Centre will rise from year to year. The more the States generate resources on their own, the more they will have to pay to the Centre by way of debt-servicing. The Centre knows it well that the States can never repay their debts. The States also know this and to meet their expenses, both on capital and revenue accounts, they go on having recourse to public borrowing.
On the other hand, as has been noticed in the past, greater allocation from the divisible pool of the Centre to the States by the Finance Commission becomes a convenient excuse of the Centre to reduce allocations for Centrally-funded schemes on the plea that now the States have more resources. So, the relief given by the Finance Commission is immediately neutralized by the Centre reducing the allocations for the States. It is indeed a ‘never-never’ situation. Both the Centre and the States know that the States can never liquidate their debts to the Centre. The Centre knows it, too, but apparently nothing can be done to solve the problem. In West Bengal, Mamata Banerjee during her initial days in power used to blame the CPM for leaving behind a huge debt. But she, too, during her six years’ rule till now, only added to the debt burden by resorting to public borrowing to meet rising expenditure. What is more, most of the money borrowed from the market goes to meet recurring expenses. The borrowings were not or could not be used for building capital assets that generate revenue. The Finance Commission obviously will not go into this question because it is outside its purview but someone will have to address it and find a way out of it,. Because in the long run it will cripple the finances of the States.

Friday, 8 December, 2017