Daily News Mail - News of 04/03/2015

Finance Commission of India

The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to define the financial relations between the centre and the state. The Finance Commission Act of 1951 states the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission. As per the Constitution, the commission is appointed every five years and consists of a chairman and four other members. Since the institution of the first finance commission, stark changes have occurred in the Indian economy causing changes in the macroeconomic scenario. This has led to major changes in the Finance Commission's recommendations over the years. Till date, Fourteen Finance Commissions have submitted their reports.

Finance Commission	Year of Establishment	Chairman	Operational Duration
First	1951	K. C. Neogy	1952–57
Second	1956	K. Santhanam	1957–62
Third	1960	A. K. Chanda	1962–66
Fourth	1964	P. V. Rajamannar	1966–69
Fifth	1968	Mahaveer Tyagi	1969–74
Sixth	1972	K. Brahmananda Reddy	1974–79
Seventh	1977	J. M. Shelat	1979–84
Eighth	1983	Y. B. Chavan	1984–89
Ninth	1987	N. K. P. Salve	1989–95
Tenth	1992	K. C. Pant	1995–2000
Eleventh	1998	A.M.Khusro	2000–2005
Twelfth	2003	C. Rangarajan	2005–2010
Thirteenth	2007	Dr. Vijay L. Kelkar	2010–2015
Fourteenth	2012	Dr. Y. V Reddy	2015–2020

Qualification of the members :

The Chairman of the Finance Commission is selected among people who have had the experience of public affairs. The other four other members are selected from people who:

1. Are, or have been, or are qualified, as judges of High Court, or
2. Have knowledge of Government finances or accounts, or
3. Have had experience in administration and financial expertise; or
4. Have special knowledge of economics

Functions of the Finance Commission can be explicitly stated as:

1. Distribution of net proceeds of taxes between Centre and the States, to be divided as per their respective contributions to the taxes.
2. Determine factors governing Grants-in Aid to the states and the magnitude of the same.
3. To make recommendations to president as to the measures needed to augment the Consolidated Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the Finance Commission of the state.

Chairman of the 14th Finance Commission

Y. V. Reddy

Recommendations of the 14th Finance Commission

TAX DEVOLUTION TO BE BASED ON AREA, POPULATION, DEMOGRAPHY, INCOME DISTANCE & FOREST COVER

Highest weight of 50% is given to distance from the highest per capita income district, followed by population (1971 census) at 17.5%, demography change(2011 census) at 10%, area at 15% and forest cover at 7.5%.

CENTRE'S FISCAL AND REVENUE DEFICITS

Fiscal deficit should come down to 3.6% of GDP in 2015-16 from projected 4.1% in 2014-15 and then 3% in following year and kept at that for three more years. Not different from existing roadmap, though the present time frame ends in 2016-17. Wants revenue deficit to come down from 2.9% in FY15 to 2.56% in FY16 and then progressively reduce to 0.93% by 2019-20.

STATES' FISCAL AND REVENUE DEFICITS

Fiscal deficit should be at 2.76% in FY16, to come down to 2.74% by FY20 though it would increase in between. To be revenue surplus in all these years.

CENTRE'S DEBT

To come down from 45.4% of GDP in FY15 to 43.6% in FY16 and then progressively should reduce to 36.3% by FY20

STATES' DEBT

Projected to increase from 21.90% in FY16 progressively to 22.38% in FY20

NATIONAL SMALL SAVING FUND (NSSF)

States be taken away from operation of NSSF with effect from next financial year

CONSOLIDATED SINKING FUND

Examine the possibility of setting up of CST for amortisation of debt of the Union govt

RAIL TARIFF AUTHORITY

Replace the advisory body with a statutory body, through necessary amendments to the Railways Act, 1989.

ADVERTISEMENT TAX

States should empower local bodies to impose this tax to augment their revenues

BOOST FOR STATES' SHARE IN NET PROCEEDS OF TAX REVENUES

The commission has recommended states' share in net proceeds of tax revenues be 42%, a huge jump from the 32% recommend by the 13th Finance Commission, the largest change ever in the percentage of devolution. As compared to total devolutions in 2014-15, total devolution of states in 2015-16 will increase by over 45%

TAX DEVOLUTION BE PRIMARY ROUTE OF TRANSFER OF RESOURCES

The panel has recommended tax devolution be the primary route of transfer of resources to the states; the government has accepted the recommendations keeping in mind the spirit of National Institution for Transforming India (NITI)

GRANTS FOR LOCAL BODIES BE BASED ON 2011 POPULATION

The commission has recommended distribution of grants to states for local bodies using 2011 population data. Grants will be divided into two broad categories on the basis of rural and urban population - (i) a grant constituting gram panchayats and (ii) a grant constituting municipal bodies

GRANTS BE IN TWO PARTS - BASIC AND PERFORMANCE

The panel has recommended the grants to states for local bodies be in two parts, a basic grant and a performance grant. The ratio of basic to performance grant is 90:10 with respect to panchayats and 80:20 in the case of municipalities.

GRANTS TO GRAM PANCHAYATS & MUNICIPALITIES

The total grants recommended by the commission are Rs 2,87,436 crore for a five-year period from April 1, 2015 to March 31, 2020. Of this, Rs 2,00,292.20 crore will be given to panchayats and Rs 87,143.80 crore to municipalities. The transfers for financial year 2015-16 will be Rs 29,988 crore. 2.88 lakh crore grant to local bodies.
Each state will spend money according their laws for governing the local bodies.

STATES' SHARE IN DISASTER RELIEF SHOULD STAY UNCHANGED

The Commission has said, with regard to disaster relief, the percentage share of states will continue to be as before and follow the existing mechanism. This will be to the tune of Rs 55,097 crore. After implementation of GST, the recommendations of the panel on disaster relief would be implemented

POST-DEVOLUTION REVENUE DEFICIT GRANTS FOR STATES

The panel has recommended 'post-devolution revenue deficit grants' for a total of Rs 1,94,821 crore on account of expenditure requirements of the states, tax devolution and revenue mobilisation capacity of the states. These grants will be given to 11 states.

Revenue deficit states (aid for 5 years)-
Andhra Pradesh
Himachal Pradesh
Jammu & Kashmir
Manipur
Mizoram
Nagaland
Tripura

Revenue deficit states (aid for 1 or more years)-
Assam
Kerala
Meghalaya
West Bengal

SOME CENTRAL SCHEMES BE DE-LINKED

Eight centrally sponsored schemes will be delinked from support from the Centre. Various centrally sponsored schemes will now see a change in sharing pattern, with states sharing a higher fiscal responsibility for implementing the schemes.
The government has decided to delink eight Centrally Sponsored Schemes (CSS), including National e-Governance Plan, Backward Regions Grant Funds, Modernisation of Police Forces and Rajiv Gandhi Panchayat Sashaktikaran Abhiyaan (RGPSA), from its support.

As many as 24 CSS will run with the changed sharing pattern and 31 programmes will get full support of the Centre in 2015-16. According to the Budget 2015-16, Centre has decided to fully support those centrally-sponsored schemes which are aimed at delivering benefits to socially disadvantaged group.
Schemes delinked are - http://pib.nic.in/newsite/PrintRelease.aspx?relid=116152

OTHER RECOMMENDATIONS

The Finance Commission has also made recommendations on cooperative federalism, GST, fiscal consolidation roadmap, pricing of public utilities and public sector undertakings. (Source - Business Standard)

Hill state of Uttarakhand is going to lose about Rs 2,800 crore. Uttarakhand has an annual plan size of Rs 9,700 crore during the current fiscal. Decrease in net share of Uttarakhand from 1.120% in 13th Finance Commission to 1.052 in 14th Finance Commission.

14th Finance Commission recommendations: Nine states, including Bihar and UP lose

• While the Narendra Modi government may be gloating(gloat - delight in, relish, take great pleasure in) over the 14th Finance Commission's recommendation increasing the share of states in Central taxes to 42% from the current 32%, but the share of nine states has decreased.
• Andhra Pradesh (including Telangana), Assam, Bihar, Himachal Pradesh, Odisha, Rajasthan, Tamil Nadu, Uttar Pradesh and Uttarakhand in fact stand to lose in the Commission's recommendations.
• Non-BJP-ruled states like Telangana, Assam, Himachal Pradesh, Odisha, Tamil Nadu and Uttarakhand, or Bihar, which is going to polls later in 2015, will protest the decrease in their share and try to derive political mileage out of it.
• The Commission added a new criterion of forest cover for devolution of Central taxes which has gone against the nine states. "We believe that a large forest cover provides huge ecological benefits, but there is also an opportunity cost in terms of area not available for other economic activities and this also serves as an importantindicator of fiscal disability," according to the Commission.
• The panel has assigned 7.5% weight to forest cover for inter-se determination of the shares of taxes to the states, while population carries 17.5% weight, demographic change 10, income distance 50 and area 15% weight.
• With the addition of the new criterion, Uttar Pradesh is the biggest loser followed by Bihar. Uttar Pradesh's per-se share has reduced from 19.677% in 13th Finance Commission to 17.959% now, while Bihar's has come down from 10.917% to 9.665%.
• Meanwhile, 19 states stand to gain from the new arrangement. Arunachal Pradesh is the biggest gainer, followed by Chhattisgarh. Among the other major gainers are Maharashtra, Madhya Pradesh, Karnataka, Jharkhand and Jammu and Kashmir. Incidentally, except for Arunachal Pradesh and Karnataka, BJP has a say in the rule of the other five states.
• As per the increased devolution suggested in the report of the 14th Finance Commission, the states will get Rs 3.48 lakh crore in 2014-15 and Rs 5.26 lakh crore in 2015-16. "The higher tax devolution will allow states greater autonomy in financing and designing of schemes as per their needs and requirements," the report said.

Maharashtra Bill banning cow slaughter gets President’s nod

• The Bill banning cow slaughter in Maharashtra, pending for the past several years, has received the President’s assent.
• “I am very happy that the President finally gave his assent,” said State Finance Minister Sudhir Mungantiwar sad, "It will not only ensure that animals are not killed, but also stabilise the agriculture situation. Ban on killing the animals will increase the productivity of farms ... Even healthy animals were being killed for money, but it will stop now.”
• Chief Minister Devendra Fadnavis too expressed his happiness. “Thanks a lot honourable President sir for the assent on Maharashtra Animal Preservation Bill. Our dream of ban on cow-slaughter becomes a reality now,” he said on Twitter.
• The memorandum said the Bill, passed during the previous Shiv Sena-BJP regime, had been pending for approval for 19 years. 

Reform needed in Bankruptcy law

• Budget 2015 recognises the need for legal reforms to stimulate business and growth. Economic policies overwhelmingly focus on fiscal measures, monetary interventions and welfare programmes to aid businesses, but the legal processes that underlie commerce are often ignored. Laws that are concerned with starting businesses, enforcing contracts, ensuring debt repayments and exiting businesses, play a critical role and can thwart growth, rendering even good policies ineffective. It is in such a spirit of broadening the approach that Finance Minister Arun Jaitley has identified reform in bankruptcy laws as a key priority, envisaging legal clarity and speedy processes that will ultimately ease doing business in India. The connection between better insolvency(insolvent - unable to pay debts owed) laws and economic growth is straightforward: stronger bankruptcy laws protect the rights of borrowers and lenders, promote predictability, clarify the risks associated with lending, and make the collection of debt through bankruptcy proceedings more attractive. These factors ultimately facilitate credit and thus a higher flow of capital in the economy. But as per the recent Doing Business, 2015 Report, India is ranked 134 on the ease of doing business and at 137 for resolving insolvencies. The average time taken for insolvency proceedings in India is about 4.3 years, while it is only 1.7 years in high-income OECD countries. The recovery rate (cents on the dollar) is 71.9 in high-income OECD countries as opposed to 25.7 in India.

• This is why the Interim Report of the Bankruptcy Law Reform Committee released in February 2015 is welcome. The Committee set up by the Ministry of Finance in August 2014 will be crucial to the new legislation promised in the Budget. The Committee sees the early recognition of financial distress and timely intervention as key features of efficient rescue regimes and believes that the degree of viability of a company must be the central consideration for allowing it to be rescued, and that an unviable company should be liquidated as soon as possible to minimise losses for stakeholders. They recommend that secured creditors be allowed to file an application for the rescue of a company at a sufficiently early stage, rather than wait for the company to have defaulted on 50 per cent of its outstanding debt, as currently provided for in the Companies Act, 2013. The Committee suggests that unsecured creditors representing 25 per cent of the debt be allowed to initiate rescue proceedings against the debtor company. The report also focusses on individual insolvency, a crucial area covering sole proprietorships and small and medium enterprises in India. Therefore, a new bankruptcy law coupled with practical changes, removing the judicial bottlenecks and delays, will be crucial to the reform process.