Recommendations of the 15th Union Finance Commission: Expectations and Realities

Abstract

The 15th Union Finance Commission (UFC) report, submitted in India in the middle of a global economic setback due to COVID-19, was a hope for sub-national governments to arrive at a favourable financial devolution mechanism. Even though few recommendations by 15th UFC looks promising, it is difficult to outrightly reject the possibilities of increasing fiscal imbalances. The retention of the proportion of shared tax devolution to states as used during 14th UFC and the use of (a) tax and fiscal effort, (b) 2011 census population figure and (c) total fertility rate as demographic performance, for distribution of shared tax across states may be helpful to reduce fiscal imbalances. However, the decline in the size of shared taxes of states due to (a) shrinking tax collection by the central government during current economic crisis and (b) assignment of additional burdens on states like (i) the contribution of states towards national defence and (ii) internal security, may result in vertical imbalance. There is a possibility of an increase in horizontal imbalance with the rise in the weightage of neutral (need based) criteria and decline in the weight of equity criterion due to the proportionate decline in the shares of poorer state through these two criteria. The fiscal imbalances are to be reduced to a minimum level to enable the country providing a common minimum level of public goods to its people. Since the weight of neutral criteria is implicit in equity and efficiency criteria, an optimum weight adjustment solution as suggested by Mahamallik and Sahu ((2015) , Artha Vijnana, 57(4), 301–320) may be helpful to reduce imbalances. JEL Code: H770