15th Finance Commission report tabled, recommends state health spending to be increased by over 8%

The 15th Finance Commission’s report was unique and wide-ranging, as it was asked to recommend performance incentives for States in many areas such as power, solid waste management and adoption of DBT.

Created On: Feb 1, 2021 19:49 ISTModified On: Feb 1, 2021 19:49 IST
15th Finance Commission submits report

The final report of the Fifteenth Finance Commission of India for FY 2021-22 to FY 2025-26 was tabled in the Parliament on February 1, 2021 alongside the Union Budget 2021-22. The commission’s interim report for FY 2020-21 was tabled along with Union Budget 2020-21.

The Finance Commissions generally submit their reports for a five-year duration. The 15th Finance Commission, however, was given an extension of a year due to uncertainties in key macro-areas such as new monetary policy framework, GST, bankruptcy code and demonetization.

Key Highlights

The 15th Finance Commission’s report was unique and wide-ranging, as it was asked to recommend performance incentives for States in many areas such as power, solid waste management and adoption of DBT. It was also asked to recommend funding mechanisms for defence and internal security.

The 15th Finance Commission’s report has been organized in four volumes:

-Volume I and II – Main report

-Volume III: Focused on centre, it examines key departments in greater depth, with the medium-term challenges and the roadmap ahead.

-Volume IV: Entirely focused on states, it analyses the finances of each State in great depth and has recommended state-specific considerations to address the key challenges that individual States face.

Overall, the main report has a total of 117 core recommendations and Vol-III and IV have many suggested reforms for the Union ministries and State governments respectively.

15th Finance Commission’s Recommendations

The 15th Finance Commission has recommended maintaining vertical devolution at 41 per cent to maintain predictability and stability of resources, especially in the wake of the pandemic.

As per XVFC’s assessment, gross tax revenues for a 5-year period is expected to be 135.2 lakh crore, out of which the divisible pool is estimated to be 103 lakh crore. The states’ share at 41 per cent of divisible pool comes to 42.2 lakh crore for 2021-26 period.

On horizontal devolution, while the 15th Finance Commission agreed that the Census 2011 population data better represents the present need of States, to reward the states that have done better on the demographic front, XVFC has assigned a 12.5 per cent weight to the demographic performance criterion. The commission has also re-introduced tax effort criterion to reward fiscal performance.

•Revenue deficit grants: The 15th Finance Commission has recommended total revenue deficit grants (RDG) of Rs 2,94,514 crore over the award period for seventeen States.

•Local Governments: The commission has recommended that the total size of the grant to local governments should be Rs. 4,36,361 crore for the period 2021-26. Out of these, Rs. 8,000 crore will be performance-based grants for incubation of new cities and Rs. 450 crore for shared municipal services. 

Besides this, a sum of Rs. 2,36,805 crore has been earmarked for rural local bodies, Rs.1,21,055 crore for urban local bodies and Rs. 70,051 crore for health grants through local governments.

Health: The 15th Finance Commission has recommended that the spending on health by states should be increased to more than 8 per cent of their budget by 2022.

The commission also noted the need to constitute an All India Medical and Health Service as envisaged under Section 2A of the All-India Services Act, 1951 given the inter-State disparity in the availability of medical doctors.

So overall, the total grants-in-aid support to the health sector over the award period works out to Rs. 1,06,606 crore, which is 10.3 per cent of the total grants-in-aid recommended by XVFC. The grants for the health sector will be unconditional.

Out of this, the commission has recommended health grants amounting to Rs. 70,051 crore for urban health and wellness centres (HWCs) and other block-level healthcare units.

The remaining grant worth Rs 31,755 crore has been suggested for the health sector and Rs. 15,265 crore for critical care hospitals, which includes Rs. 13,367 crore for general States and Rs 1,898 crore for NEH States.

The commission has also recommended Rs. 13,296 crore for training of the allied healthcare workforce.

•Performance incentives and grants: The 15th Finance Commission has recommended grants worth Rs. 4,800 crore (Rs. 1,200 crore each year) from 2022-23 to 2025-26 for incentivising the States to enhance educational outcomes. It has also recommended Rs. 6,143 crore for online learning and development of professional courses in regional languages for higher education in India.

The commission has recommended that Rs. 45,000 crore be kept as a performance-based incentive for all the States for carrying out agricultural reforms.

•Defence: The 15th Finance Commission has re-calibrated the relative shares of Union and States in gross revenue receipts. This will enable the centre to set aside resources for the special funding mechanism that XVFC has proposed.

It has also recommended that the government may constitute the Public Account of India, a dedicated non-lapsable fund, Modernisation Fund for Defence and Internal Security (MFDIS).

•Disaster Risk Management: The Commission has recommended that mitigation funds should be set up at both state and national levels in line with Disaster Management Act provisions. The fund will be used for local level and community-based interventions that help reduce risks and promote environment-friendly settlements and livelihood practices.

The commission has recommended Rs.1,60,153 crore for States for disaster management for 2021-26, of which the centre’s share will be Rs. 1,22,601 crore and States’ share Rs. 37,552 crore.

•Fiscal consolidation: The 15th Finance Commission has provided a range for fiscal deficit and debt path of both the Union and States.

It has also recommended giving additional borrowing room to States based on performance in power sector reforms.

Source: PIB

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