New Delhi: The government on Wednesday constituted the much-delayed 14th Finance Commission under the chairmanship of former Reserve Bank of India (RBI) governor Y.V. Reddy to review the distribution of resources among the Centre, states and local bodies.
The terms of reference include a new fiscal consolidation road map, devising a mechanism to compensate states in case of revenue loss due to the implementation of a single goods and services tax (GST), a blueprint for subsidy reform, and also insulating the pricing of public utility services such as drinking water, irrigation, power and public transport from policy fluctuations through statutory provisions.
The members of the panel include M. Govinda Rao, director, National Institute of Public Finance and Policy (NIPFP); Sudipto Mundle, former acting chairman, National Statistical Commission; and Abhijit Sen, member, Planning Commission. Sen will serve as a part time member. The recommendations of the committee will cover a five-year period starting 1 April 2015. The recommendations of the 13th Finance Commission headed by former finance secretary Vijay Kelkar are valid till 31 March 2015.
The commission has also been asked to look into the level of subsidies required for sustainable and inclusive growth, and the equitable sharing of subsidies between the Centre and state governments. It will also draw up recommendations on making public sector enterprises more competitive and market-oriented, issues regarding their listing and divestment as well as ways of relinquishing non-priority enterprises.
The other members of the Kelkar panel were Indira Rajaraman, Atul Sharma and Sanjiv Misra. It raised the state’s share in net tax proceeds to 32.5% from the 31% set by the 12th Finance Commission led by C. Rangarajan.
The Kelkar commission not only increased the share of urban areas in net tax proceeds nearly five times, it also moved away from fixed transfers to a formula (as a percentage share of the divisible pool of taxes). It also put in place incentives linked to performance metrics.
The 14th Finance Commission’s terms of reference are very comprehensive, said Pratap Ranjan Jena, associate professor at NIPFP. “The two critical points before the commission are devising a fiscal road map going beyond 2014-15 and formulating a mechanism for compensation once GST is implemented,” he said.
While announcing the formation of the new finance commission, finance minister P. Chidambaram said the government had made special reference to the issues concerning debt-stressed states to the panel. The commission will also take into account taxation efforts and the potential for increasing the tax-GDP ratio by such states, he said.
“All this will help the finance commission in making recommendations for states that are far away from the national average,” he said.
Chidambaram also indicated that the government may revise the criteria for according special category status to states. “Existing criteria were formulated some time ago. And perhaps it is time to revisit the criteria,” he said, responding to queries over Bihar chief minister Nitish Kumar’s demand for special category status for the state.