Headline : Explained: The new debate on defence funding
- The Union Cabinet has amended the terms of reference (ToR) of the 15th Finance Commission (FC) to widen their scope.
- Through the change, the government has requested the FC to look into the possibility of a separate mechanism for the funding of defence and internal security.
- The Finance Commission is a constitutional body that owes its existence to Article 280 of the Indian Constitution. It has a five-year term.
- There have been fifteen commissions to date. The most recent (15th FC) was constituted in November 2017 and its recommendations will apply from 2020 to 2025. It is chaired by N. K.Singh, a former member of the Planning Commission.
- Its mandate is to determine the distribution of tax revenues between the Centre and the states, and amongst the states themselves.
- Federal structure: In a federal structure such as India’s, powers and responsibilities are divided between the Centre and the states. While the Union collects a majority of the tax revenue, states have a greater responsibility for the delivery of public goods.
- Thus, FCs aim to do two types of adjustments.
- Vertical imbalance: Address the vertical imbalance between the taxation powers of the Centre and the expenditure priorities of the states.
- Horizontal imbalance: Allay the horizontal imbalances between the states themselves with the objective of ensuring balanced regional development.
- In the past, FCs have also dwelt on the distribution of central grants to states, as well as the flow of resources to the third tier of governance — the panchayats and the municipalities.
- The Chairman is selected from people with experience of public affairs.
- The other four members should be
- A judge of high court or one qualified to be appointed as one.
- A person who has specialised knowledge of finance and accounts of the government
- A person who has wide experience in financial matters and in administration.
- A person who has special knowledge of Economics
- Recommendations: The Commission submits its report to the President. He/She lays it before both the Houses of the Parliament, along with an explanatory memorandum as to the actions taken on its recommendations. The recommendations are only advisory in nature and not binding on the government.
Role of Terms of Reference
- One of the reasons why FCs are reconstituted every five years is to ensure that they can take into account the changing dynamics of the political and fiscal landscape.
- Even though the ToRs are essentially in the nature of guidelines to the FC, yet a change in ToRs over the years has reflected the changing needs of India’s overall development.
Current updation of ToR
- The latest addition to the 15th FC’s ToR calls for the FC to examine the possibility of allocation of adequate, secure and non-lapsable funds for defence and internal security of India.
- In other words, the Centre has requested the FC to examine whether a separate mechanism for funding of defence and internal security ought to be set up, and how such a mechanism could be operationalised.
- The Seventh Schedule of the Constitution lists the separate (Union List and State List) and joint (Concurrent List) responsibilities of the Centre and the states.
- Defence is in the Union List.
Why is the Centre resorting to this move?
- The Centre’s request to the FC for greater resources is rooted in its limited ability to ramp up expenditure on items in the Union list due to the limited fiscal space at its disposal.
- The Centre’s expenditure on items in the State and Concurrent Lists has been increasing over the years.
- Research has shown that the share of the Centre’s revenue expenditure on items in the State List has broadly grown over the years; it went up from 13.4 per cent in 2002-03 to 23.1 per cent in 2008-09, before declining to16.2 per cent in 2015-16.
- Similarly, the Centre spent 16.4 per cent of its revenue expenditure on Concurrent List subjects in 2015-16, up from 11.8 per cent in 2002-03.
- This increase in spending by the Centre on items in the State and the Concurrent Lists has led to a reduction in its spending on items in the Union List.
Are states being squeezed out of funding?
- The added fiscal pressures of the Centre and the requirement of having to share tax revenues with states has left the Centre in a peculiar position.
- To shore up its revenues, the Centre has, over the years, begun to rely more on cesses and surcharges.
- In the recent Union Budget, too, it increased the special additional excise duty and road and infrastructure cess on petrol and diesel by one rupee each.
- But the revenue from cesses and surcharges is not part of the divisible tax pool that is shared with the states. It is kept by the Centre. This leads to the states receiving a lower share of the Centre’s gross tax revenue collections.
Impact of the move
- With capital spending on defence continuing to fall short of requirements, it is difficult to contest the basic premise that spending on defence needs to be bolstered.
- However, sequestering funds for defence from the Centre’s gross tax revenues means a reduction in the overall tax pool that is shared with states.
- This is likely to be protested by the states, several of whom are already arguing for an increase in their share in taxes collected to 50 per cent from the current 42 per cent.