Post-Devolution Revenue Deficit Financing

Context:

● Recently, The Finance Ministry has released its fifth monthly instalment of Post Devolution Revenue Deficit (PDRD) Grant of Rs 9,871 crore to the states on August 9.

● With the release of this instalment, a total amount of Rs 49,355 crore has been released to eligible states as Post Devolution Revenue Deficit Grant (PDRD) in the current financial year.

Probable Question:

1. What do you mean by Post Devolution Revenue Deficit Grant? Give a short account of various mechanisms provided in the constitution to address vertical fiscal imbalance between states and centre?

Finance Commission :

● The Finance Commission is a constitutional body created under Article 280 that is responsible for making recommendations to the President about the principles that govern the financial distribution between the Centre and the states.

● After the 73rd and 74th Amendment Acts, the Finance Commission can also suggest measures to augment the Consolidated Fund of the States to supplement the resources of rural and urban local bodies.

● The Finance Commission recommends grants that are primarily divided into four categories - Grants for rural local bodies , grants for urban local bodies, assistance to State Disaster Response Force and Post devolution revenue deficit grants.

About Post Devolution Revenue Deficit Grant

● The Post Devolution Revenue Deficit Grant is provided to the States under Article 275 of the Constitution. The grants are released as per the recommendations of the Fifteenth Finance Commission in monthly instalments to meet the gap in Revenue Accounts of the States post devolution.

● The Commission has recommended PDRD grants to 17 States during 2021-22.

● The eligibility of States to receive this grant and the quantum of grant was decided by the Commission based on the gap between assessment of revenue and expenditure of the State after taking into account the assessed devolution for the financial year 2021-22.

● The 15th Finance Commission has recommended a total Post Devolution Revenue Deficit Grant of ₹1,18,452 crore to 17 States in the financial year 2021-22. The grant is released to the States in 12 monthly instalments.

● The revenue deficit grants form a part of the Grants-in-Aid given by the Centre under Article 275(1) on the recommendation of the Finance Commission, a constitutional body formed under Article 280 of the Constitution. This is provided as per the needs of each State apart from the regular devolution of Central Taxes on the basis of various criteria laid down by the FCs.

⮚ To put it in simpler terms, all the States receive a share of the Central taxes on the basis of certain criteria, namely, Income Distance, Population, Area, Forest Cover, Forest and Ecology, Demographic performance and tax effort (the last three added by the 15th FC) in order to mitigate the fiscal imbalance. Despite such distribution (i.e. post devolution), some States will continue to have a revenue deficit and it is for such states the Revenue Deficit Grant is given.

About Grants-in-Aid to the States:

The Constitution, under the Seventh Schedule, assigned greater revenue-raising powers to the Union, whereas much of the expenditure responsibilities, particularly those pertaining to welfare and development of the citizens, were assigned to the states. The report of the 15th Finance Commission notes that in 2018-19, the states had only 37.3 per cent of the resources but were responsible for 62.4 per cent of the expenditure that was incurred.

To address this vertical fiscal imbalance,the Constitution’s fiscal federal architecture allows multiple channels for the flow of funds from the Centre to the states. Predominantly, intergovernmental transfers are channelled through the following routes:

● Article 270 provides for distribution between the Union and the states of taxes and duties which are collected by the Government of India.

● Grants-in-Aid to the States: Besides sharing taxes amongst the Union and the states, the Constitution endows with grants-in-aid to the states from the Central resources. There are two sorts of grants-in-aid, viz. statutory grants and discretionary grants:

⮚ Statutory Grants:

o Article 275 authorizes the Parliament to make grants to the states which are in need of financial support and not to every single state. These grants are charged on the Consolidated Fund of India (CFI) each year.

o It provides for grants-in-aid to supplement the revenues of states which need assistance. Different sums may be fixed for different states based on their specific needs. For instance, grants under Article 275 have been made to Tamil Nadu for promoting the welfare of Scheduled Tribes. Grants have also been made to Nagaland and Meghalaya for welfare of vulnerable groups and communities.

o Apart from this regular provision, the Constitution also offers for specific grants for promoting the welfare of the scheduled tribes (STs) in a state or for raising the level of administration of the scheduled areas in a state involving the State of Assam.

o The statutory grants in Article 275 (both general and specific) are given to the states on the suggestion of the Finance Commission.

⮚ Discretionary Grants

o Article 282 authorizes both the Union and the states to make any grants for any public purpose, even if it is not within their respective legislative competence. Under this provision, the Centre formulates grants to the states.

● While transfers under Articles 270 and 275 are based on the recommendations of the Finance Commission (established under Article 280), transfers under Article 282 are outside the Commission’s formal purview.