3.

ECONOMY
3.1. FIFTEENTH FINANCE COMMISSION REPORT
Why in News?
The Fifteenth Finance released its report which was recently tabled in the Parliament.
About the Fifteenth FC Finance Commission
The Finance Commissions are commissions periodically constituted
• The Commission was chaired by Mr. by the President of India under Article 280 of the Indian
N.K. Singh and the report was titled Constitution. Following are key functions assigned to it-
‘Finance Commission in COVID times.’ • Distribution of 'net proceeds' of taxes between Center and the
• The Commission was required to submit States, to be divided as per their respective contributions to the
two reports. The first report, consisting taxes.
of recommendations for the financial • Determine factors governing Grants-in-Aid to the states and the
year 2020-21. The final report with magnitude of the same.
recommendations for the 2021-26 • To make recommendations to the president as to the measures
period. needed to augment the Fund of a State to supplement the
resources of the panchayats and municipalities in the state on
o Also, this is also the first ever
the basis of the recommendations made by the finance
Commission to have given commission of the state.
recommendations spanning a • Any other matter related to it by the president in the interest of
period of six years, that is, 2020-26. sound finance.
• The Commission was asked to prepare a
report on a many new and unique demand via its Terms of Reference (ToR).
How the Terms of Reference (ToR) of Fifteenth FC were different from previous commissions?
• Fiscal Consolidation Roadmap: The Commission was asked to review the current finances of both state and
central government and recommend a fiscal consolidation roadmap for sound fiscal management.
o This task became all the more difficult with the outbreak of the Pandemic, as the need for fiscal room
became dire.
• Indirect Taxation System: The commission was asked to evaluate the impact of the GST, including the need
for payment of compensation for possible loss of revenues for 5 years, and abolition of a number of cesses.
• Measurable Performance Incentives: The Commission was asked to consider proposing of measurable
performance-based incentives for States, at the appropriate level of government in areas like deepening of
tax nets, population control, power sector reforms etc.
• Using 2011 population against 1971 population data: The Commission had to use the population data of 2011
while making its recommendations. This was tricky as there was an active opposition from Southern States on
usage 2011 population data.
• Other unique demands:
o Analyzing the possibility of creation of a non-lapsable defense fund.
o Reviewing the present arrangements on financing Disaster Management initiatives.
What are the recommendations given by the Fifteenth FC Report for 2021-26 period?
Vertical Devolution The commission has recommended maintaining the vertical devolution at 41%.
• The idea is to maintain the same level of devolution as recommended by 14 th FC (i.e., 42%),
the adjustment of about 1% has been made due to the changed status of the erstwhile State
of Jammu and Kashmir into the new Union Territories of Ladakh and Jammu and Kashmir.
• Gross tax revenue for 5-year period is expected to be 135.2 lakh crore. Out of that, Divisible
pool (after deducting cesses and surcharges & cost of collection) is estimated to be 103 lakh
crore.
Horizontal Devolution The horizontal devolution is primarily based on three principles namely need of states, equity
among states and performance of states. To balance all three principles, six criteria are used to
calculate tax distribution- Income Distance, Area, Population (2011), Demographic Performance,
Forest and Ecology and Tax and Fiscal Transfers.

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 • Income distance: Income distance is the distance of a state’s income from the state with the
highest income. Income of a state has been computed as average per capita GSDP during
the three-year period between 2016-17 and 2018-19. A state with lower per capita income
will have a higher share to maintain equity among states.
• Demographic performance: The demographic performance criterion has been used to
reward efforts made by states in controlling their population. States with a lower fertility
ratio will be scored higher on this criterion.
• Forest and ecology: This is calculated as the share of the dense forest of each state in the
total dense forest of all the states.
• Tax and fiscal efforts: This criterion has been used to reward states with higher tax collection
efficiency. It is measured as the ratio of the average per capita own tax revenue and the
average per capita state GDP during the three years between 2016-17 and 2018-19.
Grants to States • Revenue deficit grants: 17 states will receive grants worth Rs 2.9 lakh crore to eliminate
revenue deficit.
• Sector-specific grants: Sector-specific grants of Rs 1.3 lakh crore will be given to states for
sectors like health, education, implementation of agricultural reforms etc. A portion of
these grants will be performance-linked.
• State-specific grants: The Commission recommended state-specific grants of about 0.5 lakh
crore. These will be given in the areas of social needs, administrative governance and
infrastructure etc.
• Grants to local bodies: The total grants to local bodies will be Rs 4.36 lakh crore (a portion
of grants to be performance-linked).
o Grants to local bodies (other than health grants) will be distributed among states based
on population and area, with 90% and 10% weightage, respectively.
o Also, no grants will be released to local bodies of a state after March 2024 if the state
does not constitute State Finance Commission and act upon its recommendations by
then.
• Disaster risk management: The Commission recommended retaining the existing cost-
sharing patterns between the centre and states for disaster management funds. The cost-
sharing pattern between centre and states is: (i) 90:10 for north-eastern and Himalayan
states, and (ii) 75:25 for all other states. State disaster management funds will have a corpus
of Rs 1.6 lakh crore (centre’s share is Rs 1.2 lakh crore).
• Incubation of new cities: Finance Commission has recommended Rs 8,000 crore to states
for incubation of new cities, granting Rs 1,000 crore each for eight new cities. The focus of
urban grants for million-plus cities is improvement in air quality and meeting the service level
benchmark of solid waste management and sanitation.
Total transfers • Including total grants of Rs. 10.33 lakh crore and tax devolution of Rs. 42.2 lakh crore (41%
of 103 lakh crore), aggregate transfers to States is estimated to remain at around 50.9 per
cent of the divisible pool during 2021-26 period.
• Total transfers (devolution + grants) constitutes about 34 per cent of estimated Gross
Revenue Receipts of the Union.
Fiscal Management The Commission suggested that the centre bring down fiscal deficit to 4% of GDP by 2025-26. For
and Consolidation states, it recommended the fiscal deficit limit (as % of GSDP) of: (i) 4% in 2021-22, (ii) 3.5% in
Roadmap 2022-23, and (iii) 3% during 2023-26.
• Extra annual borrowing worth 0.5% of GSDP will be allowed to states during first four years
(2021-25) upon undertaking power sector reforms including: (i) reduction in operational

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 losses, (ii) reduction in revenue gap, (iii) reduction in payment of cash subsidy by adopting
direct benefit transfer, and (iv) reduction in tariff subsidy as a percentage of revenue.
• It recommended forming a high-powered inter-governmental group to: (i) review the Fiscal
Responsibility and Budget Management Act (FRBM), (ii) recommend a new FRBM
framework for centre as
well as states and oversee
its implementation.
• The inverted duty structure
between intermediate
inputs and final outputs
present in GST needs to be
resolved. Revenue
neutrality of GST rate
should be restored which
has been compromised by
multiple rate structure and
several downward
adjustments.
• A comprehensive
framework for public
financial management
should be developed. An
independent Fiscal Council
should be established with powers to assess records from the Centre as well as states.
Other • Disaster Management Fund: Setting up the state and national level Disaster Risk Mitigation
recommendations Fund (SDRMF), in line with the provisions of the Disaster Management Act.
• Defense Modernization Fund: Creation of a separate non-lapsable fund for modernization
of defense and internal security. The objective is to bridge the gap between defense budget
allocations and the projected budgetary requirements.
o The Commission has also recommended that Rs 1,000 crore per annum should be
allocated from this fund for the welfare of families of the defense and CAPF personnel
who sacrifice their lives in frontline duties.
• Health: States should increase spending on health to more than 8% of their budget by 2022.
Primary healthcare expenditure should be two-thirds of the total health expenditure by
2022.
• Centrally sponsored schemes (CSS): A threshold should be fixed for annual allocation to CSS
below which the funding for a CSS should be stopped (to phase out CSS which outlived its
utility or has insignificant outlay)

3.2. DRAFT BLUE ECONOMY POLICY FOR INDIA

Why in news?
Ministry of Earth Sciences (MoES) has rolled out the Draft Blue Economy policy for India in the public domain
inviting suggestions and inputs from various stakeholders including industry, NGOs, academia, and citizens.
About Blue Economy
• According to World Bank, Blue Economy refers to sustainable use of ocean resources for economic growth,
improved livelihood and jobs, and ocean ecosystem health.
• Blue Economy seeks to promote economic growth, social inclusion and the preservation or improvement of
livelihoods as well as ensuring environmental sustainability of the oceans and coastal areas.
• The economic philosophy of the Blue Economy was first introduced in 1994 by Professor Gunter Pauli at the
United Nations University (UNU) to reflect the needs of future growth and prosperity, along with the threats
posed by global warming.

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