15th Finance Commission may propose performance-based incentives for states

New Delhi, Jun 26: The Fifteenth Finance Commission is likely to propose bringing back performance-based incentives for states, wherein they will be assessed on certain parameters, Business Standard has learnt. Performance-based incentives were recommended by the 13th Finance Commission but omitted by the 14th Finance Commission.
Additionally, in spite of pressure by a number of state governments to amend some contentious terms of reference (ToRs), there will be no changes to the ToRs by the centre. Though, as reported earlier, the 15th FC has the freedom to not consider some of the ToRs when it recommends devolution of taxes between centre and states.
Among the TORs provided to FFC, it has been mandated with considering measurable performance-based incentives for states. Some parameters have been opposed by seven state and union territory governments, including how well states implement the flagship schemes of the central government of India, and control or lack of it in incurring expenditure on populist measures, efforts made by them in deepening goods and service taxes, progress made through direct benefit transfers and in promoting ease of doing business.
While some of the more controversial parameters like those on populist schemes and implementing centre’s schemes may be left out, the 15th FC is likely to advise the centre to reward states based on other parameters, like effectiveness of capital spending, progress in increasing revenues, progress made in achieving replacement rate of population growth, and achievements in infrastructure and social sector schemes, said officials aware of the work going on in the commission.
In May, seven state and union territories’ governments had jointly written to President of India Ram Nath Kovind seeking amendments to some of the contentious ToRs. A memorandum, signed by Chief Ministers or Finance Ministers of Andhra Pradesh, Puducherry, Karnataka, Delhi, Bengal, Kerala and Punjab said the terms were disruptive and a cause of concern.
Their biggest concern was the usage of the 2011 census, which they said would benefit Northern states which have not worked towards population control. Till the 14th Finance Commission, the 1971 census was used.
Prime Minister Narendra Modi, last Sunday at the meeting of Governing Council of Niti Aayog, made it clear that census 2011 should be one of the parameters for devolving funds to states. He, however, urged states to identify parameters or indices through which performance in other fields could be rewarded so that no one feels left out.