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February 2021: Current Affairs Polity & Economy- 2 - Indian Economy for UPSC CSE


Performance based incentives disincentives indepen­dent decision-making. Any conditions on the state's ability to borrow will hurt the state's spending, particularly on development, thus undermining cooperative fiscal federalism.

It does not hold the Union government accountable for its own fiscal prudence and dilutes the joint responsibility that the Union and States have.

Horizontal Devolution Criteria

➤ Population:

  • The State's population represents the needs of the State to undertake expenditure for providing services to its residents.
  • It is also a simple and transparent indicator that has a significant equalising impact.


The larger the area, greater is the expenditure requirement for providing comparable services.

Forest and Ecology: 

By taking into account the share of dense forest of each state in the dense aggregate forest of all the states, the share on this criteria is determined.

Income Distance:

  • Income distance is the Gross State Domestic Product (GSDP) distance of a particular state from the state with the highest GSDP.
  • To maintain inter state equity, the states with lower per capita income would be given a higher share.

Demographic Performance:

  1. It rewards efforts made by states in controlling their population.
  2. This criterion has been computed by using the reciprocal of each state's total fertility ratio, scaled by 1971 population data.
    • This has been done to assuage the fears of southern States about losing some share in tax transfers due to the reliance on the 2011 Census data instead of the 1971 census, which could penalise States that did better manage demographics.
  3. States with a lower fertility ratio will be scored higher on this criterion.
    • The Total Fertility Ratio in a specific year is defined as the total number of children that would be born to each woman if she/ they were to pass through the childbearing years bearing children according to a current schedule of age-specific fertility rates.

 ➤ Tax Effort:

  • This criterion has been used to reward states with higher tax collection efficiency.
  • It has been computed 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.

15th Finance Commission Recommendations: Different Sectors

Recently, the 15th Finance Commission's Report was tabled in the Parliament. The Report included recom­mendations for different sectors - Health, Defence and Internal Security and Disaster Risk Management, etc.

Key Points


  • Health spending by States should be increased to more than 8% of their budget by 2022.
  • Given the inter-State disparity in medical doctors' availability, it is essential to constitute an All India Medical and Health Service as is envisaged under Section 2A of the All-India Services Act, 1951.
  • 15th FC also allocated funds for overhauling medical services at all the allied healthcare workforce levels and training.

Defence and Internal Security:

  • The Union Government may constitute in the Public Account of India, a dedicated non-lapsable fund, Modernisation Fund for Defence and Internal Security (MFDIS).

Disaster Risk Management:

  1. Formation of Mitigation Funds at both the national and State levels, in line with the Disaster Management Act's provisions, 2005.
    • The Fund should be used for those local level and community-based interventions which reduce risks and promote environment-friendly settlements and livelihood practices.
  2. Funding Priority Areas: 15th FC has also earmarked allocations for certain priority areas, such as :
    • Funds for the National Disaster Response Force for expansion and modernisation of fire services and resettlement of displaced people affected by erosion.
    • Funds for National Disaster Mitigation Fund (NDMF) for catalytic assistance to twelve most drought-prone states, managing seismic and landslide risks in ten hill States, reducing urban flooding risk in seven most populous cities and mitigation measures to prevent erosion.

15th Finance Commission Recommendations: Fiscal Consolidation

Recently, the 15th Finance Commission's Report was tabled in the Parliament. It provided a range for both the Union and States' fiscal deficit and debt path.

Key Points

Fiscal Deficit:

  • Target for Centre: It recommended that the Centre brings down its fiscal deficit to 4% of Gross Domestic Product GDP by 2025-26 against 6.8% in FY22. 
  • Target for States: For states, it recommended fiscal deficit at 4% of Gross State Domestic Product (GSDP) in 2021-22, 3.5% in the following year and 3% for the next three years.

Borrowing Ceilings for States:

  1. Because of Article 293 of the Constitution, State Governments operate under borrowing limits and, hence, budget constraints, approved by the Union Government.
  2. The standard limit for net borrowing may be fixed at 4% of Gross State Domestic Product (GSDP) in 2021-22, 3.5% in 2022-23 and be maintained at 3% of GSDP from 2023-24 to 2025-26.
  3. An additional borrowing of 0.5% of GSDP to be allowed to the States if they meet the criteria for power sector reforms.

Better Monitoring of Centrally Sponsored Scheme (CSS):

  1. A threshold amount of annual appropriation should be fixed below which the funding for a CSS may be stopped.
    • Below the stipulated threshold, the administration department should justify the need to continue the scheme.
  2. As the life cycle of ongoing schemes has been made co-terminus with the cycle of Finance Commissions, third-party evaluation of all CSSs should be completed within a stipulated time frame.

New FRBM Framework:

  1. The Fiscal Responsibility and Budget Management Act (FRBM Act, 2003) needs a major restructuring and recommended that a High-powered Inter-governmental Group may examine the time-table for defining and achieving debt sustainability.
    • This High-powered Group can craft the new FRBM framework and oversee its implementation.
  2. State Governments may explore formation of independent public debt management cells which will chart their borrowing programme efficiently.

Regulations on FCRA Contributions

Recently, the Ministry of Home Affairs (MHA) issued new regulation guidelines to banks under the Foreign Contribution (Regulation) Act, 2010. It states that the donations received in Indian rupees by non-governmental organisations (NGOs) and associations from any foreign source (even if that source is located in India at the time of such donation) should be treated as foreign.

Key Points

About the New Guidelines:

  1. Widening the Scope of Foreign Contribution: Under the issued regulations, donations given in Indian rupees (INR) by any foreigner/foreign source including foreigners of Indian origin like Overseas Citizen of India (OCI) or Person of India Origin (PIO) cardholders should also be treated as foreign contribution.
  2. Meeting the Standards of FATF: The guidelines mandate that NGOs follow good practices according to standards of global financial watchdog- Financial Action Task Force (FATF).
    • It asked NGOs to inform the Ministry about "suspicious activities" of any donor or recipient and "take due diligence of its employees at the time of recruitment."

Existing Rules:

  1. Mandatory Reporting by Banks: All banks have to report the receipt or utilisation of any foreign contribution by any NGO, association or person to the Central government within 48 hours, whether or not they are registered or granted prior permission under the Foreign Contribution Regulation Act (FCRA) 2010.
  2. Prescribed Banking Channels:
    • In September 2020, the Foreign Contribution (Regulation) Amendment Act (FCRA), 2020 was passed by the Parliament.
    • A new provision that makes it mandatory for all NGOs to receive foreign funds in a designated bank account at the State Bank of India's New Delhi branch was inserted.
    • All NGOs seeking foreign donations have to open a designated FCRA account at the SBI branch or link their existing account.

Reasons for FCRA Regulations:

  1. The annual inflow of foreign contribution has almost doubled between the years 2010 and 2019. Still, many recipients of foreign contribution are being not utilised the same for the purpose for which they were registered or granted prior permission under amended provisions of the FCRA 2010.
    • Recently, the Union Home Ministry has sus­pended licenses of the six (NGOs) who were alleged to have used foreign contributions for religious conversion.
  2. To ensure that such contributions do not adversely affect the country's internal security.
    • Recently the National Investigation Agency (NIA) registered a case against a foreign based group that provides funds for secessionist and pro-Khalistani activities in India.
  3. These regulations could enhance transparency and accountability in the receipt and utilisation of foreign contributions.

Controversies Related to FCRA:

  1. Scope not defined: It prohibits the receipt of foreign contributions "for any activities detrimental to the national interest" or the "economic interest of the state".
    • However, there is no clear guidance on what constitutes "public interest".
  2. Limits Fundamental Rights: The FCRA restrictions have serious consequences on both the rights to free speech and freedom of association under Articles 19(1)(a) and 19(1)(c) of the Constitution.

Foreign Contribution (Regulation) Act (FCRA), 2010

  1. Foreign funding of persons in India is regulated under FCRA Act and is implemented by the Ministry of Home Affairs.
    • Individuals are permitted to accept foreign contributions without permission of MHA. However, the monetary limit for accepting such foreign contributions shall be less than Rs. 25,000.
  2. The Act ensures that the recipients of foreign contributions adhere to the stated purpose for which such contribution has been obtained.
  3. Under the Act, organisations are required to register themselves every five years.
  4. Foreign Contribution (Regulation) Amendment Act, 2020
  5. Prohibition to accept foreign contribution: The Act bars public servants from receiving foreign contributions. Public servant includes any person who is in service or pay of the government or remunerated by the government for any public duty performance.
  6. Transfer of foreign contribution: The Act prohibits foreign contribution to any other person not registered to accept foreign contributions.
  7. Aadhaar for registration: The Act makes Aadhaar number mandatory for all office bearers, directors or key functionaries of a person receiving foreign contribution, as an identification document.
  8. FCRA account: The Act states that foreign contribution must be received only in an account designated by the bank as FCRA account in such branches of the State Bank of India, New Delhi.
  9. Reduction in use of foreign contribution for administrative purposes: The Act proposes that not more than 20% of the total foreign funds received could be defrayed for administrative expenses. In FCRA 2010 the limit was 50%.
  10. Surrender of certificate: The Act allows the central government to permit a person to surrender their registration certificate.

Economic Impact of Judicial Decisions

Recently, the NITI Aayog has asked research organisation' Consumer Unity and Trust Society (CUTS) International' to conduct a study on the "economic impact" of various judgments delivered by courts and tribunals and the 'judicial activism' of such courts and tribunals.

  • Judicial Activism: It implies the judiciary's assertive role to force the other two organs of the government (legislature and executive) to discharge their constitutional duties. It is also known as "judicial dynamism". It is the antithesis of "judicial restraint", which means the judiciary's self-control.

Key Points

Conducting Organization:

  • The study is to be undertaken by the Jaipur- headquartered CUTS (Consumer Unity and Trust Society) Centre for Competition, Investment and Economic Regulation, which also has an international presence.
  • It is a registered, recognised, non-profit, non­partisan, non-government organisation (NGO) pursuing social justice and economic equity both within and across borders.


  • The study's objective aims a "narrative building for sensitising the judiciary on the economic impact of their decisions". 
  • It is to do an objective cost-benefit analysis of the decisions' economic impact.

Projects to be Studied:

  • The Study intends to examine five major projects that have been "impacted" by judicial decisions of the Supreme Court (SC) or the National Green Tribunal (NGT).
    1. Projects to be analysed include constructing an airport in Mopa, Goa; cessation of iron ore mining in Goa, and the shutting down of the Sterlite copper plant in Thoothukudi, Tamil Nadu.
    2. The others are decisions by the NGT involving sand mining, and construction activities in the National Capital Region.


  • It plans to do this by interviewing people who have been affected by the closure of the projects, environmental campaigners, experts and assessing the business impact of closure.


  • The findings will be used as a training input for judges of commercial courts, NGT, High Courts and SC.
  • It would contribute to public discourse among policymakers for promoting an "economically responsible approach by the judiciary" in its decisions. o The study is also a part of the larger umbrella project undertaken by NITI Aayog, under which it wants to establish a judicial performance index, which would measure judges' performance at district courts and subordinate levels.

Schemes for Reducing Tax Disputes

Recently, the Finance Secretary has said that the new system of faceless assessment and appeal would help bring down tax disputes substantially.

Key Points

Tax Disputes (Data):

  • As per official data, the amount involved in tax disputes was over Rs. 11 lakh crore in FY19-end, up 23% over a year-ago.
  • Since India has a very high number of tax litigations, the resolution times are significantly higher, involving time and cost (on the part of the government and taxpayers).

Initiatives Taken to Reduce Tax Disputes: 

  1. Dispute Resolution Committee:
    • In Budget 2021, the Minister of Finance has proposed the formation of a Dispute Resolution Committee (DRC) to provide quicker relief to taxpayers in tax disputes.
    • It will be formed under a new section, 245MA, of the Income Tax Act.
    • The DRC will cater to small taxpayers having a taxable income of up to Rs. 50 lakh and a disputed income of up to Rs. 10 lakh.
    • The Committee will have the powers to reduce, waive any penalty or give immunity from any offence punishable under the Income Tax Act.
    • The alternative mechanism through the DRC shall help taxpayers prevent new disputes and settle the issue at the initial stage. 
    • India has been ranked at 88 in the World Rule of Law Index 2020 in terms of accessibility of alternative dispute resolution mechanisms.
  2. Faceless Assessment and Appeal:
    • The Prime Minister in August 2020 announced three key structural tax reforms under the 'Transparent Taxation - Honouring the Honest' platform - faceless assessment, faceless appeal and taxpayers' charter.
    • The faceless assessment system was launched to remove the need for the taxpayers' physical presence in front of the tax officials.
    • Since the faceless random assessment launch, over 50,000 disputes have been settled.
    • The faceless appeals system aims to eliminate the taxman's discretionary powers, curb corrupt practices, and provide ease of compliance to taxpayers.
    • Income Tax appeals will be finalised in a faceless manner except appeals related to serious fraud, major tax evasion, search matters, international tax issues and matters about black money.
    • The tax charter elaborated on the taxpayers' rights and responsibilities to help them familiarise with the whole process of Income Tax collection.
    • The effort is on to establish a National Faceless Income Tax Appellate Tribunal Centre that will offer personal hearings through video­conferencing.
  3. Vivad Se Vishwas Scheme:
    • The scheme provides for settlement of disputed tax, disputed interest, disputed penalty or disputed fees about an assessment or reassessment order on payment of 100% of the disputed tax and 25% of the disputed penalty or interest or fee.
    • The Direct Tax Vivad se Vishwas Act, 2020 was enacted in March 2020 to settle direct tax disputes locked up in various appellate forums. As many as 1.25 lakh cases, a quarter of all direct disputes, have opted for Vivad se Vishwas scheme, enabling settlement of Rs. 97,000 crore in tax demands.
The document February 2021: Current Affairs Polity & Economy- 2 | Indian Economy for UPSC CSE is a part of the UPSC Course Indian Economy for UPSC CSE.
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FAQs on February 2021: Current Affairs Polity & Economy- 2 - Indian Economy for UPSC CSE

1. What are the key recommendations made by the 15th Finance Commission?
Ans. The key recommendations made by the 15th Finance Commission include recommendations on different sectors, fiscal consolidation, regulations on FCRA contributions, economic impact of judicial decisions, and schemes for reducing tax disputes.
2. What is the significance of the 15th Finance Commission's recommendations on fiscal consolidation?
Ans. The 15th Finance Commission's recommendations on fiscal consolidation are significant as they provide guidance on how the government can achieve its goal of reducing fiscal deficits and stabilizing the economy. These recommendations may include measures such as reducing government spending, increasing revenue generation, and implementing reforms to improve the efficiency of public expenditure.
3. What are the regulations on FCRA contributions mentioned in the article?
Ans. The article mentions that the 15th Finance Commission has recommended regulations on FCRA (Foreign Contribution Regulation Act) contributions. These regulations may aim to streamline the process of receiving and utilizing foreign contributions, ensuring transparency and accountability in the use of such funds.
4. How do judicial decisions impact the economy, according to the article?
Ans. According to the article, judicial decisions can have an economic impact. The article does not provide specific details on how judicial decisions impact the economy, but it suggests that the 15th Finance Commission has considered this factor in its recommendations. Judicial decisions can influence various aspects of the economy, such as investments, business operations, and government policies.
5. What are the schemes mentioned in the article to reduce tax disputes?
Ans. The article mentions that the 15th Finance Commission has proposed schemes to reduce tax disputes. However, the specific details of these schemes are not provided in the article. These schemes may include measures such as alternative dispute resolution mechanisms, simplification of tax laws, and strengthening of tax administration to minimize tax disputes and promote a taxpayer-friendly environment.
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