Mains Practice Questions

Approach

• First provide a brief introduction of the Finance Commission
• Then assess its role in maintaining and strengthening fiscal federalism in the country
• Provide the arguments in favour of according permanent status and associated implications
• Conclude suitably

Introduction

The Finance Commission is a Constitutionally mandated body that is at the centre of fiscal federalism. Set up under Article 280 of the Constitution, its core responsibility is to evaluate the state of finances of the Union and State Governments, recommend the sharing of taxes between them, lay down the principles determining the distribution of these taxes among States. Its working is characterised by extensive and intensive consultations with all levels of governments, thus strengthening the principle of cooperative federalism. Its recommendations are also geared towards improving the quality of public spending and promoting fiscal stability.

Body

The Finance Commission helps in maintaining fiscal federalism in India by performing following functions:

• The distribution between the Union and the States of the net proceeds of taxes which are to be divided between them and the allocation between the States of the respective shares of such proceeds.
• Determination of principles and quantum of grants-in-aid to States which are in need of such assistance.
• Measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.

Despite the changing fiscal environment and considerable expansion in its functions, the institution of the Finance Commission has ensured smooth functioning of Centre-State fiscal relations. If there has been no breakdown in the CentreState relations, the credit for this also goes to the Finance Commissions. It also goes to the credit of the framers of the Indian Constitution that the provisions relating to Central- State fiscal relations have stood the test of time. They proved adequate even in meeting the changing environment

The demand to accord permanent status to the Finance Commission seems right on the following grounds:

• There is a need for robust expenditure planning without compromising on fiscal consolidation as fiscal federalism gathers momentum in the era of uniform Goods and Services tax (GST).
• There is a need to ensure consistency between Finance Commissions so that there is some certainty in the flow of funds to States.
• During the intervening period, it can also address issues arising from implementation of the recommendation of the Commission.
• This will also help add knowledge and capacities and boost fiscal prudence. The upcoming Finance Commission will be able to get a clear hearing on the challenges and rate of effectiveness of its likely recommendations.
• The Commission can function as a leaner entity in the intervening period till the next Finance Commission is set up in a full-fledged manner.

However, the proposal for making the Finance Commission a permanent body could evolve in two ways. First, the government would abdicate its discretion currently available in designing and implementing the specific purpose transfers. Second, it would dilute the neutrality of the Finance Commission between the Union and the States through a process of continuous association with the government.

Conclusion

Thus there is considerable merit in having one apolitical body that provides stability and predictability primarily to share taxes that ensures fiscal balance. The way forward for fiscal federalism in India is, therefore, to refocus the scope of the Finance Commission to maintain the trust of all stakeholders in the institution.