Sambhav-2025

Approach Briefly introduce the role of the Finance Commission in India. Discuss the role of the Finance Commission as the constitutional safeguard for financial justice. Mention the challenges faced by the Finance Commission. To conclude, suggest reforms for enhancing the role of the Finance Commission.

Introduction

The Finance Commission is an essential constitutional body in India, tasked with ensuring the equitable distribution of financial resources between the Centre and the States. Established under Article 280 of the Constitution, the Commission plays a vital role in India’s federal structure.

Body

The Role of Finance Commission As The Constitutional Safeguard For Financial Justice :

• Tax Revenue Sharing:
  • The Finance Commission recommends how the net proceeds of taxes collected by the Centre are to be divided between the Centre and the States.
  • By recommending appropriate tax revenue distribution and fiscal transfers, it helps maintain both autonomy and unity in the federal structure.
    • For instance, in the 14th Finance Commission (2015-2020), it increased the share of States in the central tax pool from 32% to 42%, making a significant difference in fiscal allocations.
• Ensuring Equitable Resource Allocation:
  • One of the core mandates of the Finance Commission is to reduce regional disparities by ensuring a fair distribution of resources.
  • In its 14th Finance Commission Report, it was recommended that less developed States, such as Bihar, Uttar Pradesh, and Odisha, receive higher fiscal transfers.
  • This has allowed these States to address their unique developmental challenges.
• Promoting Cooperative Federalism:
  • The Finance Commission plays a key role in cooperative federalism, where it encourages collaboration between the Union and the States.
  • The recommendations of the 15th Finance Commission (2020-2025) emphasized cooperative federalism by aligning State-level fiscal needs with national priorities like climate change adaptation and population control.
• Addressing the Needs of Underdeveloped States:
  • The Finance Commission also addresses the special needs of States facing socio-economic challenges.
  • For example, Jammu & Kashmir and Northeastern States have historically received larger shares in grants-in-aid due to their geographical, economic, and security constraints.

Challenges Faced by the Finance Commission

• Political Interference:
  • The Finance Commission’s recommendations are advisory and often face political resistance, especially when they do not align with the priorities of the ruling government at the Centre or in certain States.
• Complexity of State Needs:
  • Some States may require more assistance in infrastructure development, while others may need financial help in addressing social issues. The diversity in needs makes it challenging to craft a one-size-fits-all solution.
  • The southern states frequently complain about receiving fewer funds despite contributing more in taxes compared to the northern states, attributing this disparity to their lower population.
• Limited Enforcement Power:
  • The Finance Commission can only make recommendations, which means that it has no direct power to enforce the implementation of its suggestions.
  • The effective implementation of its recommendations depends on the political will of the government in power.
• Economic Challenges:
  • The growing fiscal deficit and national economic crises, such as the COVID-19 pandemic, have made it difficult for the Commission to strike a balance between the resource needs of States and the Union's fiscal health.
  • Grants-in-Aid: Equitable Distribution: It ensures that the fiscal needs of States with varying levels of economic development are met fairly.

Conclusion

The Finance Commission plays an indispensable role in safeguarding financial justice within India’s federal structure. Strengthening its independence, enhancing its adaptability, and improving transparency will make the Finance Commission a more effective tool in achieving India’s fiscal and developmental goals.