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The next Finance Commission will have a tough task

In this section, we have discussed issues related to the functioning and mandates of the Finance Commission.

What is the Background?

The Union Government is going to appoint a new Finance Commission in the coming few days under article 280 of the constitution of India. The government will appoint Sixteenth Finance Commission in the month of November. The Finance Commission is a constitutional body. It is formed to determine the methods and formulas necessary for distributing the net proceeds between the centre and states. It means the devolution of taxes between the Centre and states.

The devolution is performed in two segments, one is horizontal and another is vertical. The devolution between Centre and States is referred as verticle devolution and between States is referred as horizontal devolution.

In the earlier time, the recommendations of the Finance Commission were not so valuable. As Centre some way to the other support to favourite states. But, in the current time, Finance Commission is recognized as sole architect of India’s fiscal federalism. Hence we can say that, responsibilities and influence are much larger compare to the other in fiscal policy. Due to all these, we can say that, the Finance Commission function as a quasi-judicial body.

Issues with the Indian way of economy
Horizontal Distribution

There is a consistent demand to increase the pool of states. Currently, the share of States in the net proceeds is 42%. But the states are demanding higher, which looks a difficult task. Before 2017, the Finance Commission took data of population from 1971 census, but the sixteenth finance commission was mandated to use 2011 census data. That results, the states which which perform well in stabilizing population, typically the southern states got less share. They termed this as a penalty for good governance.

On a similar way, the grants given to the states in the segment of revenue deficit, remain in deficit on the current account even after the devolution. In general, the revenue deficit grants have a neat rationale, that every state in a country should be able to provide a minimum level of services to its residents. That creates an easiness regarding why bother raising revenues on there own, when the finance commission will compensate the states.

The primary challenge before the Finance Commission is to determine how much the deficit of State is due to fiscal incapacity and how much is due to fiscal irresponsibility. Hence, to whatever reason, Finance Commission will have to pay more to such under performed states on make a compromise to another. Due to all these, every horizontal distribution formula has been criticised as being inefficient or unfair or both.







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