16TH FINANCE COMMISSION
1. Context
The Sixteenth Finance Commission is due to be set up shortly. Many critical changes have taken place since the constitution of the Fifteenth Finance Commission in November 2017 that includes COVID-19 and the subsequent geopolitical challenges. The combined government debt-GDP ratio had also shot up close to 90% at the end of 2020-21.
2. Finance Commission
- The Finance Commission is a crucial constitutional body in India responsible for the distribution of financial resources between the central government and the state governments.
- It plays a vital role in maintaining fiscal federalism by ensuring a fair and equitable distribution of financial revenues and grants-in-aid among the various tiers of government.
- The Finance Commission is set up every five years, or at such earlier intervals as the President of India may decide, as per Article 280 of the Indian Constitution.
- It consists of a Chairman and four other members, each appointed by the President. These members are experts in the fields of economics, finance, and public administration.
3. Mandate and Functions
- The primary objective of the Finance Commission is to make recommendations to the President regarding the distribution of the net proceeds of taxes between the Union (central government) and the states, and the allocation of resources among the states.
- It also suggests measures to improve the financial position of the states, if necessary. The Commission's recommendations are aimed at addressing regional imbalances and ensuring the overall economic development of the country.
4. The specific functions of the Finance Commission include
- Tax Revenue Sharing: The Commission reviews the trends in revenue collections and recommends the percentage of the divisible pool of taxes that should be shared with the states. The divisible pool includes taxes like income tax, corporate tax, and excise duty.
- Grants-in-Aid: Besides the devolution of taxes, the Finance Commission also suggests grants-in-aid to states to support their financial requirements for various developmental projects and schemes.
- Debt Relief: The Commission may recommend measures to provide relief to states facing a high burden of debt, thereby promoting fiscal discipline.
- Macro-Fiscal Management: It examines the overall financial situation of the country and suggests measures to maintain macroeconomic stability.
- Any Other Matter: The President may also refer specific matters to the Commission for examination and recommendations.
5. Process of Working
- The Finance Commission follows a consultative process while formulating its recommendations.
- It seeks input from various stakeholders, including the central and state governments, local bodies, financial experts, and economists.
- The Commission examines historical data, financial indicators, and the needs of states to arrive at a comprehensive and objective assessment.
- After conducting detailed studies and consultations, the Commission submits its report to the President.
- The recommendations of the Finance Commission are ordinarily binding in nature, and both the central and state governments are expected to implement them. However, their acceptance depends on the discretion of the central government.
6. Importance
- The Finance Commission is crucial in maintaining the federal structure of India and ensuring that all states receive adequate financial support for their development.
- By promoting equitable distribution of resources, helps in reducing regional disparities and fostering balanced economic growth across the country.
- The Commission's recommendations also play a vital role in shaping the fiscal policies of both the central and state governments.
7. Recommendations of the Previous Finance Commission
13th Finance Commission Recommendations:
- Increase the number of court working hours using existing infrastructure.
- Enhance support to Lok Adalats.
- Provide additional funding to State Legal Services Authorities to enhance legal aid for the marginalized.
- Promote the use of Alternative Dispute Resolution (ADR) mechanisms.
- Enhance the capacity of judicial officers and public prosecutors through training programs.
- Support the creation of a judicial academy in every state for training purposes.
- Allocate funds for the setting up of specialized courts.
14th Finance Commission's Recommendations:
- Raised states' share in the divisible pool of central taxes to 42%
- Revised to 41% after the number of states reduced to 28
- The withdrawal of Planning Commission grants helped manage the situation
15th Finance Commission Recommendations:
- Gather quantifiable data on the level of various services available in different states.
- Collect corresponding unit cost data to estimate cost disabilities among states.
- Fill gaps in statistical data through the efforts of the Ministry of Statistics.
8. Need for realistic expectations regarding the following 16th Finance Commission
- Acknowledging Implementation Challenges: Recognize the challenges and complexities involved in implementing Finance Commission recommendations, such as coordination issues, administrative capacity, and resistance to change. This understanding will help shape realistic expectations and strategies for addressing these challenges.
- Strengthening Implementation Mechanisms: Focus on improving the implementation mechanisms and processes. This includes enhancing coordination and cooperation between the Union and state governments, strengthening administrative capacity at all levels, and streamlining the implementation of conditionalities to facilitate smoother execution.
- Robust Monitoring and Evaluation: Establish effective monitoring and evaluation mechanisms to track the progress and outcomes of implemented reforms. Regular assessment will help identify implementation gaps and provide opportunities for course correction and improvement.
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For Prelims: Finance Commission, Article 280, Fiscal Consolidation, Fiscal Federalism, and Alternative Dispute Resolution (ADR) mechanism.
For Mains: 1. Discuss the Role and Challenges of the Finance Commission in Promoting Fiscal Federalism and Ensuring Equitable Resource Distribution in India. (250 words).
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Previous year Question1. With reference to the Finance Commission of India, which of the following statements is correct? (UPSC 2011)
A. It encourages the inflow of foreign capital for infrastructure development.
B. It facilitates the proper distribution of finances among the Public Sector Undertaking.
C. It ensures transparency in financial administration.
D. None of the statements (a), (b), and (c) given above is correct in this context.
Answer: D
2. With reference to the Fourteenth Finance Commission, which of the following statements is/are correct? (UPSC 2015)
1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent.
2. It has made recommendations concerning sector-specific grants.
Select the correct answer using the code given below.
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
Answer: A
3. Which of the following is/are among the noticeable features of the recommendations of the Thirteenth Finance Commission? (UPSC 2012)
1. A design for the Goods and Services Tax, and a compensation package linked to adherence to the proposed design.
2. A design for the creation of lakhs of jobs in the next ten years in consonance with India's demographic dividend.
3. Devolution of a specified share of central taxes to local bodies as grants
Select the correct answer using the codes given below:
A. 1 only
B. 2 and 3 only
C. 1 and 3 only
D. 1, 2 and 3
Answer: C
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Source: The Hindu
