Table of Contents
THE CONTEXT: The results of India’s 2024 general election suggest a trend towards greater democratization, with regional parties performing well and set to have representation on both the ruling and opposition benches in Parliament. This outcome could help strengthen federalism in India, which has been under strain in recent years. However, center-state relations became contentious during the election campaign, with some perceiving the ruling party’s rhetoric as threatening to opposition-ruled states.
THE ISSUES:
- Contentious Centre-State Relations: There has been increasing tension between the Centre and Opposition-ruled States, exacerbated by perceived threats and stepmotherly treatment from the Centre. This includes issues like inadequate resource transfers and biased treatment in allocating funds and projects.
- Bias in Resource Allocation: The Finance Commission’s role in devolving funds from the Centre to the States is seen as biased. The Centre’s predominant role in setting the terms of reference for the Commission introduces a bias in favor of the Centre, leading to conflicts over resource allocation.
- Diverse Needs of States: There is a vast diversity among Indian States, which necessitates greater autonomy for each State to address its unique issues. A common approach imposed by a dominant Centre is not conducive to the progress of such diverse States.
- Economic Disparities Among States: There is a significant gap between rich and poor States, with richer States resenting the proportionately more substantial share of resources allocated to poorer States. This economic disparity remains despite the efforts of the Finance Commission.
- Political Influence in Resource Distribution: The Centre’s allocation of resources and projects is often influenced by political considerations, favoring States governed by the same party as the Centre. This undermines the autonomy of Opposition-ruled States and weakens federalism.
- Need for Cooperative Federalism: There is a need to reverse fraying federalism and strengthen the spirit of India as a ‘Union of States.’ It suggests that the Sixteenth Finance Commission should ensure even-handed treatment of all States and reduce friction by transferring more resources to poorer States to keep rising inequality in check.
THE WAY FORWARD:
- Expansion of the Divisible Pool: One of the primary concerns is the exclusion of cesses and surcharges from the divisible pool, which constitutes around 23% of the Centre’s gross tax receipts. Including a portion of these cesses and surcharges in the divisible pool could enhance revenue sharing among states, ensuring a more equitable distribution of resources. This recommendation has been echoed by various experts and committees, emphasizing the need for a more inclusive approach to tax devolution.
- Enhanced Weightage for Efficiency: The current criteria for horizontal devolution focus heavily on equity and need-based factors such as income distance and population. Increasing the weightage for efficiency criteria, such as GST contribution and tax collection efficiency, can promote a more balanced and fair distribution of resources. This approach would reward states that perform better in revenue generation and fiscal management, thereby encouraging overall efficiency.
- Greater State Participation in the Finance Commission: Establishing a formal mechanism for state participation in the Finance Commission’s constitution and functioning, like the GST Council, can ensure a more inclusive decision-making process. This would give states a more significant say in allocating resources and more effectively address their specific concerns. Such a participatory approach is crucial for maintaining the spirit of cooperative federalism.
- Revisiting the Criteria for Horizontal Devolution: The criteria for horizontal devolution should be periodically reviewed and updated to reflect states’ changing economic landscape and development needs. For instance, the 15th Finance Commission introduced the demographic performance criterion to reward states for controlling population growth. Similar innovative criteria can be introduced to address contemporary challenges and ensure a fair distribution of resources.
- Strengthening the Role of the Finance Commission: The Finance Commission should act as a neutral arbiter of Centre-State relations, maintaining a delicate balance in deciding on contesting claims. It should also ensure the Centre does not unduly assert its dominance over states. Recommendations for increasing the devolution of resources from the Centre to the States from 41% to a higher percentage could help reduce the Centre’s undue control over resources and strengthen federalism.
- Improving Flexibility in Fund Utilization: States often face constraints in utilizing devolved funds due to rigid guidelines and conditionalities imposed by the Centre. Providing greater flexibility in fund utilization can help states address their local priorities more effectively. This approach would empower states to tailor their development programs according to their unique needs and circumstances, thereby enhancing the overall efficiency and effectiveness of public spending.
THE CONCLUSION:
To reduce the central government’s domination over states, the 16th Finance Commission could recommend substantially raising the devolution of resources from the current 41% and curtailing the center’s role in specific joint schemes. The center’s assertiveness has undermined federalism, and it’s time for the utilization of the country’s resources to be jointly decided by the central and state governments as equal partners. The changed political situation following the 2024 election results makes this a more feasible prospect.
UPSC PAST YEAR QUESTIONS:
Q.1 How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position? 2021
Q.2 How is the Finance Commission of India constituted? What do you think about the terms of reference of the recently constituted Finance Commission? Discuss. 2018
Q.3 Discuss the recommendations of the 13th Finance Commission, which has been a departure from the previous commissions for strengthening the local government’s finances. 2013
MAINS PRACTICE QUESTION:
Q.1 Financing States and devolving resources from the Centre to the States had been a significant source of conflict in Indian federalism. Discuss the role of the Finance Commission in this context and suggest reforms to make the process of fiscal federalism more equitable, transparent, and conducive to reducing regional disparities.
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