Finance commission

About:

• • It a constitutional body constituted by the President under Article 280 of the Constitution.
  • It is a quasi-judicial body.
  • It functions as a balancing wheel of fiscal federalism and an instrument of cooperative federalism.

Role:

It recommends to the President of India on the following matters:

• • The distribution of the net proceeds of taxes between Centre and States, and allocation between States of the respective shares of such proceeds.
  • The principles that should govern the grants-in-aid to the States by the Centre.
  • The measures to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and the Municipalities.
  • Any other matter referred to it by the President in the interests of sound finance.

Promoting cooperative fiscal federalism:

• • Equitable Resource Distribution: Recommends for Vertical devolution and Horizontal devolution.
    • 14^th Finance commission recommended vertical devolution of 42%.
  • Recommend Governance Reforms
    • The 13th Finance Commission, recommended reforms in GST like a single rate of 12%.
  • The Finance Commission, suggested reforms for rationalisation of Centrally Sponsored Schemes (CSS).
  • Ensuring Fiscal Discipline: Promoting fiscal consolidation and responsible financial management.
    • Recommended reforms like accrual accounting, and a fiscal roadmap for FRBM Act.
  • Others: Strengthening local self-governance, sector-specific grants, Performance-based grants and strengthening State Finance Commissions.

Challenges

Way forward:

• • Punchhi commission- FC to be made a permanent body to create an institutional memory.
  • Vijay Kelkar- Integrate 4 pillars of fiscal federalism– GSTCouncil, NITI Aayog, Finance Commission, Inter-state Council.

Issues before 16^th finance commission:

• • Maintaining sanctity of tax devolution: Avoid dilution through cess and surcharges
  • Proliferation of centrally sponsored schemes (CSS)
  • Conditional vs. unconditional grants: Promoting fiscal autonomy.
    • About 57% of the total transfers are conditional transfers.
  • Freebies and fiscal stability
  • Fiscal consolidation roadmap: Ensuring fiscal prudence
  • Balancing equity and efficiency: Addressing the North-South divide
    • About 17% of the horizontal devolution goes to Uttar Pradesh alone, which is almost equal to that of all southern states combined.
  • Absorptive capacity of backward states: Enhancing the ability of backward states to utilize resources efficiently
  • Grants to local bodies

Way forward:

• • Policy guidelines for resource sharing
  • Optimizing Centrally Sponsored Schemes
  • Promoting fiscal discipline
  • Strengthening local governance
  • Transition to accrual-based budgeting and introduction of sunset clauses