GS Paper 2 : Centre State relations and issues in sharing of resources
Qn. “Finance Commissions often have a responsibility to maintain fiscal federalism in India.” Examine how the 15th FC has ensured this ? (15 marks)
Why this Question ?
The question has been asked in the backdrop of the15th Finance Commission recommendations for sharing divisible pool of resources between the centre and the states.Various concerns have been raised by the states on the revenue sharing formula itself because the COVID-19 situation has placed a huge burden on the states for handling the relief measures.
Demand of the Question:
Since it is an “Examine” type of question,the answer has to look into the statement given in the question. The statement emphasizes the importance of the role of Finance Commissions to ensure fiscal federalism remains alive in India. By bringing out the role of previous FC’s in the answer we have to point out if the 15th Finance Commission has also performed on the lines of the earlier FC’s or not .
The introduction can bring out why fiscal federalism is ncessary in India.This can be done by pointing out that the majority of the development functions are assigned to the states as provided for in the 7th schedule of the Constitution of India. Functions such as Public Health, housing,Sanitation,Food security etc. are all in the domain of state governments.
In order to ensure the carrying out of these functions properly, the framers of our Constitution, thought to establish non-political body to determine the scheme for the transfer of the Central revenue to the states.
An emphasis can also be added on the divergent financial requirements of different states on account of the difference in the capacity and needs of different states.(developed vs developing states)
The content part of the answer should bring out how the Finance Commissions have achieved this in India.
The Finance Commissions in India have taken into consideration certain broad principles in deciding the devolution to be granted to the states.
The considerations are :-
Budgetary needs of the State.
Extent of tax effort taken by the State to increase the revenue.
Third was to analyze how the Grants would help in equalizing the standards of basis service provided by the States.
Fourth was any special burden or obligations that the States has, which are of national concern.
Last principle is that the grants should be given to the less advanced states to bring them to the main stream of development.
Generally these principles have led the Finance Commission to the recommendation for providing the grants in aid to the needy States.
Generally the Grant in aids is known as gap filling revenues to meet the all non plan expenditure deficiencies in the State Budget.
From the Sixth Finance Commission onwards, the Grant in Aids were given to the States for some specific purpose like upgrading general Administration, upgrading the standards in non development sectors and service, girl child education, welfare of backward people in the States, and for providing the basis development activities in the States.
It can be mentioned in the content of the answer that the earlier Finance Commissions have taken these measures so as to ensure adequate finance availability in the hands of the states so that states can exist as independent units in the federal setup.
Role of 15th Finance Commission
The 15th Finance Commission had an important role to play in the backdrop of controversial terms of conditions given by the President to the 15th Finance Commission.
Various state governments especially the southern states have raised their voice of protest against the Terms of Conditions. Their concern that the switch to the population estimates based on the 2011 census can allow for reduced allocation to the southern states was not without a reason. The 15th Finance Commission has paid due attention to the concerns of the southern states and by a fine balancing act had ensured that the total allocation to the Southern states do not get affected.This was achieved by carefully giving less weightage for the total population numbers in the 2011 census figures and by rewarding the states that have incentivised population control measures.
In other ways as well such as recommending for ‘special grants’ to states such as Karnataka that stood to lose their share of allocation, the 15th FC had carefully ensured fiscal federalism in India.
On the whole, it can be said that the mechanism of Finance Commission has helped and strengthens the Centre State financial relationship which the critical element in federalism, by providing the scheme for tax sharing in the divisible pool and as well through fiscal grants to the needy States. The role of Finance Commission has a greater significance by increasing economic position or status of the weaker States on par with richer States.
As a final word of conclusion a caution should be added to the conclusion by mentioning that despite all the good intentions and recommendations of the 15th FC, it is the will of the Union Government to accept the recommendations of the FC and thus strengthen fiscal federalism in India.