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Q 65- Do you agree that the Finance Commission in India serves as a lynchpin between the Centre and the States in numerous ways? Comment. (250 words)

Paper & Topic: GS II à Appointment to various Constitutional Posts, Powers, Functions and Responsibilities of various Constitutional Bodies

 

  • Model Answer:

 

  • Introduction:

 

  • Under Article 280 of the Constitution, the President appoints a financial commission every five years.
  • Its principal task is to make recommendations on how the Union government should split the taxes it collects with the states.
  • These guidelines are for a five-year period.
  • The commission also establishes guidelines for the central government's distribution of grants-in-aid to states from the Consolidated Fund of India.
  • It is also necessary to recommend strategies to supplement the resources of panchayats and municipalities, as well as ways to supplement the resources of states.

 

  • Body:

 

  • The Finance Commission as a link between the federal government and the states:

 

  • Since colonial control, the founding fathers of the Indian Constitution were cognizant of difficulties relating to uneven development of native states and traditionally poorer hinterlands.
  • The coastal states were wealthier than Central India's drought-stricken provinces.
  • Because the writers of the Constitution recognized the difficulty of rigidly allocating all financial resources and earnings among different areas, an independent Finance Commission (FC) was established.
  • Since 1951, Finance Commissions (FC) have been formed with the specific macroeconomic and fiscal realities of the constituent period in mind.
  • The Indian federal system allows the center and the states to share power and duties.
  • Similarly, the powers of taxation are widely split between the center and the states.
  • Because of scale savings in the collection of some taxes, the center collects the majority of tax revenue.
  • Because of their proximity to local challenges and needs, states are responsible for delivering public goods in their territory.
  • This can lead to states incurring costs that are greater than their revenue.
  • Furthermore, due to significant regional discrepancies, some states are unable to raise sufficient resources in comparison to others. The Finance Commission advises that the amount of central money shared with states be increased to remedy these disparities.
  • Any other problem that the President of India refers to the Commission in the interest of prudent financial management.
  • Several matters have been presented to the Commission under this section, including debt relief, financing of state calamity relief, and increased excise levies.
  • Because federal finance is inherently dynamic rather than static, constant readjustment of federal states – local financial relations is required. In every federation, "Balancing Factors" such as shared taxes and grant-in-aid central loans to federating units exist, the devolution of which has a significant impact on the country's economic development and balanced regional growth. The FC aims to strike a balance between the balancing components.
  • The Finance Body's provision is meant to reassure the states that the union's distribution system will not be decided arbitrarily, under duress, or with bias, but rather on the proposal of an impartial commission.
  • D.T Lakdawala, a well-known economist, believes that "The Finance Commission is intended to act as a wise man, a judge between the states' competing demands on the one hand and the central government's on the other."

 

  • Concerns about the Finance Commission's fifteenth session:

 

  • To calculate the states' portion of the divisible pool of taxes, FC took into account the population in 2011, as well as forest cover, tax effort, state area, and "demographic performance."
  • In order to recognize states' population control efforts, the Commission devised a 12.5 percent weighted criterion for demographic effort, which is effectively the ratio of the state's population in 1971 to its fertility rate in 2011.
  • The FC also considered the total area of states, the area under forest cover, and "income distance" to arrive at the tax-sharing formula.

 

  • Important points to consider:

 

  • The Commission has lowered vertical devolution, or the share of tax income shared by the Centre and the states, from 42% to 41%.
  • According to the Commission, it plans to form an expert group to establish a non-lapsable fund for defence spending.

 

  • Distribution by state:

 

  • Except for Tamil Nadu, the southern states' stocks have declined, with Karnataka losing the most.
  • State shares have increased marginally in Maharashtra, Himachal Pradesh, Punjab, and Tamil Nadu, all of which have fertility rates below the replacement level.
  • Andhra Pradesh, Kerala, Karnataka, and West Bengal, on the other hand, have seen their shares shrink, despite having low fertility rates.
  • According to an RBI assessment on state finances, Karnataka, the greatest loser in this exercise, also had the highest tax-to-GDP ratio in 2017-18.

 

 

  • Criticisms:

 

  • The Commission's population metric has been chastised by the governments of the southern states.
  • The previous FC calculated the states' shares using both the 1971 and 2011 populations, giving the 1971 population (17.5 percent) more weight than the 2011 population (10 percent ).
  • Because of the use of 2011 population statistics, states with higher populations, such as Uttar Pradesh and Bihar, have received larger shares, while smaller states with lower fertility rates have lost out.
  • Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan, and Jharkhand have a combined population of 47.8 million people.
  • According to the 2011 Census, this represents about 39.48 percent of India's total population and covers 32.4 percent of the country's land area.
  • The southern states of Tamil Nadu, Kerala, Karnataka, and undivided Andhra Pradesh, on the other hand, have just 20.75 percent of the population, living in 19.34 percent of the area and paying 13.89 percent of the taxes.
  • As a result, the Commission's conditions are stacked against the more progressive (and wealthier) southern states.

 

  • Conclusion:

 

  • Despite the numerous challenges surrounding the 15th finance commission, the subsequent FCs have attempted to serve as a lynchpin between the federal government and the states, upholding the principle of fiscal federalism.
  • The Finance Commission has been recommending financial resources to the states in order to achieve balanced development, normalize the financial ties between the Centre and the States, and eliminate the country's vertical and horizontal imbalances.
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