Discuss the role of the Finance Commission in promoting fiscal federalism in India.

Q.9 Discuss the role of the Finance Commission in promoting fiscal federalism in India.

Ans: The 16th Finance Commission was constituted under Article 280 of the Indian Constitution on December 31, 2023. It is responsible for reviewing and recommending the revenue-sharing model between the central and state governments for a five-year period starting from April 1, 2026.

Role of the Finance Commission in Promoting Fiscal Federalism

1. Vertical Devolution of Resources: The FC recommends the share of central taxes to be devolved to States, ensuring a fair distribution of resources. Example: The 15th Finance Commission recommended a 41% devolution of central taxes to States for 2021-26.
2. Addressing Horizontal Imbalances: The FC allocates resources to reduce disparities among States based on factors like population, income distance, and area. Example: States like Bihar and Uttar Pradesh receive higher allocations due to their lower per capita income.
3. Grants-in-Aid for Specific Purposes: The FC provides grants to States for disaster management, local bodies, and health infrastructure. Example: The 15th FC allocated ₹1.3 lakh crore for health grants to strengthen primary healthcare systems post-COVID-19.
4. Promoting Cooperative Federalism: The FC fosters collaboration between the Centre and States by involving State governments in its consultations. Example: The 15th FC held consultations with all States before finalizing its recommendations.
5. Strengthening Local Governance: The FC allocates funds to local bodies (panchayats and municipalities) to empower grassroots democracy. Example: The 15th FC recommended ₹4.36 lakh crore for local bodies, emphasizing basic services like water and sanitation.
6. Fiscal Discipline and Stability: The FC encourages States to maintain fiscal discipline by linking grants to performance-based criteria. Example: The 15th FC tied a portion of grants to improvements in States’ fiscal management and service delivery.
7. Addressing Emerging Challenges: The FC adapts its recommendations to address contemporary issues like climate change and pandemics. Example: The 15th FC allocated ₹12,000 crore for disaster risk management, considering the increasing frequency of natural calamities.
8. Ensuring Predictability in Transfers: The FC’s five-year recommendations provide stability and predictability in resource allocation. Example: States can plan their budgets effectively based on the 15th FC’s recommendations for 2021-26.

The Finance Commission plays a crucial role in promoting fiscal federalism by ensuring equitable resource distribution, addressing imbalances, and fostering cooperative federalism. Its recommendations are vital for maintaining fiscal stability and empowering States and local bodies

Keywords: Fiscal Federalism, Vertical Devolution, Horizontal Imbalance, Grants-in-Aid, Cooperative Federalism, Revenue Devolution, Grants-in-Aid, Income Distance, Competitive Federalism

Source : Indian Express Link, Finance Commission Website : Link

Extra Info : Terms of Reference for the Sixteenth Finance Commission:   The Finance Commission shall make recommendations as to the following matters, namely:The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between the States of the respective shares of such proceeds;The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States by way of grants-in-aid of their revenues under article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that article; andThe measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.   What are the functions of the Finance Commission? It is the duty of the Commission to make recommendations to the President as to—  the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds; the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India;the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State;the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State;any other matter referred to the Commission by the President in the interests of sound finance. The Commission determines its procedure and have such powers in the performance of their functions as Parliament may by law confer on them.