Finance Commission – Issues related to devolution of resources

RBI governor bats for permanent status to Finance Commission

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Mains Paper 2: Polity | Functions & responsibilities of the Union & the States, issues & challenges pertaining to the federal structure

From UPSC perspective, the following things are important:

Prelims level: Finance Commission

Mains level: Read the attached story


News

  • The 15th Finance Commission, constituted in November 2017, will give recommendations for devolution of taxes and other fiscal matters for five fiscal years, commencing April 1, 2020.
  • RBI Governor Shaktikanta Das has said increasingly it is felt that there is a need to give permanent status to the Finance Commission and constitution of State Finance Commissions every five years.

Addressing various challenges

  • According to Das, there is now general agreement in the country about the importance of fiscal consolidation roadmap both at national and sub-national levels.
  • Successive finance commissions have made efforts to address the emerging issues and challenges, but in a democracy like India, the debate goes on.
  • Geopolitical risks have necessitated higher expenditure on defence and internal security.
  • Natural calamities and disasters have called for higher expenditure on relief and rehabilitation.
  • In parallel, aspirations of people and the country as a whole have required that the government spends more on developmental programmes.

Why such move?

  • The Commission can function as a leaner entity in the intervening period till the next Finance Commission is set up in a full-fledged manner.
  • Over past several decades, Finance Commissions have adopted different approaches with regard to principles of tax devolution, grants to be given to states and fiscal consolidation issues.
  • There is a need to ensure broad consistency between Finance Commissions so that there is some degree of certainty in the flow of funds, especially to the states.
  • This has become even more critical in the post GST scenario.

Imbibing Continuity

  • According to Das, finance commissions have over the past several decades adopted different approaches with regard to principles of tax devolution, grants to be given to states and fiscal consolidation issues.
  • In other words, there has to be continuity and change between finance commissions.
  • Increasingly, therefore, it is felt that there is a need to give permanent status to the finance commission.
  • A commission can function lean till the next finance commission is set up in a full-fledged manner.
  • During the intervening period, it can also address issues arising from implementation of the recommendations of the finance commission.

Other recommendations

  • The principle of decentralisation works better when powers and functions are delegated based on which tier of governance is best suited to fulfill that responsibility.
  • The constitution has already provided for delegation of certain functions to the urban and rural local bodies; but it is seen that there is still good distance to traverse when it comes to devolution of funds to these local bodies.
  • It is essential that State Finance Commissions are constituted every five years as per the mandate in Article 243I of the Constitution and arrangements are made for their robust functioning.

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