Overview of the Finance Commission
The Finance Commission is established by the President every five years to recommend a fair distribution of fiscal resources between the Union and the states. This process ensures that states have the necessary resources to perform their functions as outlined in the Seventh Schedule of the Indian Constitution.
16th Finance Commission Report
- The 16th Finance Commission report was presented to Parliament on February 1.
- The Commission upheld the devolution of 41% of Union taxes to the states, maintaining stability and continuity in its recommendations.
Changes and Recommendations
- Horizontal Distribution of Taxes: Introduction of the contribution of states’ share in the national GDP as a factor.
- Weighting Adjustments:
- 10% weighting assigned to GDP contribution by reducing per capita income distance, demographic performance, and area weights.
- 17.5% weighting to population share, removing the tax effort factor.
- Demographic performance now measured by inverse population growth (1971-2011).
- Forest cover weighted by its density.
- The Commission has discontinued state-specific and sector-specific grants.
Vertical and Horizontal Transfers
Transfers are assessed based on the relative capacities and needs of the Union and states. They can be general-purpose (unconditional) or specific-purpose grants.
- General-purpose transfers: Offsets states’ revenue and cost disabilities, allowing them to provide services according to local preferences.
- Specific-purpose transfers: Ensures minimum standards for services with significant externalities, accessible to all citizens.
Concerns and Challenges
- Incentives vs. Revenue Disabilities: Introducing GDP contribution as a factor may conflict with addressing revenue disabilities, especially in states with uneven capacities to respond to incentives.
- Removal of Revenue-deficit Grants: Raises issues of equity and targeting specific state needs, described as “tyranny of the base year” and “fiscal dentistry.”
Centrally Sponsored Schemes (CSS)
- The 16th Commission recognizes the importance of CSS in national development, although questions remain regarding their economic objectives.
- Many schemes are aggregations of older schemes, yet their objectives in achieving minimum standards remain unspecified.
Conclusion
The 16th Finance Commission's report continues to emphasize a balance between state autonomy and equitable distribution of resources, though challenges like addressing revenue disabilities and the effectiveness of Centrally Sponsored Schemes persist.
