14th Finance Commission: Some Challenges

The Constitution provides for a Finance Commission under Article 280, in order to facilitate the mechanism of transfer of funds and resources between the Centre and states. The Finance Commission is to address the vertical imbalance- between Centre and states- as well as the horizontal imbalances- the one between the states with varying degree of fiscal capability but similar responsibilities.

The 14th Finance Commission was announced in 2013, with Y. V. Reddy as its Chairman. It’s recommendations would be applied for the period 2015-16 to 2019-20.

An important issue, which has given birth to several debates, is the growing dominance of the centre at the cost of the autonomy of the states. The growing role of the Planning Commission, rise in the number of Centrally Sponsored Schemes, and its transfer of resources to states tied to the broad or specific objectives of the Central Ministries have been the basis for criticism of the Central government. This tied funds are due to the reason that the proportion of the normal central assistance in the Gross Budgetary Support of the centre for the national five year plans has been only about 10% in the 11th plan as well as in 12th plan.

Thus, States have high expectations from the Finance Commission, in giving the untied transfers, comprising the states’ share in central taxes and statutory grants-in-aid. However, in recent year, Finance Commission has been showing a tendency towards greater centralization. The ratio of unplanned grants to plan-grants have significantly changed, signaling the increase in the tied nature of fund transfer to states. All this has placed a restriction on the expenditure decisions of the states. Thus, it is one of the biggest challenges to the Finance Commission, to maintain a correct vertical balance.

Another problem relates to the shortage of the staff at the state level. A probable reason for this might be the attempt to eliminate the Revenue Deficit by the states in order to perform better in the count of fiscal capacity. Such measures have checked the long-term expenditure commitments of the state governments. The Finance Commission is the only institution which can address the concerns of the state.

The final and probably the most significant challenge before the Finance Commission is- the equalization among the states. It is necessary to reduce the horizontal imbalance. The inter-state inequality on account of differences in fiscal capacity is compounded by two factors: One, the states with low income levels are also the ones with large population. It implies a greater transfer of additional resources if there has to be an impact on equalization. Second, some states have certain geographical and climatic factors that have extra cost implication for the centre. Thus, an explicit equalization methodology needs to be developed to tackle this systemic problem.

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