Que. How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss.
भारत के वित्तीय आयोग का गठन किस प्रकार किया जाता है? हाल में गठित वित्तीय आयोग के विचारार्थ विषय (टर्म्स ऑफ रेफरेंस) के बारे में आप क्या जानते हैं? विवेचना कीजिए।
Structure of the Answer
(i) Introduction: Briefly explain the role of the Finance Commission, its constitutional basis, and its importance in India’s fiscal federalism.
(ii) Main Body: Discuss the composition of the Finance Commission, its key functions, and the terms of reference of the current Finance Commission.
(iii) Conclusion: Summarize the critical role of the Finance Commission in ensuring equitable financial distribution and maintaining fiscal stability in India.
Introduction
The Finance Commission of India is a constitutional body established under “Article 280” of the Indian Constitution. Its primary function is to recommend the distribution of financial resources between the Union Government and the States, ensuring fiscal balance.
Constitution of the Finance Commission
(i) Constitutional Mandate (Article 280): The Finance Commission is established under “Article 280” of the Indian Constitution. Its role is vital in maintaining the fiscal balance between the Union and the States, ensuring that resources are distributed equitably for the country’s governance.
(ii) Composition of the Finance Commission: The Finance Commission is composed of a “Chairman” and four members, all appointed by the President of India. These members must be experts in public finance, law, economics, and administration, ensuring effective decision-making.
(iii) Role of the Chairman: The Chairman of the Finance Commission is a key figure in leading the body and ensuring the accurate and fair distribution of financial resources. The Chairman’s leadership is critical in shaping the Commission’s recommendations.
(iv) Role of the Other Members: The four members bring expertise in various fields such as “public finance”, “economics”, and “administration”. Their combined knowledge and experience ensure that the Finance Commission’s recommendations are comprehensive and well-informed.
(v) Appointment and Tenure: The members of the Finance Commission are appointed by the President, and the Commission typically functions for a tenure of five years, after which a new Commission is constituted to reevaluate fiscal needs.
Functions of the Finance Commission
(i) Revenue Sharing: One of the primary functions of the Finance Commission is to recommend the distribution of “tax revenues” between the Centre and States, ensuring fiscal justice and addressing regional disparities in income and expenditure.
(ii) Grants-in-Aid to States: The Finance Commission also suggests the allocation of “grants-in-aid” to States with fiscal deficits or those in need of additional financial support. This is critical in maintaining the financial health of States with weaker economies.
(iii) Fiscal Responsibility and Deficit Control: The Commission plays a role in advising the Centre and States on maintaining “fiscal discipline”. It recommends measures to control deficits and debt, helping prevent unsustainable borrowing by both levels of government.
(iv) Assistance for Special Needs: The Finance Commission allocates additional resources to States that face unique challenges, such as those with high population density or those suffering from natural calamities. It ensures that no region is financially excluded.
(v) Monitoring the Financial Health of States: The Commission also evaluates the financial situation of States and offers recommendations for improving fiscal management, promoting better governance, and ensuring fiscal accountability at the State level.
Terms of Reference of the Recently Constituted Finance Commission
(i) Devolution of Resources: The recent Finance Commission’s terms of reference focus on the “vertical” and “horizontal” devolution of funds, ensuring the Union and States receive adequate resources while addressing the fiscal needs of individual States.
(ii) Incorporating Population and Demographics: For the first time, the Finance Commission has considered “demographic factors” when recommending revenue-sharing formulas, rewarding States with better population control policies and incentivizing family planning measures for sustainable growth.
(iii) COVID-19 Impact: In light of the financial strain caused by the “COVID-19 pandemic”, the Commission has addressed the economic setbacks faced by States and recommended additional financial resources to revive State economies affected by the pandemic.
(iv) Fiscal Deficit Targets: The Commission’s recommendations include setting “fiscal deficit” targets for the Centre and States, aimed at curbing excessive borrowing and promoting financial sustainability, ensuring a balance between growth and fiscal responsibility.
(v) Environmental Concerns: The Commission has also suggested considering “environmental issues” in resource allocation, particularly for States facing ecological challenges. This is a forward-thinking approach to ensure that environmental sustainability is factored into fiscal planning.
Significance of the Finance Commission’s Role
(i) Promoting Fiscal Federalism: The Finance Commission ensures that “fiscal federalism” is maintained by distributing resources between the Centre and States. This strengthens India’s decentralized governance structure by making sure States have the resources needed for development.
(ii) Equitable Development: By addressing disparities in resource allocation, the Finance Commission promotes “equitable development” across States, helping reduce regional inequalities and ensuring that all States, regardless of their economic strength, have the means for progress.
(iii) Ensuring Accountability: The Finance Commission enhances the “accountability” of both the Centre and States in their financial dealings. The recommendations guide them in managing public funds responsibly, with transparency and efficiency.
(iv) Stabilizing the Economy: The Finance Commission’s role in maintaining fiscal discipline and recommending revenue-sharing formulas contributes significantly to “economic stability”, preventing excessive borrowing or financial mismanagement by both the Centre and States.
(v) Ensuring Balanced Governance: Through its financial recommendations, the Finance Commission ensures that the “governance” process is not hampered by lack of resources. This supports democratic governance and ensures that the Union and States can function effectively.
Conclusion
The Finance Commission plays a pivotal role in ensuring fiscal federalism, equitable resource distribution, and financial discipline. Through its recommendations, it promotes economic stability and sustainable development, contributing to the overall governance and balanced growth of the nation.
