16th Finance Commission will have to find a fair way through high intensity GOI-states fiscal disputes
Sixteenth Finance Commission’s work is set to get started following yesterday’s announcement of its members. Commission’s terms of reference were set out in December along with the appointment of economist Arvind Panagariya as its chairman.
Federalism’s lynchpin | As an institutional arrangement, finance commissions are at the heart of India’s federal architecture. Mandated by the Constitution, FCs are primarily meant to recommend a division of resources between GOI and states. In the process, they also set out how the resources that flow to states from GOI are to be distributed among them. GOI’s budget arithmetic is influenced by an FC’s recommendations. This makes FCs more important in resource transfers, even if it is budgets that hog attention.
Two asymmetries | Expenditures incurred by states as a percentage of GDP are greater than that of GOI. However, for administrative efficiency, GOI is empowered to raise most of the taxes. It leads to vertical asymmetry in India’s federal system. Separately, states are very different in terms of financial needs and capabilities. Addressing these two asymmetries smoothly determines how harmonious a federal system is.
Limited ToR | FCs function according to terms of reference (ToR) they are given. 16th FC has a limited ToR compared to its predecessor’s. 15th FC was given three terms that determined the incentive structure underpinning grants given to states. That level of detailing is missing in ToRs for this FC. It’s not unusual for FCs to be given ToRs halfway through their functioning. Therefore, there’s a possibility the current ToRs will be expanded.
Data gaps, delimitation fears | 16th FC will function against the backdrop of inadequate data and political anxiety among southern states about the possibility of delimitation of parliamentary seats. A delay in conducting 2021 Census deprives this FC of valuable data, particularly a recent baseline for population projections. While delimitation is unrelated to an FC’s remit, politics around it is unlikely to leave 16th FC untouched. It will require deft handling as FCs are far too important to be ensnared in political cross-currents.
FCs make their recommendations after extensive consultation with both GOI and states. FC’s functioning over the next 21 months before the October 2025 deadline will make it a real-time experiment in federalism. It’s critical that its effort is seen as being even-handed.
This piece appeared as an editorial opinion in the print edition of The Times of India.
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