Points to Remember:
- Composition of the Finance Commission of India.
- Terms of Reference (ToR) of the 15th Finance Commission.
- Key areas addressed by the 15th Finance Commission’s ToR.
- Significance of the Finance Commission in India’s federal structure.
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 net proceeds of taxes between the Union and the States, and among the States themselves. The Commission plays a crucial role in maintaining fiscal federalism and ensuring equitable resource allocation across different levels of government. The recently constituted 15th Finance Commission (2020-2025) inherited a complex economic landscape, marked by the COVID-19 pandemic and the need for fiscal consolidation. Understanding its constitution and terms of reference is vital to comprehending its impact on India’s fiscal architecture.
Body:
1. Constitution of the Finance Commission:
The Finance Commission is constituted by the President of India every five years or as and when needed. It comprises a Chairman and four other members, who are appointed based on their expertise in public finance, economics, administration, or other relevant fields. The Constitution doesn’t specify any specific qualifications, but the appointees are typically individuals with extensive experience in these areas. The Chairman is usually a former judge of the Supreme Court or a person of similar standing. The Commission’s independence is crucial for its credibility and effectiveness. Its members are appointed for a fixed term and are not subject to government interference in their work.
2. Terms of Reference of the 15th Finance Commission:
The 15th Finance Commission’s terms of reference were significantly influenced by the prevailing economic conditions and policy priorities. Key aspects of its ToR include:
- Distribution of net proceeds of taxes: This remains a core function, determining the share of tax revenue allocated to the Union and States. The Commission considers various factors, including population, area, income, and development needs.
- Grants-in-aid to States: The Commission recommends grants-in-aid to States to ensure equitable resource distribution and address regional disparities. This is particularly crucial for less developed states.
- Fiscal consolidation: Given the need for fiscal prudence, the ToR emphasized the importance of fiscal consolidation at both the Union and State levels. The Commission was tasked with suggesting measures to improve fiscal management and reduce debt levels.
- Impact of Goods and Services Tax (GST): The introduction of GST necessitated a re-evaluation of the vertical and horizontal devolution of taxes. The 15th Finance Commission was tasked with considering the impact of GST on the fiscal balance of the Union and States.
- Impact of COVID-19 Pandemic: The unprecedented challenges posed by the pandemic were explicitly included in the ToR. The Commission was asked to consider the pandemic’s impact on the economy and suggest measures to mitigate its adverse effects on the states’ finances.
- Other considerations: The ToR also included considerations like the principles of fiscal federalism, the needs of local bodies, and the importance of sustainable development.
3. Significance of the 15th Finance Commission’s ToR:
The 15th Finance Commission’s ToR reflects a shift towards a more nuanced approach to fiscal federalism. The inclusion of factors like the impact of GST and the COVID-19 pandemic highlights the Commission’s role in adapting to evolving economic realities. The emphasis on fiscal consolidation underscores the need for long-term fiscal sustainability. The Commission’s recommendations have significant implications for the allocation of resources and the overall economic development of the country.
Conclusion:
The Finance Commission of India plays a vital role in India’s federal structure by ensuring equitable distribution of resources. The 15th Finance Commission, with its comprehensive ToR, addressed the complexities of the post-GST and COVID-19 era. Its recommendations have far-reaching consequences for fiscal management at both the Union and State levels. Moving forward, it is crucial to maintain the Commission’s independence and ensure that its recommendations are implemented effectively to promote balanced regional development and fiscal sustainability. A continuous review of the Commission’s functioning and its ToR is necessary to adapt to the changing economic landscape and ensure that the principles of fiscal federalism are upheld in the interest of holistic national development. This will contribute to a stronger and more equitable India, reflecting the constitutional values of justice, liberty, equality, and fraternity.