News
Analyzing the Finance Commission’s impact on intergovernmental fiscal transfer – Defense News
By Manish Kumar Tiwary
On 29 November 2023, the Union Cabinet, chaired by Prime Minister Narendra Modi, approved the Terms of Reference of the Sixteenth Finance Commission as part of the Azadi Ka Amrit Mahotsav celebrations. This approval marks a significant step in setting the commission’s agenda, whose recommendations, once accepted by the government, will cover a period of five years from 1 April 2026. As mandated by article 280(1), of the Constitution, the President of India plays a crucial role in the constitution of the Finance Committee. The Sixteenth Finance Commission was constituted on December 31, 2023, with Shri Arvind Panagariya, former vice-chairman of NITI Aayog, as its chairman. The following members were appointed to the Commission with the approval of the President of India: Ajay Narayan Jha, former member of the 15th Finance Commission and former Expenditure Secretary, as a full-time member; Smt. Annie George Mathew, former Special Secretary for Expenditure, as a full-time member; Dr. Niranjan Rajadhyaksha, Executive Director, Artha Global, as a full-time member; and Dr. Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India, as a part-time member. The commission is tasked with recommending the distribution of net tax revenues between the Union and the States, allocating respective shares among the States, providing grants and suggesting measures to increase resources for Panchayats during the grant period.
The Fifteenth Finance Commission, constituted on November 27, 2017, provided recommendations for a period of six years starting April 1, 2020, through interim and final reports. These recommendations will remain valid until the end of the 2025-26 financial year. The newly created Sixteenth Finance Commission will build on this foundation and will have specific Terms of Reference to guide its work. The commission’s Terms of Reference include several critical mandates: determining the distribution of net tax revenues between the Union and the States under Chapter I, Part XII of the Constitution, and allocating the respective shares among the States. It will further lay down principles to govern grants from the Consolidated Fund of India to the revenue of the State under Article 275 of the Constitution, excluding the purposes specified in the provisions of clause (1) of that Article. The committee will also propose measures to increase the Consolidated Fund of a State, thereby supplementing the resources of Panchayats and Municipalities based on the recommendations of the State Finance Commission. Furthermore, the committee is expected to review the current provisions for financing Disaster Management initiatives, taking into account the funds constituted under the Disaster Management Act, 2005. It is expected that the report of the Sixteenth Finance Committee be available by October 31, 2025, covering a five-year period beginning April 1, 2026. Historically, the Fifteenth Finance Commission has been tasked with making recommendations for the fiscal period 2020-21 to 2024-25. However, an amendment to its Terms of Reference on 29 November 2019 extended its scope to include an additional year, thus covering six years from 2020-21 to 2025-26. Typically, the Finance Committee takes around two years to finalize its recommendations. According to Article 280(1) of the Constitution, a Finance Commission is constituted every five years or earlier if necessary. As the recommendations of the Fifteenth Finance Commission extend until March 31, 2026, the Sixteenth Finance Commission is now being constituted to ensure continuous financial assessment and planning of the Union and States. The groundwork for the Sixteenth Finance Commission began with the formation of an Advance Cell within the Ministry of Finance on 21 November 2022, to oversee the preliminary tasks pending the formal constitution of the commission. Subsequently, a Working Group, led by the Finance Secretary and the Secretary (Expenditure), including members such as the Secretary (Economic Affairs), the Secretary (Revenue), the Secretary (Financial Services), the Chief Economic Adviser, the NITI Aayog and Additional Secretary (Budget), was created to assist in formulating the Terms of Reference. This group engaged in a consultative process, seeking and deliberating on views and suggestions from the State Governments and Union Territories with the legislatures, ensuring a comprehensive approach to the commission’s mandates. This strategic approach underlines the government’s commitment to structured financial governance, reflecting the broader objectives of Azadi Ka Amrit Mahotsav to celebrate India’s progress and prepare for future challenges in a coordinated and inclusive manner.
India and Bangladesh: A strategic partnership shaping the future of South Asia
India surpasses China; To help Bangladesh in the Teesta river project
Key takeaways from PM Modi’s visit to Kashmir
Strengthening ties: Modi and Hasina’s strategic dialogue elevates India-Bangladesh relations
Figure 1 titled “Tax Return Recommendations by Financial Commissions” explains the percentage of tax returns to states recommended by successive Financial Commissions from the 11th (2000-2005) to the 15th (2020-2025). From the 11th Finance Commission onwards, tax devolution to states was fixed at 29.5%. This relatively lower percentage indicates a greater retention of tax revenue by the central government during this period. The 12th Finance Commission (2005-2010) recorded a slight increase to 30.5%, reflecting a marginal shift towards greater revenue sharing with states. The trend continued with the 13th Finance Commission (2010-2015), which recommended an increase to 32%, demonstrating a continued movement towards increasing states’ share of tax revenues. The most significant jump occurred with the 14th Finance Commission (2015-2020), which increased tax refunds to 42%. This marked a fundamental shift in fiscal federalism, showing a strong move towards empowering states with a greater share of tax revenues, thus facilitating greater autonomy and financial resources at the state level. The 15th Finance Commission (2020-2025) slightly reduced this percentage to 41%, but the level remained high compared to previous periods, indicating a sustained commitment to greater financial empowerment of the State.
This trend of increasing tax devolution underlines the importance of cooperative federalism in India. Cooperative federalism involves a collaborative relationship between the central and state governments, where both entities work together to achieve common national goals while respecting each other’s autonomy. Greater return of tax revenue is crucial for several reasons. Firstly, it empowers States by providing them with greater fiscal resources, allowing them to plan and implement development projects tailored to their specific needs, thus addressing local issues more effectively. Secondly, it promotes balanced regional development, allowing states with fewer resources to boost critical sectors such as infrastructure, healthand education, promoting equitable development across the country. Furthermore, increased funding allows state governments to improve the quality and reach of public services, directly benefiting citizens through better healthcare facilities, educational institutions and public infrastructure. Greater fiscal autonomy also promotes trust and cooperation between central and state governments, strengthening the overall federal structure. Furthermore, financially empowered states are more likely to experiment with innovative policies and programs, contributing to overall policy improvement by expanding successful initiatives to other states or at the national level.
The gradual increase in tax devolution to the states, as recommended by successive Finance Commissions, signifies a substantial shift towards cooperative federalism in India. This change underlines the central government’s recognition of the importance of financially empowering States to achieve balanced and inclusive development. By providing states with a greater share of tax revenues, regional imbalances can be addressed more effectively and state governments can improve public services such as healthcare, education and infrastructure, directly benefiting citizens. Furthermore, greater fiscal autonomy promotes trust and cooperation between central and state governments, strengthening the federal structure. It also encourages states to experiment with innovative policies and programs, which can be scaled up or adopted nationally, contributing to overall policy improvement. The substantial increase recommended by the 14th Finance Commission and the sustained high level of decentralization in the 15th Finance Commission reflect a strong commitment to this approach.
In conclusion, increasing fiscal delegation to states is crucial to empower them, promote balanced regional development and foster a collaborative and innovative federal system, ultimately leading to more effective governance and a better quality of life . life for citizens across the country.
The author is PhD Scholar, Jamia Millia Islamia.
Disclaimer: The opinions expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproduction of this content without permission is prohibited.