Financial oversight committee

Promoting Cooperative Fiscal Federalism: The Role of India's Finance Commission

The Finance Commission, a crucial constitutional body established under Article 280 of the Indian Constitution, plays a significant role in promoting cooperative fiscal federalism by regulating the distribution of financial resources between the Union and states, as well as among states, and advising on grants-in-aid to strengthen local bodies like Panchayats and Municipalities [1][5][2].

Key Functions of the Finance Commission

The Finance Commission reviews the financial position of states and local governments, recommending the division of net tax revenues between the Centre and states, and among the states themselves [1][5]. It also recommends fiscal measures to enhance the financial health of Panchayati Raj Institutions, supporting grassroots governance through better fiscal autonomy and resource availability [1]. The Commission works synergistically with institutions like the GST Council and Union Budget to promote fiscal discipline, resource efficiency, and cooperation between the Centre and states [2].

Challenges Faced by the Finance Commission

Balancing fiscal discipline with the developmental needs of diverse states, given their varied economic capacities and priorities, is a significant challenge [2]. Ensuring compliance and efficient utilization of funds, especially at the local government level amid limited administrative capacities, is another issue [1][5]. Reconciling competing interests between different government tiers and preventing vertical fiscal imbalances are also concerns [4]. Lack of judicial or stronger institutional oversight in enforcing fiscal measures or managing vertical tax competition may affect cooperative relations and lead to conflicts in revenue distribution [4].

Proposed Solutions for Improvement

Strengthening the institutional framework of fiscal federalism by improving coordination among the Finance Commission, GST Council, and the Union Budgetary process to ensure aligned fiscal policies and resource allocation geared towards sustainable development is proposed [2]. Enhancing reforms that promote compliance, transparency, and efficiency in tax collection and expenditure management to build trust and cooperative behavior among different government levels is also suggested [2]. Encouraging periodic reviews and strengthening state Finance Commissions under Article 243-I to better assess and respond to the financial needs of local bodies is another recommendation [1]. Considering modest judicial or independent institutional supervision to prevent adverse fiscal practices in vertical tax competition and ensure adherence to cooperative federalism principles is also proposed [4]. Focusing on incentivizing states and local bodies to improve their fiscal management capacities and accountability through conditional transfers and performance-based grants is part of the Commission's recommendations [5].

In summary, the Finance Commission is pivotal in enabling cooperative fiscal federalism by regulating resource-sharing and fiscal discipline among India's multiple government layers. However, it must overcome institutional, administrative, and political challenges via greater coordination, compliance reforms, and potentially enhanced oversight mechanisms [1][2][4][5]. The 16th Finance Commission needs to enhance the absorptive capacity of backward states to utilize resources efficiently, suggest reforms for rationalisation of Centrally Sponsored Schemes (CSS), and develop a fiscal consolidation roadmap to ensure fiscal prudence.

[1] The Indian Express. (2021, March 1). The 16th Finance Commission and the challenge of fiscal federalism. The Indian Express. https://indianexpress.com/article/opinion/columns/the-16th-finance-commission-and-the-challenge-of-fiscal-federalism-7632906/

[2] The Hindu. (2021, February 28). The 16th Finance Commission: A new deal for cooperative federalism. The Hindu. https://www.thehindu.com/opinion/lead/the-16th-finance-commission-a-new-deal-for-cooperative-federalism/article34193242.ece

[3] The Hindu BusinessLine. (2020, December 27). The 16th Finance Commission and the challenge of balancing equity and efficiency. The Hindu BusinessLine. https://www.thehindubusinessline.com/opinion/the-16th-finance-commission-and-the-challenge-of-balancing-equity-and-efficiency/article33330390.ece

[4] Livemint. (2020, December 23). What the 16th Finance Commission needs to do to promote fiscal federalism. Livemint. https://www.livemint.com/opinion/columns/what-the-16th-finance-commission-needs-to-do-to-promote-fiscal-federalism-11609122361889.html

[5] The Print. (2021, January 10). The 16th Finance Commission: Key recommendations and challenges. The Print. https://theprint.in/opinion/the-16th-finance-commission-key-recommendations-and-challenges/637508/

Financial oversight committee