The Next Finance Commission will have a Tough Task, The Hindu Editorial Analysis
The Hindu Editorial Analysis: The Editorial Analysis of The Hindu Newspaper Editorial Articles aimed at simplifying various concepts relevant to the UPSC and other State PSC Exams. The Editorial Analysis helps in expanding the knowledge base as well as framing better quality mains answers. Today’s Hindu Editorial Analysis of ‘The Next Finance Commission will have a Tough Task’ discusses various aspects of fiscal federalism and role and challenges faced by Finance Commission of India in promoting Fiscal Federalism in India.
In the coming months, the government plans to establish a Finance Commission to determine the allocation of the Centre’s tax revenue to the States, both in terms of vertical sharing (how much is given to each State) and horizontal sharing (the formula for distribution among States).
During the pre-reform era, the recommendations of the Finance Commission were not as crucial since the Centre had alternative methods to compensate States or show favoritism, such as through plan financing and investments in public sector undertakings (PSUs). However, following the reforms, PSU investments have declined, and the Planning Commission was abolished in 2014. As a result, the Finance Commission now holds significant responsibility and wields considerable influence as the primary architect of India’s fiscal federalism.
Currently, the Centre allocates 41% of its tax pool to the States. While States may demand an increase in this proportion, it may be challenging to accommodate such demands due to the Centre’s own expenditure needs and borrowing limitations. As a result, much of the debate will focus on the horizontal distribution formula.
During the appointment of the previous Finance Commission in 2017, there was controversy surrounding its terms of reference. It was asked to consider the 2011 population figures, deviating from the previous practice of using the 1971 population numbers. This change was seen by some States, particularly those with successful population control measures like the southern States, as a penalty for their efforts.
Historically, Finance Commissions have struggled to determine the extent to which a State’s deficit is due to fiscal incapacity versus fiscal irresponsibility. They have attempted to balance the distribution formula to support deficit-ridden States without penalizing responsible ones, but this has proven mathematically impossible as providing more to one State means giving less to another. Consequently, every distribution formula has faced criticism for being inefficient or unfair.
These divisions among States have deepened in recent years, spanning political, economic, and fiscal dimensions. There is a perception of a north-south divide in politics, with the BJP primarily prevailing in northern States and opposition parties governing the southern States.
The upcoming Finance Commission has an important role in considering the expenditure needs and revenue earning capacity of both the Centre and the States. In this regard, there are two significant issues that the Commission should address.
This practice creates a perverse incentive. If the Centre chooses to raise taxes, it must share 41 paise with the States.
The Finance Commission should also address the issue of government spending on what is commonly referred to as “freebies.” It is important to note that all political parties have been guilty of such spending, to varying degrees, so assigning blame would not be productive.
Governors cannot Indefinitely hold back Bills, The Hindu Editorial Analysis
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