Overview of Finance Commissions in India

This article analyzes the role and decisions of the 14th Finance Commission in the context of intergovernmental finance theory, constitutional mandates, and historical precedents. It discusses the Commission's role in balancing fiscal capacities between the Union and states, as well as among states themselves.

Constitutional Role and Responsibilities

• The Finance Commission is tasked with distributing resources between the Centre and states based on constitutional competencies.
• The Sixth Finance Commission emphasized the allocation of resources according to constitutional mandates rather than overlapping functions.

Critique of the 14th Finance Commission's Recommendations

A member of the 16th Finance Commission critiques the 14th Commission's decision to increase the states' share of the divisible pool by 10%. Key points of the critique include:

• Lack of mandate to consider plan expenditure requirements.
• Inclusion of plan requirements does not justify the 10% increase.
• Ineffectiveness of the normative approach due to discrepancies between revenue deficit grants and actual revenue deficits.
• Differences between Union government subsidies and state-level untargeted consumption subsidies.

Constitutional and Historical Context

• Article 280 mandates the Commission to address the entire revenue expenditure needs of states.
• Earlier Finance Commissions were limited to addressing non-plan requirements due to the influence of the Planning Commission.
• The 14th Finance Commission had no such limitation, aligning its scope with constitutional obligations.

Plan Grants and Divisible Pool Calculations

The article questions the additional requirements due to subsuming plan grants:

• In 2014-15, the states' share of Union taxes was ₹3.37 trillion, equal to 32% of the ₹10.55 trillion divisible pool.
• Total plan grants amounted to ₹1.02 trillion, corresponding to 9.5% of the divisible pool, and normal central assistance alone was 5.1%.
• The 14th Commission excluded several grants, such as those for ecology and environment, to align with its formula.

Analysis of Centrally Sponsored Schemes (CSS)

The Commission recommended a cap on total transfers at 49% of gross tax revenues, suggesting CSS should focus on services with substantial spillovers:

• The expansion of CSS reduced the divisible pool, funded by cesses and surcharges.
• Criticism highlights a mismatch between normative assessments and actual revenue deficits.
• Fiscal federalism theory supports varying public services according to local preferences and tax efforts.
• Specific purpose transfers for ensuring minimum standards on "meritorious" services need evaluation for effectiveness.

Evaluation and Recommendations

The 16th Commission recommended setting up a high-power committee to evaluate CSS and suggested closing those with inefficient resource use.

The article concludes that achieving national objectives requires careful evaluation of schemes like the Jal Jivan Mission and MGNREGA, focusing on opportunity costs and more effective interventions.