Protecting federal autonomy
Finance Commission’s role in devolving funds to states demands urgent reform
The 15th Finance Commission of India, whose recommendations will come into effect from April 1, 2020, until March 31, 2025, will be visiting Telangana from February 18 to 20, to hold discussions with the Chief Minister and top officials of the state Finance Department, ostensibly to decide on the state's requirement in the process of devolving funds. To what extent the state's requirements are taken into consideration and met on various aspects is still an unanswered question. In reality, the commission has to play a crucial role in the Indian federal system and should usher in a new era of need-based fiscal federalism. For the next five years, the state's financial and economic conditions, as well as fiscal plans, will be richly influenced by the recommendations of the 15th Finance Commission.
The Finance Commission must think of leveraging the Indian economy and modifying its role so that it is not reduced to a mere redundant tool. Despite different governments assuming power, there has not been a qualitative change in the Finance Commission's approach. It's time the Commission introspects on this. People are agitated with a visible disappointment in respective Union Government policies. Both Congress and BJP have miserably failed the nation.
The broad fiscal policy lies with the Government of India. And, whatever powers they are expected to devolve has instead been centralised. As suggested by CM KCR in a NITI Aayog meeting, the Centre should not hinder the growth of states. Disincentivising growing states is not a healthy practice. Alongside lending assistance to poor states, the states which contribute massively to the country's economy should also be equally encouraged.
The share of tax devolution to states whose per capita income is higher is reduced by labelling them as rich states. For Telangana, for instance, which has a surplus budget, the Finance Commission decided to give a 2.4375 per cent of share in tax devolution, whereas, for Andhra Pradesh (AP), the devolution has been put at 4.305 per cent. Accordingly, Telangana in FY 2018-19 received Rs 18,560 crore, whereas AP benefited with Rs 32,787 crore. Uttar Pradesh receives a much higher amount of Rs 1,15,682 crore. Even if we take the per capita tax devolution into consideration, Telangana's will be much lower than AP's. Therefore, Telangana, which is one among the top states in income contribution to the country, is not getting its due share of tax devolution.
Even for meagre funds, several conditions have been imposed by the Centre. The fiscal relationship that should exist between the Union government and the state administration is conspicuously absent. It is unfortunate that the policies of devolution dishonour state governments and their powers before respecting their views.
The role of the Finance Commission, especially in its visits to states with pre-occupied notions, needs to be reformed. They come with preconceived designs and Terms of Reference (ToR) which, in fact, should be completed after their visit and discussions with state governments. The ToR, however, is listed in the Presidential Order appointing the Commission. The Commission plays no role in framing the ToR. In fact, the core functions of the Finance Commission are listed out in Article 280 of the Constitution and reproduced verbatim in the ToR. The ToR stipulates certain considerations to be taken into account while making recommendations and a number of other matters in reference to the interest of sound finance. The considerations are invariably biased in favour of the Centre. It may be better if the Finance Commission becomes a policy formulating body rather than a mere recommendatory institution. Devolution must be recognised as a right of states.
The Finance Commission, to be appointed once in five years as an autonomous body, was first established by the President of India on November 22, 1951, under Article 280 of the Constitution. The commission, consisting of a Chairman and four other members, is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and states, and also its allocation among the states themselves. The Finance Commission also defines the financial relationship between the Union and states. As of now, there have been fifteen finance commissions. The most recent 15th Finance Commission was constituted in November 2017 and is chaired by NK Singh, a retired IAS officer and former member of the planning commission.
The Finance Commission also determines the principles of governing grants as aid to states out of the consolidated fund of India. It also distributes proceeds of income tax between the Union and states. But, taxes on payments of the central government are attributable only to the union territories. It makes recommendations to the President of India regarding measures needed to augment the funds of a state to supplement the resources of Panchayats and Municipalities on the basis of recommendations made by the state's finance commission.
It is, however, desirable that the Finance Commission focuses first on financial relations between the state government and the central government. These recommendations must ensure a progressive increase in the state governments' share of receiving proceeds from income tax collection. They should also recommend a gradual increase in the amount of grants-in-aid to be given to states. If done systematically, it would allow a considerable degree of financial autonomy to states for the correct functioning of their cooperative federation. In addition to constitutional provisions, to bridge the fiscal gap between the Centre and states and define means of sharing resources between them, the Finance Commission is expected to serve as an institutional framework to facilitate Centre-state transfers.
The mandate of the present Finance Commission, as defined in the ToR, requires recommending a fiscal consolidation roadmap for sound fiscal management, assessing the impact of Goods and Service Tax (GST) on finances of the Centre and states; reviewing the need for revenue deficit grants to states, reviewing the need to increase tax devolution, reviewing conditions on state borrowings, providing performance-based incentives to states, among others.
Incidentally, right from the first Finance Commission till today, more than half of the chairmen have been politicians belonging to the ruling party. Even the Chairman of the 15th Finance Commission, NK Singh, became a Rajya Sabha Member after retirement and has been a senior member of BJP.
It is not surprising that they have completed invested themselves in safeguarding the interests of the party in power. But, the Finance Commission should not allow such practices to take root. It is, hence, time that the style of the Finance Commission is revised with appropriate and effective reforms.
(The author is Chief PRO to Telangana CM. The views expressed are strictly personal)
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