ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Thirteenth Finance Commission

A finance commission should not be asked to stray from the constitutional mandate.

A part from the core aspect of sharing of fiscal resources between the centre and the states, the recently constituted Thirteenth Finance Commission (TFC) has been asked to give its views on the impact on central and state government finances of the proposed goods and services tax (GST) that is to be introduced in April 2010 on improving the quality of public expenditure for achieving better outcomes, and on the management of the ecology, environment and climate change for sustainable development. Although all these issues are critically important, is the finance commission transfer mechanism the appropriate one to deal with them? We need to remind ourselves that, constitutionally, the basic task of a finance commission is to decide on the quantum of available resources with the government and lay down the principles of sharing between the centre and the states. Entrusting too many diverse tasks to a finance commission may unnecessarily complicate the transfer system and risks weakening the primary objective of transfer, i e, bring about fiscal equalisation across states.

Despite the apparent equity-driven principles followed by successive finance commissions, fiscal equalisation still remains a distant dream. It is worth mentioning in this context that per capita development spending in a low income state like Bihar is still as low as 49 per cent of the all-state average. There are many reasons for this, including the inadequacy of the design of finance commission transfers. The transfer system based on the gap filling approach has failed to address the issue of need-based horizontal equity. The resources required for full equalisation based on normative principles may be considerably larger than what are available. Still, there should always be a continuous effort at narrowing the gap within the overall resource constraint. Recent improvements in the fiscal situation, particularly at the central level, provide greater flexibility to a finance commission to bring about fiscal equalisation. Much would depend upon the approach the TFC takes. If we look at the issue from the perspective of the poorer constituents of the union, in the light of the improvement in the centre’s fiscal situation it may not be unreasonable for the states to expect larger transfers. One can only hope that the votaries of fiscal conservatism and anti-federal centrist ideas will not blur the Commission’s vision on resource transfer.

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