How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss.

The Finance Commission of India is an important constitutional body responsible for recommending the distribution of tax revenues between the Union and States and amongst the States themselves. The Commission is constituted by the President of India under Article 280 of the Constitution. The recently constituted Finance Commission, which submitted its report for the period of 2021-22 to 2025-26, had the following terms of reference:

  1. Fiscal Consolidation: The Commission was required to provide a roadmap for fiscal consolidation for effective financial management.
  2. Debt and Deficits: The obligation on the part of the federal government and state governments to maintain reasonable levels of overall and consolidated government debt and deficits was to be considered.
  3. Inclusive Growth: Encouraging greater inclusive growth in the nation while adhering to the values of equity, efficiency, and transparency was one of the important terms of reference.
  4. Grants for Revenue: The Commission was to look into the possibility of offering grants for revenue.
  5. Disaster Management: Reviewing the current financing arrangements for disaster management initiatives in light of the funds established by the Disaster Management Act of 2005 (53 of 2005) was another important task.
  6. GST Impact: The Commission was to assess the impact of the Goods and Services Tax (GST) on government finances, including payment of compensation for potential revenue losses for five years and elimination of a number of cesses with money set aside for compensation and other structural reforms.

Assessment of Terms of Reference:

The terms of reference of the recently constituted Finance Commission are comprehensive and aim to address various fiscal and developmental issues in the country. However, certain concerns have been raised regarding the recommendations made by the Commission.

  1. Restrictions on State’s borrowing capacity may impact spending: The Commission’s recommendation of imposing restrictions on the State’s borrowing capacity may have a negative impact on the State’s spending, especially on development, undermining cooperative fiscal federalism.
  2. Joint accountability is lessened: The recommendations made by the Commission do not hold the Union government responsible for its own fiscal responsibility, which lessens the joint accountability that the Union and the States have.
  3. Fair distribution of resources: There is an urgent need to address stakeholder concerns and develop principles that result in a fair distribution of resources between states and between the centre and states.
  4. Streamlining policies: The government will need to give extra attention to policy matters such as streamlining the GST, the Direct Tax Code, and improving expenditure results, to accomplish the goals set forth by the Finance Commission.

In conclusion, the Finance Commission of India plays a crucial role in ensuring fiscal federalism and equalization of all public services across the States. The terms of reference of the recently constituted Finance Commission aim to address various fiscal and developmental issues in the country, and while they are comprehensive, certain concerns need to be addressed to ensure a fair distribution of resources and joint accountability between the Union and the States.

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