16th Finance Commission’s political challenge

Source: The post is based on the article “16th Finance Commission’s political challenge” published in “Business standard” on 13th October 2023.

Syllabus: GS2- Polity- constitutional post (finance commission)

News: The article discusses challenges in India’s fiscal policy and intergovernmental financial relations. It highlights issues like the central government’s weak fiscal position, political conflicts regarding resource distribution between states, and problems with the Goods and Services Tax. Tensions are rising due to disparities in states’ development and mismanagement of finances.

What are the challenges in India’s fiscal policy and intergovernmental financial relations?

Weak Fiscal Position of Central Government:

The central government is struggling with a high fiscal deficit and sluggish economic growth.

Efforts to raise tax revenues and sell public assets have not been successful.

Divergent State Economies: States like Uttar Pradesh face high poverty and low development, whereas Tamil Nadu and Kerala exhibit robust economies and human development.

Resource Distribution Disputes: The historical formula, which prioritizes poorer states in resource distribution, is becoming contentious due to stark economic disparities among states.

Issues with GST: GST has become complicated and unreliable, causing friction between the central and state governments. Unresolved issues, such as converting compensation cess into loans and the Integrated-GST matter, further strain relations.

Political Tensions: Differences in development and political ideologies among states, alongside the central government’s fiscal management, leading to issues in relationships.

The approach and decisions of the upcoming Sixteenth Finance Commission are crucial amidst these challenges.

What is the relevance of the 16th Finance Commission?

Navigating Fiscal and Political Tensions: The 16th Finance Commission is essential amidst existing fiscal and political challenges between the central government and states.

Addressing Central Government’s Fiscal Management: Given the central government’s fiscal deficit and their difficulty in managing resources, the Commission’s role in guiding fiscal policies is crucial.

Ensuring Fair Resource Distribution: With economic disparities among states and differing developmental statuses, the Commission’s decisions on resource distribution are pivotal.

Handling Political and Ideological Differences: Crafting policies and making decisions that consider the varied political ideologies and economic circumstances of different states is a significant challenge for the Commission.

Maintaining Sensitivity and Foresight: The formulation of the Commission’s Terms of Reference (ToR) and subsequent policies should be executed with acute sensitivity and understanding of the complexities in intergovernmental fiscal relations.