On 16th Finance Commission – Finance Testing the South’s Patience

Source: The post is based on the article Testing the South’s Patience published in The Times of India on 3rd November 2023.

UPSC Syllabus Topic: GS Paper 2 Indian Polity – Appointment to various Constitutional posts, powers, functions and responsibilities of various Constitutional Bodies.

News: The article talks about India’s Finance Commission deciding tax sharing between the Centre and states. It discusses the debate over richer states subsidizing poorer ones, the impact of political freebies on the economy, and whether to create a fiscal council to oversee government spending. The 16th Finance Commission may present challenges to wealthy and southern states that have stabilized their populations.

For more detail on 16th finance commission read here

What is the role of the Finance Commission?

Determining Tax Distribution: The Finance Commission’s main role is to decide how to share the central tax revenue between the central government and the states in India. Currently, states get 41% of the taxes collected by the Centre.

Balancing Vertical and Horizontal Sharing: The Commission must balance vertical sharing (how much money states get from the Centre) and horizontal sharing (how the money is split among states).

Advising on Fiscal Challenges: Beyond tax distribution, the Finance Commission is expected to provide guidance on broader fiscal issues. This includes looking into the trend of political freebies and considering the need for a fiscal council to oversee the government’s budget and spending.

For more detail on the roles of finance commission read here

What federal issues will arise after the 2026 delimitation?

Reduced political influence for southern states: After the 2026 delimitation, southern states may have fewer seats in Parliament. Their slower population growth compared to northern states could lead to a decrease in their political representation.

Financial implications of delimitation: With potential reduced influence in Parliament, southern states may find it harder to argue against continued financial support to poorer, faster-growing states. This could exacerbate the north-south economic divide.

Cross-Subsidization Debate: The ongoing requirement for richer states to subsidize poorer ones may become more contentious. Southern states, which are economically better off, might resist the pressure to support the poorer northern states if their political clout diminishes post-delimitation.

For more detail on delimitation read here

What should be done?

Addressing Tax Sharing Concerns: The Finance Commission should review the current tax sharing formula, considering states’ demands for a greater share due to their front-line role in service delivery, against the Centre’s need to fund its own commitments.

Tackling the Freebie Culture: To prevent fiscal strain from political promises of freebies, the Commission could recommend setting clear guidelines or limits, promoting sustainable financial practices over short-term gains.

Evaluating the Need for a Fiscal Council: The Commission should reconsider the establishment of a fiscal council as suggested by the Fiscal Responsibility and Budget Management (FRBM) committee, to ensure responsible fiscal management and to provide informed assessments of the Centre’s fiscal performance.

Building Consensus: Address the emerging economic divide by fostering dialogue between southern states worried about losing parliamentary seats and financial autonomy, and northern states in need of support.

Question for practice:

Discuss the potential impact of the 2026 delimitation on federal finances and political representation in India?