Introduction: What is Finance Commission Body: Give the impact of government spending on freebies and how to restrain them. Conclusion: What can FC do further? |
Finance Commission is a statuary, independent, non-political body set up by the President of India every five years (or earlier) under Article 280 of the Constitution. It was established to define the financial relations between the Centre and the state. Post 1991 reforms, fresh investment in PSU has come down and due to the abolishment of the Planning Commission, Finance Commission remains virtually the sole architect of India’s fiscal federalism.
Impact of Government Spending on Freebies for long term fiscal sustainability
- Subsidy burden: Due to excessive spending on subsidies the state finances are stretched out. States are already in huge debt owing to Covid 19, the poor performance of DISCOMs.
- Fiscal health: RBI titled report, State Finances: A risk analysis has highlighted that the fiscal health of states like West Bengal, Kerela, Rajasthan, Punjab, and Andhra Pradesh needs careful assessment on account of their large spending on social welfare.
- No clear definition of subsidy: Subsidies like free electricity, free water, loan waivers, and free transportation need to be differentiated from spending on education, health, PDS system, and employment generation programs as the former leads to the undermining of credit culture, distort prices through cross-subsidization and eroding incentives for private investment.
- The burden on the exchequer: Freebies put a heavy burden on taxpayer citizen and finally leads to an increase in taxes and debt.
What guidelines can be laid down by FC to restrain such spending?
- Evaluate the state’s fiscal health: The Finance Commission is an independent body. The Commission, while making allocations to the States, can take into account the debts of each state and examine whether offers of freebies would be viable for them or not.
- Cooperation with Election Commission: Both constitutional bodies can cooperate to restrain political parties to indulge in promises of “irrational freebies” during elections. This is against the free and fair election principle.
- Fiscal Responsibility and Budget Management (FRBM) Act: Strict implementation of the FRBM Act aims to ensure fiscal discipline for the centre by setting targets including reduction of fiscal deficits and elimination of revenue deficit. It is a legal step to ensure fiscal discipline and fiscal consolidation in India.
- Grants be made conditional: FC could be one of the institutional mechanisms to regulate spending on freebies, which destroys the foundation of macroeconomic stability. A crucial step to restrain freebie culture can be to link revenue deficit grants to states to curbing freebies and off-budget liabilities.
Conclusion:
The next FC faces a tough task in determining the tax proceeds to be allocated to the states and to bridge the divide which is deepening in terms of infrastructure, private investment, social indicators, and the rule of law between southern and northern states.