Bibek Debroy writes: Why normative recommendations of finance commissions remain on paper

Source: The post is based on the article “Bibek Debroy writes: Why normative recommendations of finance commissions remain on paper” published in “The Indian Express ” on 13th July 2023.

Syllabus: GS 2- Function and responsibility of various constitutional bodies & GS-3 -Government budgeting

News: The article talks about the work of India’s Finance Commissions, which give advice on how money should be moved between the national and state governments. The article says that this advice often doesn’t get followed because it’s too complicated or not a priority.

What is the Role of Finance Commissions?

Finance Commissions (FCs) in India are established under Article 280 of the Constitution. They primarily handle three responsibilities:

1. Vertical devolution, which involves transferring funds from the Union to states.
2. Horizontal distribution, which concerns distributing funds between states, based on specific formulas.
3. Grant-in-aid, regulated under Article 275, provided to states in need of assistance.

What Was the Impact of the 13th and 15th Finance Commissions?

The 13th FC was set up in 2007 and made recommendations for the period 2010 to 2015. A focus of the 13th FC was on grants-in-aid, which are significant parts of FC transfers.

Two key areas for grant assistance highlighted by the 13th FC were justice delivery and the statistical system.

Despite optimistic expectations, the impact in these areas was disappointing. For instance, the FC hoped to dispose of a large number of pending court cases and enhance the justice delivery system with a funding of Rs 2,500 crore. However, the actual outcome was not as expected.

Similarly, the 15th FC made a number of reform suggestions for both Union and state levels, and performance-based grants. Yet, many of these recommendations, despite being comprehensive, were often ignored.

Why normative recommendations of finance commissions remain on paper?

Lack of compliance: Both the Union and state governments sometimes overlook or ignore the recommendations. They may not agree with them or have other priorities.

Complex reforms: Some of the suggested reforms can be complicated to implement. They require significant changes in government processes and policies.

Resource constraints: The governments, particularly at the state level, might face resource constraints. This can make it hard for them to put the recommendations into practice.

Policy prioritization: The governments often focus more on resource distribution. The recommended reforms may not align with their policy priorities.

Conditionalities: Some states object to the conditions attached to grants. They believe these restrictions limit their expenditure options.

Insufficient data: There can be a lack of necessary data to implement the recommendations. For instance, the 13th FC pointed out statistical gaps that hindered implementation.

Performance-Based Grants: The 15th FC proposed performance-based grants. However, this requires the establishment of clear and efficient performance metrics, which can be challenging.

What should be done?

For better results, the Finance Commission should make recommendations simpler and more practical. It should also work with governments to understand and overcome their challenges.

Governments should prioritize these recommendations, gather needed resources, adjust grant conditions, and fill data gaps.