Effect of delimitation on Fiscal federalism – The Finance Commission has a highly critical task

Source: The post Effect of delimitation on Fiscal federalism has been created on the article “The Finance Commission has a highly critical task” published in “Live Mints” on 5th December 2023.

UPSC Syllabus Topic: GS paper 2- polity- issues and challenges pertaining to the federal structure

News: The article effectively highlights the challenges that the 16th Finance Commission (FC) will encounter, especially in terms of fiscal federalism, due to the upcoming delimitation exercise. These challenges are reminiscent of those faced by the 15th FC following the introduction of GST. It emphasizes the complexities in tax distribution and the likely changes in Lok Sabha seats post the 2026 census, which may significantly impact political representation.

About 16th finance commission:

The Union Cabinet has approved the Terms of Reference for the Sixteenth Finance Commission, for five years (starting from 1st April 2026).

For more details on 16th FC term of reference read here

For more details on challenges faced by FC read here

What are the challenges in front of 16th FC due to delimitation exercise?

Shift in Political Representation: Post-2026 census delimitation is expected to reallocate Lok Sabha seats. It may likely increase the representation of northern states due to higher population growth.

Tax Revenue Distribution Complications: This political shift could affect the FC’s approach to distributing tax revenues, possibly favoring states with greater representation. For example, States like Tamil Nadu and Maharashtra, despite their significant economic contributions, may struggle to advocate for their fiscal interests due to potentially reduced representation.

Maintaining Federal Harmony: The Commission must navigate these changes carefully to maintain harmony in India’s federal structure, ensuring that the fiscal needs of all states are met while managing the shifting political landscape.

For more information read here

What should be done?

Fair Lok Sabha Representation: To ensure fair representation of all states in the Lok Sabha post-2026 census delimitation, it is crucial to consider both population and economic contributions. This approach will help address the concerns of southern and western states, which have achieved better population control and economic growth. They fear losing their political influence in the Lok Sabha due to the current population-based seat allocation system.

Strengthen Federal Structure: Develop mechanisms to manage the economic disparities between states more effectively, reducing the burden on higher-performing states while encouraging efficient resource utilization.

Question to practice:

Examine the impact of the 2026 census delimitation on political representation and fiscal federalism