Sixteenth Finance Commission and India’s Fiscal Challenges

Source: The post Sixteenth Finance Commission and India’s Fiscal Challenges has been created, based on the article “States and the challenge before the Finance Commission” published in “The Hindu” on 6th December 2024

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

Context: The article discusses the Sixteenth Finance Commission chaired by Arvind Panagariya, focusing on fiscal challenges in India. It highlights the need for a fair distribution of resources between States and the Union, addressing issues like devolution, growth incentives, urbanization, and demographic changes.

For detailed information on Fiscal Federalism in India read this article here

What is the Role of the Sixteenth Finance Commission?

1. The Sixteenth Finance Commission, led by Arvind Panagariya, is tasked with addressing India’s fiscal challenges and improving the financial relationship between the States and the Union.
2. It aims to create a balance between equitable redistribution of resources and incentivizing growth in high-performing States like Tamil Nadu.

For detailed information on 16th Finance Commission read this article here

How do global trends impact the Commission’s decisions?

1. Global economic changes, such as “friendshoring” and “reshoring,” are reshaping trade and investment.

2.These trends provide opportunities for India, especially Tamil Nadu, to strengthen its position in international markets.

3. The Commission must align its policies to support this growth.

How Has the Finance Commission Changed Over Time?

1. Since its first formation in 1951, each Finance Commission has tried to fairly distribute resources.
2. They have increased the States’ share of taxes and directed funds to less-developed regions.
3. However, there have been discrepancies in achieving these goals, as shown by the Fifteenth Finance Commission’s results where the actual money given to States was only 33.16% of the Union’s gross tax revenue instead of the proposed 41%.

What challenges do progressive States face?

1. Aging Population: States like Tamil Nadu face rising costs to support an aging population, as their median age is above the national average. This reduces consumption-based tax revenue.
2. Urbanization: Tamil Nadu is rapidly urbanizing, with its urban population projected to reach 57.30% by 2031, compared to the national average of 37.90%. This creates infrastructure demands.
3. Middle-Income Trap: Progressive States risk stagnation and “growing old before becoming rich.”
4. Fiscal Strain: Limited fiscal autonomy and inadequate resource allocation hinder these States’ ability to sustain growth and address local needs effectively.

What should be done for future resource distribution?

1. States should receive 50% of the gross central taxes to better manage local schemes and expenses.
2. There is a need to balance between giving enough resources to both less-developed and progressive States to support overall growth.

What is the broader impact of the Commission’s work?

1. The Commission’s decisions affect manufacturing, urban challenges, and climate resilience.
2. Its work is vital for ensuring that all States contribute to and benefit from national progress, aiming to position India among the leading global economies.

Question for practice:

Examine the impact of global economic trends on the decisions and policies of the Sixteenth Finance Commission.