May 22, 2024
Finance

What to expect from the Sixteenth Finance Commission?


NEW DELHI :The government on Sunday named former vice chairman of Niti Aayog and Columbia University professor Arvind Panagariya as the chairman of the Sixteenth Finance Commission (SFC), a constitutional body. Mint takes a look at what to expect from the SFC.

The government on Sunday named former vice chairman of Niti Aayog and Columbia University professor Arvind Panagariya as the chairman of the Sixteenth Finance Commission (SFC), a constitutional body. Mint takes a look at what to expect from the SFC.

What is the role of finance commissions?

Finance commissions are independent constitutional bodies with a key role to play in the division of the Centre’s net tax proceeds between Central and state governments keeping in mind the fiscal needs of the states. All central taxes other than those meant for states and the specific surcharges and cesses levied by the Centre form part of this divisible pool of tax revenue. The finance commissions decide the extent of the Centre’s revenue to be shared with the states and the formula for dividing it among states. The commission is a key pillar of fiscal federalism.

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What is the role of finance commissions?

Finance commissions are independent constitutional bodies with a key role to play in the division of the Centre’s net tax proceeds between Central and state governments keeping in mind the fiscal needs of the states. All central taxes other than those meant for states and the specific surcharges and cesses levied by the Centre form part of this divisible pool of tax revenue. The finance commissions decide the extent of the Centre’s revenue to be shared with the states and the formula for dividing it among states. The commission is a key pillar of fiscal federalism.

Why were some states unhappy?

Revenue sharing among states is a controversial subject as resources are finite. The parameters have to accommodate the interests of all states while factoring in their various stages of development. When the Fifteenth Finance Commission was set up, one of the terms of reference was to use the population data of the 2011 census. Karnataka and Tamil Nadu complained saying that would reduce allocations for them as they had been successful in their population stabilisation initiatives. The panel then gave weight to population and ‘population performance’ for an equitable allocation.

What has the Centre asked the SFC to do?

The Centre has kept the terms of reference of the SFC short and direct rather than prescriptive. The panel has been asked to also suggest ways to augment the consolidated funds of states to supplement the resources of local bodies such as panchayats. In addition, the SFC may lay down the principles for grants-in-aid.

What issues does the SFC need to address?

Panagariya is expected to address sustainability of debt at the Central and state levels. The Centre maintains it is on track to achieve its target of fiscal deficit below 4.5% of GDP by FY26, and that general government debt will decline in the medium to long term. The SFC is expected to look into this as well as revenue trends and expenditure obligations at the Central and state levels to make recommendations. Another key area that the panel is expected to look into is expenditure reforms at the state level.

What does the common man get?

Finance panels tend to recommend a higher share of devolved funds to states with low per capita income so those states can deliver public goods at levels comparable to that in other states. It also incentivises the fiscal performance of states, benefiting their citizens. The panel is also expected to look into the unfinished agenda of GST rate revision of some items that are now on the backburner due to high inflation. The SFC may also take into account the next central pay panel decisions.



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