Hindu Editorial Analysis : 5-December-2023
The recent approval of the Terms of Reference for the Sixteenth Finance Commission by the Union Cabinet, chaired by the Prime Minister, marks a crucial step in India’s fiscal governance. Understanding the significance of the Finance Commission, its historical context under Article 280, and the subsequent amendments is vital for comprehending its role in shaping fiscal federalism in the country.
Finance Commission: Anchoring Fiscal Federalism
- Establishment Under Article 280: The Finance Commission, a constitutional body, operates under Article 280 to recommend the distribution of tax revenue among the Union and states. Its formation, every five years, comprises a Chairman and four members, with Parliament determining their qualifications and procedures.
- Amendment in 1992: In 1992, an amendment broadened the Commission’s duties to include recommendations on increasing funds for Panchayats and Municipalities, aligning with state Finance Commission suggestions.
Fiscal Federalism: The Crucial Context
- Definition: Fiscal federalism concerns the division of financial powers and functions between different levels of the federal government. It encompasses tax imposition, division, and joint collection, ensuring fairness through constitutional authorities like the Finance Commission.
- Significance: Fiscal federalism holds significance in determining expenditure responsibilities, financing public goods, and adopting strategies to regulate spending and borrowing at each government level.
Challenges and Limitations of Finance Commission
- Resource-Demand Imbalance: Limited resources versus unlimited demands pose a significant challenge to Finance Commissions.
- Political Power Shifts: The Commission faces difficulties when its term coincides with fundamental shifts in fiscal relationships, as seen with the challenges posed by the introduction of GST during the 15th Finance Commission.
- Intersecting Domains: The Finance Commission and the GST Council’s intersecting domains create complexities, impacting state and central tax revenues.
- Centralization Demands: Recent calls for greater centralization of expenditure assignment pose a challenge to India’s quasi-federal system.
- Third Tier of Government: Empowering local governments and Panchayati Raj institutions remains a challenge, requiring capacity building and substantial fund flows.
- Capacity Building: Strengthening the capacity of PRIs and ULBs is essential for effective decentralization, requiring reforms and resource allocation.
Why In News
The Union Cabinet, chaired by the Prime Minister, has recently approved the Terms of Reference for the Sixteenth Finance Commission, reinforcing the government’s commitment to fostering equitable fiscal policies and ensuring the effective allocation of resources for balanced economic growth.
MCQs about Sixteenth Finance Commission
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What is the primary responsibility of the Finance Commission in India?
A. Proposing constitutional amendments
B. Recommending the distribution of tax revenue
C. Enforcing fiscal policies
D. Overseeing state legislatures
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What is the central focus of Fiscal Federalism in India?
A. Environmental regulations
B. Division of financial powers and functions
C. Social welfare programs
D. Foreign relations
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What is a major challenge faced by Finance Commissions in India?
A. Excessive resources
B. Political power consolidation
C. Limited resources versus unlimited demands
D. Uniform taxation
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Why is capacity building crucial for the third tier of government in India?
A. To centralize power
B. To strengthen the Finance Commission’s authority
C. To enhance the capacity of PRIs and ULBs
D. To reduce the influence of state legislatures
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