The Hindu Editorial Analysis- 1st April 2024 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

The Finance Commission and public finance in Kerala 

Why in News?

Public debt management is getting wider attention in Centre-State financial relations, against the backdrop of recently constituted Sixteenth Union Finance Commission. One of the States in India, Kerala, had fied a suit in the Supreme Court of India against the Centre’s decision on the net borrowing ceiling of States. These recent developments relate to a clarion call for “asymmetric fiscal rules” relating to deficits and debts in India

• The SFC, also known as the Sixteenth Finance Commission, convened to address crucial matters pertaining to fiscal allocations and financial planning.

Significance

• The discussion at the meeting underscored the pivotal role of the SFC in shaping financial policies and resource distribution across regions.
• It emphasized the commission's mandate to ensure equitable distribution of funds based on evolving economic parameters and developmental needs.

Terms of Reference

• The primary focus of the meeting was to define the terms of reference, outlining the scope and objectives of the commission's work.
• These terms serve as a guiding framework for the commission's assessments and recommendations concerning fiscal matters.

Role of the SFC

• The SFC plays a crucial role in evaluating financial needs, determining revenue-sharing mechanisms, and recommending grants to states.
• By analyzing economic data and trends, the commission formulates strategies to promote financial stability and growth at both national and state levels.

Overview of the Sixteenth Finance Commission (SFC)

•  Chairman:  The Sixteenth Finance Commission is chaired by Arvind Panagariya.
•  Full Time Members:  The commission includes A.N. Jha, Annie George Mathew, and Niranjan Rajadhyaksha. A.N. Jha is a former expenditure secretary and member of the 15th Finance Commission. Annie George Mathew previously served as the special secretary of the department of expenditure. Niranjan Rajadhyaksha is the executive director of Artha Global.
•  Part-Time Member:  Soumya Kanti Ghosh, who is the group chief economic adviser of the State Bank of India, also serves on the commission.
•  Duration:  The Sixteenth Finance Commission's primary task is to determine how the Centre's tax revenue should be distributed to states over a five-year period beginning in the financial year 2027. The commission is expected to present its recommendations by 31st October 2025, covering a five-year award period commencing on 1st April 2026.

Key Responsibilities of the Finance Commission

• Assessing the financial situation of the government
• Deciding on the sharing of taxes between the center and the states
• Suggesting measures to enhance fiscal stability
• Reviewing the financial performance of the states

Example: Tax Revenue Distribution

One of the critical functions of the Finance Commission is to recommend how tax revenues should be divided between the central government and the states. For example, if a state has a weaker financial position, the Commission may suggest a higher share of central taxes to that state to support its development efforts.

Specifications for Appointing Members

• The Parliament has outlined specific criteria for appointing members to the committee:
  • The chairman must have a background in public affairs.
  • Other members should meet one of the following qualifications:
    • A High Court judge or someone eligible to become one.
    • An individual with specialized knowledge of government finance and accounts.
    • Someone with experience in financial matters and administration.
    • An individual with expertise in economics.

Qualifications for Members

• Criteria for selecting members include:
  • A High Court judge or an eligible candidate.
  • Someone with specialized knowledge of government finance and accounts.
  • An individual experienced in financial matters and administration.
  • Someone with a deep understanding of economics.

Removal of Members

• Members can be removed under the following circumstances:
  • If they are deemed mentally unfit.
  • Involvement in reprehensible actions.
  • In case of a conflict of interest.

Reasons for Disqualification of a Member

• If a member is found to be of unsound mind
• If a member is involved in a vile act
• If there is a conflict of interest

Powers of the Finance Commission

• Powers similar to a Civil Court: The Finance Commission is endowed with powers akin to those of a Civil Court as delineated in the Code of Civil Procedure 1908.
• Evidence Gathering Authority: The Commission possesses the authority to summon witnesses and requisition the production of public documents or records from any office or court.

Functions of the Finance Commission:

• Tax Distribution: The Finance Commission is responsible for dividing the net tax revenues between the Union and the States and determining how these revenues are further divided among the States.
• Rules for grants-in-aid: It establishes guidelines for providing financial assistance to the states from the Consolidated Fund of India.
• Tax Devolution at State Level: It enhances the financial resources of the state governments to support local bodies like panchayats and municipalities, based on the recommendations of the state finance commission.
• Miscellaneous Matters: The Commission addresses any other financial issues referred to it by the President to promote sound fiscal management.
• Report Submission: The Finance Commission submits a report to the President, which is then presented in both houses of Parliament. An explanatory memorandum follows, detailing the actions taken regarding the Commission's recommendations.
• Previous Functions:
  • Grants for Specific States: In the past, the Finance Commission suggested grants to states like Assam, Bihar, Odisha, and West Bengal concerning the sharing of proceeds from export duties on jute products. This arrangement was applicable for a limited period of 10 years..

Criticism of Finance Commission

• Advisory Nature: The suggestions provided by the Finance Commission are of an advisory nature and are not obligatory for the government to follow. However, the government must present strong justifications if they decide not to implement the recommendations put forth by the commission.
• Discretion of the Union Government: The central government holds discretionary powers when it comes to executing the recommendations related to allocating funds to states as advised by the Finance Commission.

State Finance Commission

State Finance Commission is a constitutional body established following the 73rd Constitutional Amendment Act of 1992 under Article 280.

• Constitutional Position: It is formed as per the 73rd Constitutional Amendment Act of 1992 under Article 280.
• Appointment: The governors of the respective states appoint the State Finance Commission every five years under Article 243-I of the Constitution of India.
• Functions: At the state level, it carries out all the roles of the Finance Commission, which involves allocating state finances to the Panchayati Raj and municipalities.

State Finance Commission plays a crucial role in the fiscal management of states by ensuring equitable distribution of funds to local governing bodies.