Editorial Simplified – Heed The Federal Framework

HEED THE FEDERAL FRAMEWORK

Why has this issue cropped up ?

Recently, the 15th Finance Commission has been constituted. The terms of reference of this Commission have created apprehension among States about principles of fairness and equity in the distribution of public resources for development.

Why a Finance Commission ?

Most federations in the world have arrangements for the mobilisation and devolution of resources. In India, the Constitution provides for the appointment of a Finance Commission every five years to recommend methodology to share resources such that the fiscal space of the constituents, especially the States, is well protected.

Fair distribution of resources between the Centre and the States:

VITAL FOR UNITY : Article 1 of the Constitution of India recognises India as a Union of States. The unity of India can be preserved only if there is real fairness and equity in the matter of devolution of powers and resources to the States by the Central government.

DEMOGRAPHIC DIFFERENCES : Using the population data of 2011 as the base for tax devolution should not reduce the allocation of resources to States that have successfully reduced their rate of population growth. These States have incurred huge fiscal costs in order to achieve a lower population growth and healthy demographic indicators.

OUTREACH : The current terms of reference go far beyond the constitutional mandate of the Finance Commission. It is not the task of a Finance Commission to impose its perception of what policies are good for the people of the States. That is for democratically elected State governments to decide.

REVENUE DEFICITS : Revenue deficits are offshoots of the path of development followed by States and cannot be brought down in the short term. To discontinue post-tax devolution of revenue deficit grants would go against the principle of cooperative federalism.

RESIDUAL APPROACH : The Finance Commission should not take a “residual approach” to the question of vertical devolution. The approach should not be that of distributing what is left over after providing for the requirements of the Centre.

PERFORMANCE BASED INCENTIVES : The terms of reference are unprecedented in asking the 15th Finance Commission to consider proposing performance-based incentives. This reflects the viewpoint and ideological inclinations of the Central government and is an attempt to micro-manage the fiscal domain of the State governments.

Conclusion

India’s great wealth rests in its diversity. To recognise this diversity is also to recognise that States will follow diverse paths of development. The Finance Commission must facilitate diversity and a democratic path of development by respecting principles of equity and fairness in allocating resources between the Centre and States in India

Relevance : GS 2, 3

Try this probable Mains question :

Fair financial distribution between Centre and States is the essence of co-operative federalism. Discuss. [250 words]

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