Great Expectations: Why Normative Recommendations of Finance Commissions Remain on Paper

Why in News?

• The 13th Finance Commission (FC), set up in 2007, made recommendations covering vertical devolution, horizontal distribution, and grant-in-aid for 2010-2015.
• Certain expectations from the 13th FC’s grants, such as improved justice delivery and statistical system, fell short.
• Despite outlined plans for judicial reform and statistical enhancement, the question of what has been achieved remains largely rhetorical.

 

Finance Commission and its Objectives

• Finance Commission
  • It is a constitutional body for giving recommendations on distribution of tax revenues between the Union and the States and amongst the States themselves.
  • The Finance Commission is constituted by the President under Article 280of the Constitution.
  • It is constituted at the end of every fifth year or earlier, as deemed necessary by the President.
  • Parliament may by law determine the requisite qualifications for appointment of members of the Commission and the procedure of their selection. On account of this, The Finance Commission (Miscellaneous Provisions) Act, 1951 was passed.
• Objectives
  • It plays a crucial role in determining the fiscal framework for resource allocation between the Union and state governments.
  • FC’s recommendations consist of three key areas: vertical devolution, horizontal distribution, and grant-in-aid.
  • Vertical devolution focuses on Union to state transfers
  • Horizontal distribution involves the allocation of resources between states based on a specific formula.
  • Grant-in-aid, covered under Article 275, includes such sums as Parliament may by law provide and shall be charged on the Consolidated Fund of India. Different sums may be fixed for different states, as per their needs.
  • There is a distinction between grants (Article 282) and grant-in-aid, as the latter operates at arm’s length and offers more flexibility in terms of control.

 

Recommendations Made by 13th Finance Commission

• On Justice Delivery
  • Increase the number of courts’ working hours using the existing infrastructure by holding morning/evening shift courts.
  • Enhance support to Lok Adalats.
  • Provide additional funding to State Legal Services Authorities to enable them to enhance legal aid to the marginalised and empower them to access justice.
  • Promote the Alternate Dispute Resolution (ADR) mechanism to resolve part of the disputes outside the court system.
  • Enhance the capacity of judicial officers and public prosecutors through training programmes.
  • Support the creation of a judicial academy in every state to facilitate such training.
  • Appointment of court managers.
• On Statistical System
  • For equitable horizontal distribution, the measurement of cost disabilities is important.
  • The cost of services varies across states due to a large number of factors.
  • To estimate the cost disabilities of states, two types of data are required: (a) quantifiable measure of the level of various services available in different states and (b) the corresponding unit cost.
  • As of now, such data is not available. Measurement of inter-regional trade data would be useful to provide insights in an inter-regional framework.
  • The recommendation was made for the Ministry of Statistics to take steps to fill in the statistical gaps.

 

Expectations and Outcomes of 13th FC’s Recommendations

• On Justice Delivery
  • It is expected that about 14,825 such courts can dispose of 225 lakhs pending as well as freshly filed cases of a minor nature within a year.
  • This aggregates to 1,125 lakh cases over the period 2010-15. Rs 2,500 crore is being provided to facilitate setting up of such courts, which has been allocated to each state in accordance with the number of sanctioned courts.
  • Plus, there was a “condition” about state governments formulating a “State Litigation Policy.”
  • The outcome fell flat and appears to be more of rhetoric.
• On Statistical System
  • The outcome on recommendations on the Statistical System too is not satisfactory.
  • The government is still struggling to incorporate and implement the recommendations.

 

Recommendations made by 15th FC (applicable from 2021 to 2026)

• Distribution of Tax Proceeds: The Commission has recommended a fair distribution of tax proceeds between the central government and the states, ensuring a balanced fiscal sharing mechanism.
• Impact of GST
  • The FC emphasises the need to study the impact of the Goods and Services Tax (GST) on the economy.
  • This assessment aims to understand the implications of GST implementation and its effects on various sectors.
• Performance-based Incentives: These incentives would be based on their efforts to address issues such as population control, ease of doing business, and other relevant factors.
• Grants to States
  • The FC has proposed the provision of revenue deficit grants, grants to local bodies, and disaster management grants to the states.
  • These grants aim to support the financial needs of the states and ensure effective governance.
• Sector-specific and Performance-based Grants
  • In addition to the above, the Commission has also recommended the establishment of a framework for sector-specific and performance-based grants.
  • These grants would encourage states to focus on specific sectors and reward their performance in achieving developmental targets.

 

Challenges in Implementation of FCs Recommendations

• Lack of Commitment
  • The recommendations made by FCs, both at the Union and state levels, are often ignored as mere pious intentions.
  • This indicates a lack of commitment and follow-through in translating the recommendations into concrete actions.
• States’ Objection to Conditionalities
  • A few states have argued that grants have been directed to particular sectors and with conditionalities that restrict the expenditure options of the states.
  • Grants-in-aid are an important instrument which enables the Commission to make its scheme of transfers more comprehensive and address various issues spelt out in the ToR.

 

Expectations from 16th FC’s Recommendations

• The expectations and outcomes of previous FCs recommendations can be best described as Charles Dickens’ Novels; Great Expectations and Bleak House respectively.
• As we look forward to 16th FC, recalling Charles Dickens, India finds itself caught in 'A Tale of Two Cities': a hopeful spring but a familiar past.
• The hope is for more practical, implementable recommendations that can truly drive fiscal transformations.
• But so far as the normative and prescriptive recommendation of FCs are concerned, we are reminded of the familiar past and that we need to dampen our expectations.

 

Conclusion

• Given the fiscal transfers between the Union and state governments is very crucial and critical, FCs’ recommendations are necessary to determine the transfer framework.
• But because of many constraints, the implementation of their recommendations frequently falls short of the expectations.

 

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Q)1 How are the recommendations of the Finance Commission implemented?

The recommendations of the Finance Commission are implemented as under:- Those to be implemented by an order of the President: The recommendations relating to distribution of Union Taxes and Duties and Grants-in-aid fall in this category. Those to be implemented by executive orders: Other recommendations to be made by the Finance Commission, as per its Terms of Reference

 

Q2) When was the first Commission Constituted and how many Commissions have been Constituted so far?

The First Finance Commission was constituted vide Presidential Order dated 22.11.1951 under the chairmanship of Shri K.C. Neogy on 6th April, 1952. Fifteenth Finance Commissions have been Constituted so far at intervals of every five years.

 

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Source: The Indian Express