Crucial for federalism

Finance Commissions are central to the Constitution

Reserve Bank of India (RBI) Governor Shaktikanta Das has expressed concern that the various Finance Commissions’ recommendations are too inconsistent with one another. Mr Das was earlier a member of the Fifteenth Finance Commission, and has served as a senior official in the Union finance ministry. He argued that in the past different Finance Commissions had “adopted different approaches on tax devolution” and made grants to states, and that was a problem because more continuity was desired. Presumably in aid of that effort, he made a case for a permanent Finance Commission as opposed to the current system, in which it is reconstituted every five years. This was necessary now that the goods and services tax (GST) had come into operation, and the GST Council could focus on the need for improving tax collections while the Finance Commission could manage other reforms.

Mr Das’ suggestions need to be given due consideration, given his background and current post. However, his expectations from Finance Commissions seem misplaced and do not take into account the continuing need for renewal in their recommendations. Finance Commissions survey the fiscal landscape as well as the state of federalism and then make recommendations, which the political class has to take on board. This is substantially different from what Mr Das is suggesting, but it is a requirement that remains important. Mr Das might worry about inconsistency in different Finance Commissions’ recommendations, but this ignores the fact that there is a broad trend in recent Commissions to increase devolution towards states. This has been established, and future Commissions will no doubt take it forward.

In fact, the problem is that such recommendations have not been followed up on in the right spirit by successive Union governments. The current government, for example, did not properly act on the Fourteenth Finance Commission’s decision to raise the proportion of the shared pool of taxes given to the states from 32 to 42 per cent. Much of that increased allotment was clawed back through various types of cess, as well as a sharp reduction in the Union’s outlay on centrally-sponsored schemes. Mr Das was speaking at the launch of a book by one of his predecessors, Y V Reddy, and Mr Reddy pointed out that while different Finance Commissions have made different recommendations, the impact of any one recommendation has never been more than 10 per cent on any particular state. In other words, fears of inconsistency across Commissions are perhaps overblown.

The Finance Commissions are a crucial part of India’s constitutional set-up. They allow for constant renewal in how the Union of India approaches federal questions. Creating a permanent Finance Commission with a particular set of rules will hamper this effort and severely undermine the federal structure of India. The states are watching this discussion closely. Already the Union has exerted undue influence on the Fifteenth Finance Commission through a controversial set of additions to the Terms of Reference that some states, particularly in the south, fear will penalise them. The Finance Commissions should be respected, and not viewed as an inconvenience.