The Finance Commission plays a pivotal role in addressing state fiscal challenges by serving as an unbiased arbitrator in the distribution of financial resources between the central and state governments. Through its recommendations, the commission aims to achieve a fair and equitable distribution of funds, taking into account the specific needs and challenges faced by each state. By analyzing the economic and fiscal conditions of states, the Finance Commission helps in formulating a balanced fiscal framework that ensures financial stability and promotes sustainable development. Moreover, its role extends beyond mere allocation, encompassing reforms and policy suggestions to enhance states’ revenue-generating capacities and fiscal management. In essence, the Finance Commission acts as a crucial instrument in fostering cooperative federalism and ensuring that states receive the necessary support to overcome fiscal hurdles and promote overall economic growth.
Tag: GS-2 Governance
In News:
A recent article suggests that the 16th Finance Commission of India ought to prioritize fiscal efficiency and discipline in its devolution formula, aiming to restrain the populist inclinations of state governments.
Addressing the Need to Curb Populism in India
Fiscal Imbalance
Rising Debt
- From 2014 to 2022, states like Andhra Pradesh and Tamil Nadu witnessed a surge in the average debt-to-GDP ratio, reaching 34.5%.
Higher Deficit
- Populist spending on free electricity, loan waivers, and social welfare schemes led to a combined fiscal deficit of 4.1% of GDP in 2021-22.
Revenue Shortfalls
- Tax revenues lagged behind populist spending, requiring states to rely heavily on central government bailouts or borrowing.
Economic Distortions
Investment Decline
- Populist policies, such as price controls, contributed to a 10% decline in Foreign Direct Investment (FDI) in 2022.
Job Growth Stagnation
- Despite increased government spending, the unemployment rate remained above 7% in 2023.
Market Inefficiency
- Price controls in sectors like agriculture disrupted supply chains and impacted consumer welfare.
Erosion of Governance
Increase in Corruption
- Populist rhetoric correlated with a drop in India’s Transparency International Corruption Perception Index ranking from 80 in 2014 to 85 in 2022.
Declining Transparency
- States with strong populist leaders showed a downward trend in transparency, as indicated by the Public Affairs Index.
Populist Policies Aggravating the Debate
Reversion to Old Pension Scheme (OPS)
- Some states reverted to OPS, incurring indefinite liabilities toward employee pensions, compared to the limited liability of the New Pension Scheme (NPS) introduced in 2004.
- An RBI study suggests OPS results in 4.5 times more liability by 2060, restricting growth and compromising future generations’ interests.
Rising States’ Fiscal Deficit
- States’ deficits increased due to subsidies for populist measures like free electricity, with an average spending on subsidies at 0.87% of Gross State Domestic Product (GSDP).
Finance Commission’s Role in Curbing Populism
Performance-Based Incentives
- The 15th Finance Commission proposed measurable incentives linked to specific outcomes, encouraging responsible governance and discouraging populist measures.
- Article 280(3) allows the Finance Commission to address issues in the interest of sound finance.
Objective Criteria for Populist Measures
- The Finance Commission can work on developing objective criteria for categorizing populist and non-populist measures, considering diverse developmental needs.
Fiscal Efficiency Parameters
- The Finance Commission can give more weight to fiscal efficiency in its transfer criteria, emphasizing fiscal consolidation and tax effort.
Public Awareness
- By creating public awareness about the consequences of populist measures, the Finance Commission can contribute to informed public discourse and pressure political parties to adopt responsible fiscal policies.
Stress on Future Implications
- The Finance Commission can highlight the long-term consequences of populist measures, recommending measures to prevent states from borrowing beyond their capacity.
Consensus Building
- Acting as a mediator, the Finance Commission can foster dialogue between the Centre and States, promoting cooperative federalism in fiscal matters.
Regular Review and Recommendations
- The Finance Commission can continually review the financial health of states, making periodic recommendations based on evolving economic scenarios.
Conclusion
A collaborative approach between the Centre and States, guided by the Finance Commission, is crucial to addressing the challenges posed by populist policies and ensuring responsible fiscal governance.
| UPSC Previous Year Questions Prelims (2010) Q. Consider the following actions by the Government: Cutting the tax rates. Increasing the government spending. Abolishing the subsidies in the context of economic recession. which of the above actions can be considered a part of the “fiscal stimulus” package? (a) 1 and 2 only (b) 2 only (c) 1 and 3 only (d) 1, 2 and 3 Ans: (a) Mains (2015) Q. In what way could the replacement of price subsidy with direct benefit Transfer (DBT) change the scenario of subsidies in India? Discuss. |
Source: BL
Frequently Asked Questions (FAQs)
1. FAQ: What is the primary responsibility of the Finance Commission in addressing state fiscal challenges?
Answer: The Finance Commission is primarily tasked with recommending the distribution of financial resources between the central and state governments. By assessing the economic and fiscal conditions of states, it aims to ensure a fair and balanced allocation that addresses each state’s specific fiscal challenges.
2. FAQ: How does the Finance Commission contribute to overcoming fiscal challenges at the state level?
Answer: The Finance Commission goes beyond mere fund allocation. It plays a crucial role in suggesting reforms and policies to enhance states’ revenue-generating capacities and improve fiscal management. Through its recommendations, the commission seeks to create a sustainable fiscal framework that promotes economic growth and financial stability at the state level.
3. FAQ: Can the Finance Commission assist states in achieving long-term fiscal sustainability?
Answer: Yes, the Finance Commission’s recommendations are designed to foster long-term fiscal sustainability. By analyzing states’ fiscal health, the commission provides insights and suggestions for reforms that aim to strengthen states’ ability to generate revenue, manage finances efficiently, and overcome fiscal challenges in the long run, promoting overall economic development.
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