Question Bank

June 4, 2018 @ 3:00 am
Question Bank

4th June 2018


(1 Question)

Answer questions in NOT MORE than 200 words each. Content of the answer is more important than its length.

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Q1. The terms of reference of the latest Finance Commission affects the decision making of the local government bodies and are against cooperative federalism. Discuss


  • A reliable system of intergovernmental fiscal transfers is the key to a viable and stable federal polity. In India, the design of a sound intergovernmental transfer system that will balance the mismatches in resources and expenditure responsibilities of the various levels of government has been statutorily left to the Union Finance Commission (UFC). After the abolition in 2014 of the Planning Commission, which played a critical role in the Indian transfer system, the UFC has emerged as the principal agency to handle this delicate task. Article 280(3) and its first three clauses clearly spell out the core duties of the UFC: tax devolution, grants-in-aid, and augmenting the resources of panchayats and municipalities. Over the years, the open-ended subclause, 280(3)(d), that provides for “any other matter… in the interests of sound finance”, has been exemplified in the Terms of References of recent UFCs. The Terms of Reference of the 15th FC have attracted considerable public debate.
  • In preparing the Terms of Reference for a quasi-judicial body like the UFC, it is important not to use it as a platform to impose the Union government’s agenda on the States. The fiscal consolidation roadmaps that entail expenditure compression which ultimately reduce vital public spending on health, education, food security entitlements, drinking water, and so on disturb the finer fabric of India’s cooperative federalism — especially in the context of India’s lowest share of direct taxes in total taxes in the world, disreputable tax-GDP ratio, imprudent transgression into States’ autonomy, alarming growth of economic inequality, and so on.
  • The memorandum to the President, relates to transfers to local governments. That, following the 73rd and 74th Constitutional Amendments, Article 280(3) was amended to incorporate the clauses relating to panchayats and municipalities underscores the organic link in Indian federal public finance. It should be taken into account constitutional mandates such as creation of institutions of self-government, planning for economic development and social justice, and so on. The Terms of Reference of the 15th FC introduces “performance-based incentives” which inter-alia want, “Provision of grants in aid to local bodies for basic services, including quality human resources, and implementation of performance grant system in improving delivery of services.” This subclause is not constitutionally neat because grants to local governments constitute a separate core mandate. Further, while including this among the “performance-based incentives”, the strategic efforts made by the 13th FC in this regard and the efforts to link local grants to the divisible pool via Article 275 are apparently ignored. Performance-based incentive clauses are valid only as a result-oriented accountability mechanism and also for ensuring constitutional mandates. Padding the Terms of Reference with questionable clauses under this rubric naturally invites resistance from subnational entities
  • The need for an integrated federal public finance that takes local governments into account in macro policymaking and in formulating strategies to ensure regional equity and for evaluating the revenue potential and fiscal capacity does not seem to have occurred to the decision-makers of the country. This omission is tantamount to tearing the web of a ‘holding together’ federation which seeks “inclusiveness” as a national goal. The Terms of Reference debate and the memorandum of the State Finance Ministers are silent on this vital issue. While we have a credible budgeting and financial reporting system at the Union and State levels, it is inexplicable why the financial accounting and accountability mechanisms at the local government level are left to fend for themselves.
  • The Terms of Reference controversy could have been averted under the dispensation of a truly cooperative federalism.The rationale of Article 280, which establishes the UFC, is derived from the acknowledged mismatches between the resources of the Centre and the expenditure responsibilities of the States. The Constitution-makers never asked pertinent questions like who should do what and who should tax where and used the principle of subsidiarity (what can be done best at a particular level should be done at that level and not at a higher level) or other criteria in functional and revenue assignments. Given this historical reality, the Terms of Reference of a UFC should have been a joint exercise rather than a Union diktat.

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