Question Bank

May 14, 2018 @ 3:00 am
Question Bank

14 MAY 2018


(1 Question)


Q1. Discuss why the Terms of reference of the 15th Finance Commission are against the spirit of federalism and rights of states.


  • The terms of reference (ToR) of the Finance Commission determined by the Union government. What the ToR of the 15th Finance Commission challenge are the federal values enshrined in the Constitution and the modicum of fiscal autonomy State governments enjoy.
  • First, no Finance Minister will welcome a reduction in the share of taxes of the States from the 42% that was awarded by the 14th Finance Commission. This is precisely what the ToR propose to do. Never before in India’s history has the Finance Commission been asked to review the award of its predecessor. A reminder of certain facts: 32% of the 13th Finance Commission and 42% of the 14th Finance Commission are not comparable. The first refers to non-plan revenue expenditure and the second to total revenue expenditure. Plan grants have been terminated. Further, the Government of India has increased state share of Centrally sponsored schemes so that the overall devolution as a share of GDP has remained more or less the same. The goods and services tax (GST) has further worsened vertical devolution due to the 50:50 sharing of taxes.
  • Second, the idea of federalism ensures that every citizen of India is provided comparable public services and taxation. It is for this purpose that the Constitution has provided for the provision of revenue deficit grant. No Finance Commission can review this. How is it then that the ToR says, “The Commission may also examine whether revenue deficit grants be provided at all”?
  • Third, the ToR want to curtail borrowing by States from the present 3% of Gross State Domestic Product (GSDP) to 1.7% if the Fiscal Responsibility and Budget Management Review Committee has its way with its recommendation. We have just started exercising borrowing rights as recommended by the 14th Finance Commission. If this is reversed, this will severely curtail capital expenditure of States. Further, there is a mischievous angle to the ToR which has asked the Finance Commission to explore the conditions to be imposed on borrowing by States. So far, there has been no condition on the 3% of GSDP fiscal deficit ceiling.
  • Fourth, the 14th Finance Commission directed its efforts to ensure that the discretionary element in the grant given by the Commission is totally eliminated. It is loud and clear from the ToR that the Union government is using the Finance Commission route to impose conditionalities through a plethora of conditional grants. The ToR talks about incentivising nine items, but the choice should be left to States. Equally unacceptable is the reference to populist schemes which are in the exclusive jurisdiction of elected State governments.

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