16th FINANCE COMMISSION from Vajirao & Reddy Institute

16^th FINANCE COMMISSION

• Recently, Mr. Arvind Panagariya- former vice chairman of Niti Aayog and professor is announced as the chairman of the Sixteenth Finance Commission (SFC).

• The Finance Commission is a Constitutionally mandated body set up under Article 280 of the Constitution.
• It helps in strengthening the principle of cooperative federalism as its working is characterized by extensive and intensive consultations with all levels of governments.
• Its recommendations are also focused towards improving the quality of public spending and thus promoting overall fiscal stability.
• The 1^st Finance Commission was set up in 1951 and till then there have been fifteen so far.
• Each FC of them has faced its own unique set of challenges.

• The FCs decide the amount of the Centre’s revenue to be shared along with the states and the formula for dividing it among states.
• The commission is also a key pillar of fiscal federalism.
• Its core responsibility is to evaluate the state of finances of the Union and State Governments.
• Apart from that, FCs also recommend the sharing of taxes between them and laying down the principles determining the distribution of these taxes among States.
• The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India are laid by FC.
• The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
• The FCs also refer any matter to the President in the interests of sound finance.
• The Commission regulates its own procedures and have such powers in performing of their functions as Parliament may by law confer on them.

• The Finance Commission is appointed by the President under Article 280 of the Constitution.
• As per the provisions contained in the Finance Commission [Miscellaneous Provisions] Act, 1951 and The Finance Commission (Salaries & Allowances) Rules, 1951, the Chairman of the Commission is selected from among persons who have had experience in public affairs.
• The four other members of the commission are selected from among persons who-- (a) are, or have been, or are qualified to be appointed as Judges of a High Court; or (b) have special knowledge of the finances and accounts of Government; or (c) have had wide experience in financial matters and in administration; or (d) have special knowledge of economics

• Implemented by President Order: The recommendations relating to distribution of Union Taxes and Duties and Grants-in-aid fall in this category.
• Implemented by executive orders: Other recommendations to be made by the Finance Commission, as per its Terms of Reference

• Revenue sharing among states has always been a controversial subject due to finite resources.
• The parameters of sharing have to accommodate the interests of all the states while factoring in their various stages of development.
• During Fifteenth Finance Commission, one of the issues was of terms of reference to use the population data of the 2011 census.

• Southern states mainly Karnataka and Tamil Nadu complained saying that using 2011 census would reduce the allocations for them as they had been successfully stabilized their population.
• Later on panel gave weight to population and population performance for an equitable allocation.

• The 16^th FC is expected to address the sustainability of debt at the Central and state levels.
• Although the Centre maintains that it is on track to achieve its target of fiscal deficit below 4.5% of GDP by FY26.
• The panel is also expected to look into expenditure reforms at the state level.
• The Commission is also expected to look into the revenue trends and expenditure obligations at the Central and state levels before making recommendations.