Permanent Status to Finance Commission

What is the issue?

RBI Governor Shaktikanta Das recently emphasized on the need for giving permanent status to Finance Commission.
In this backdrop, here is an overview on the significance of the Finance Commissions and the present shortfalls in the institution.

What is the need for a permanent status?

In the past, different Finance Commissions (FCs) had adopted different approaches on tax devolution and making grants to states.
This is problematic because more certainty in the flow of funds, especially to the states, is desired.
Mr. Das thus made a case for a permanent Finance Commission as opposed to the current system of reconstituting it every 5 years.
This is necessary now as the goods and services tax (GST) had come into operation.
While the GST Council could focus on the need for improving tax collections, the FC should be able to manage other reforms.

Is this a valid argument?

Despite Mr.Das's rationale, there is a continuing need for renewal in the recommendations of the Finance Commissions.
Finance Commissions survey the current fiscal landscape as well as the state of federalism in making recommendations.
Despite the different approaches, there is a broad trend in recent Commissions to increase devolution towards states.
This has been established, and future Commissions are certainly expected to take this forward.

What are the real concerns?

The real problem is that such recommendations have not been followed up on in the right spirit by successive governments.
E.g. the current government did not properly act on the 14th FC's decision to raise the states' proportion of tax pool from 32 to 42%
Much of the increased allotment was absorbed back through various types of cess.
There is also a sharp reduction in the Union’s outlay on centrally-sponsored schemes.

Why are Finance Commissions significant?

The Union has exerted undue influence on the 15th FC through a controversial set of additions to the Terms of Reference. Click here to know more.
So states, particularly in the south, are already concerned about this and are keenly following the developments in the discourse on FCs.
In this context, 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.
So creating a permanent Finance Commission with a particular set of rules may hamper this effort.
It could severely undermine the federal structure of India.

Source: Business Standard