Evaluate the role of the Finance Commission in maintaining fiscal federalism in India.

Question

Ghissu Editorial · Accepted Answer

The Finance Commission under Article 280 sustains fiscal federalism by recommending, every five years, how central taxes are shared with and among states, plus grants to states and local bodies. The Fourteenth Finance Commission raised states' share from 32% to 42%, though its 2011 Census criteria draw criticism.

**Introduction**

The Finance Commission⟦1⟧, mandated by Article 280, plays a crucial role in maintaining fiscal federalism by recommending the distribution of financial resources between the Centre and States, with the Fourteenth Finance Commission⟦2⟧ (FFC) notably increasing states’ share in central taxes from 32% to 42%, empowering states like ==Telangana==.

**Constitutional and Statutory Role**

SKETCH: mindmap | Finance Commission’s Fiscal Balance Role
- Vertical Devolution
- Horizontal Equity
- Grants and Incentives
- Local Government Support

1. **Constitutional Mandate and Advisory Role**: Constituted every five years, the Commission recommends tax devolution and grants; its advisory recommendations are generally accepted, preserving fiscal balance.

2. **Expanded Terms of Reference**: Beyond tax sharing, it recommends grants-in-aid, performance incentives, and local government finance augmentation, reflecting its evolving role in cooperative federalism.

**Contribution to Fiscal Balance**

3. **Vertical and Horizontal Equity**: The FFC’s increase in states’ tax share addresses vertical imbalances; criteria like population and income distance ensure horizontal equity, benefiting diverse states including ==Telangana==.

4. **Grants and Local Government Support**: Grants-in-aid and performance-based incentives promote fiscal discipline; support for local bodies aligns with 73rd and 74th Amendments, aiding gram panchayats and municipalities in ==Telangana==.

**Effectiveness and Challenges**

5. **Enhancing State Autonomy**: Increased tax shares and performance grants have improved states’ fiscal autonomy and social sector investments, as seen in ==Telangana’s== budget allocations.

6. **Challenges of Data and Enforcement**: Reliance on 2011 census data raises fairness concerns; as an advisory body, the Commission’s recommendations can be overridden, though this is rare.

**Conclusion**

The Finance Commission effectively balances fiscal equity and regional concerns, sustaining India’s fiscal federalism through structured financial transfers and incentives.

భారతదేశంలో ఆర్థిక సమాఖ్య వ్యవస్థను (Fiscal Federalism) నిర్వహించడంలో ఆర్థిక సంఘం (Finance Commission) పాత్రను మూల్యాంకనం చేయండి.

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