Explained: Finance Commission (FC)

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The 15th Finance Commission was constituted in November of 2017. It was headed by Chairman Mr. Nand Kishore Singh, former IAS Officer, a senior politician and an economist. The permanent members of this commission include former IAS Officer Mr. Ajay Narayan Jha, economist Mr. Ashok Lahari, and adjunct professor Mr. Anoop Singh. Mr. Ramesh Chand, a member of NITI Aayog is a part-time member of the commission. This commission was set up for the fiscal year starting from 1st of April 2020.

Meetings took place between the Commission and the Advisory Council at regular intervals; however, the most recent meetings were in regard to the effect of the Covid-19 Pandemic over the GDP of India. The meeting took place for two days, on 23rd and 24th of April 2020 with the meeting mode being online.

The meeting revolved around the economy of India post- lockdown. With the emergence of an economic slowdown, there would be a severe shortage in the flow of money for various financial institutions and businesses. There would also be a dip in the demand for Indian goods in the foreign market due to global slowdown. Discussions were also held over the impact of the pandemic on government expenses. The government shall be burdened by the cost paid for public health, for empowerment of the downtrodden and any other economic issues that shall take place due to the current scenario. Discussions were also made over the fall in the tax receipts due to the lockdown, lower economic activity would mean a lower amount of taxes paid. Therefore, the commission felt that the planning for the coming fiscal years should be made with more minute inspection.  

Significance of this development

One of the most important significances of this meeting was with regards to the calculation towards the projection of real GDP. A common conscience among the members of the meeting was that the projections of the real GDP, which was estimated initially, before March of 2020 should be recalculated. The members believed that the projections should be revised lower to what was estimated before the pandemic.

This belief was brought in considering the fact that even after the relaxation of lockdown, economic activities shall take time to revert back to the original pace and that it will happen according to various other sources that are dependent on each other such as the restoration of supplies, the availability of intermediate products, and finally, the demand by customers. 

The other significance of this development includes the recommendations or suggestions that were put up by the council to the commission. The first of which included the economic aid that the small-scale industries would require. The small-scale industries have always been able to earn at a slower pace. However, with the lockdown, their money flow has completed dried up which would mean the help they would require by the government would be high.

The second recommendation that came up was in relation to non-banking financial companies. This was in regards to policies that will have to be made to keep them away from bankruptcies. The solution for these would include methods like partial loan guarantee. The role of RBI was considered to be of utmost importance.    

One of the most important issues to address was that of the money matters of Government, both at Union and State level. Even though various measures have been devised to keep up the expenditure of the government, for the future, methods would have to be thought of to fund the deficit that the governments are additionally facing.

Light was also thrown over the fact that various states would come out of this economic halt at different times and with variation to the effect they have on the economy. Therefore, the rebooting of the economy would take place at different times in different states.

What is Finance Commission?

India follows the policy of Fiscal Federalism. This means that India follows a division of powers even when it comes to matters related to its finance. In furtherance of this policy, Dr. Ambedkar, the then Law Minister of India, came up with the idea of the Finance Commission. It first came to function on the 22nd of November, 1951. The commission constituted of a Chairman and four other members that are to be assigned by the President in accordance with Article 280 of our constitution along with any essential manpower including a secretary. The present Finance Commission is the 15th FC with Mr. N K Singh, an ex- Planning Commission member, as the Chairman.

The main task of the commission is the division of tax among the Centre and the various states. This is done by formulating plans that take into consideration both the constitutional arrangements among the states and the Union and the present requirements of these states.

The commission majorly has meetings with various important people of power, such as cabinet ministers, department of the Central Government, ministers of various states, major financial stakeholders such as bankers, traders and various industries to make up the policy on how finance with respect to taxes shall function, both horizontally and vertically. They also work towards the Finance Commission Grants. These are the amount of taxes or grants that are given to various local bodies from the total tax share. This Grant becomes a part of the Union Budget.

The recommendations given by the commission are of utmost importance. In fact, it is the duty of the President to ask for an explanation from Lok Sabha and Rajya Sabha over how have they implemented the recommendations given under the Report by the Finance Commission. This has also been sanctioned under Article 281 of our Constitution.

Objectives and purposes

The Indian Economy suffers from two types of imbalances, namely, horizontal and vertical imbalance. Vertical Imbalance refers to the imbalance that takes place when a state incurs expenditure more than its revenue while providing to its people. Horizontal Imbalance refers to the imbalance that takes place between the various states due to any historical reason or due to their resources. The former is easier to handle as it can be fixed rather easily through good governance and policy. However, the latter is difficult to handle as the base of the development is different for the various states due to their resource share or history. The main objective of the Finance Commission is to balance out the fiscal imbalances the economy suffers.

To do so, the Commission does various actions. This can also be defined as the commission’s purpose. These include:

  • distribution of proceeds of Income Tax among Union and states.
  • selection of suitable principles for distribution of grants in aids from Consolidated Funds.
  • distribution of the net proceeds of the taxes and how such proceeds should be allocated among the Union and the states.

Legal/ constitutional basis

As mentioned earlier, the basis for the Finance Commission is the very Constitution itself. The provisions concerning the establishment of the Finance Commission can be observed in Article 280 of our Constitution. The first sub-clause of the article states the duty of the president to establish a commission, two years from the effect of the constitution and after the end of every five years or any time the president considers suitable. He may do so through an order. It also states that such a commission shall consist of a Chairman and four other members. 

The next sub-clause states about the qualification and selection of the members. It states that the Parliament can decide the qualification of the members and the manner through which they shall be selected and that such a decision should be made by law. The law with relation to this has been established in the Finance Commission (Miscellaneous Provisions) Act of 1951 and the Finance Commission (Salaries & Allowances) Rules of 1951.

The third part of the article is one of importance. It talks about the subject over which the commission is to make its recommendations. The first subject emphasizes the distribution of the net proceeds of the taxes and how such proceeds should be allocated among the Union and the states. The next subject talks about the recommendations made about the principles that deal with the Consolidated Funds for the States through which the grants- in- aid of revenues are extracted. The next two subjects deal with how funds can be added into the Consolidated Funds of India to support the requirements of the Panchayats and the Municipalities in the various states. The final subject includes any other matters that the President may refer to the commission in the interest of the finance.

The last part of the article states that a law that should be set by the Parliament, to set the method of working and the powers for the sound functioning of the Finance Commission. This is also mentioned in the Finance Commission (Miscellaneous Provisions) Act of 1951 and the Finance Commission (Salaries & Allowances) Rules of 1951.

Critical analysis

With the downwards predictions of India’s growth by the World Bank, it is a growing concern for the population to predict how India would fight through this pandemic economically. The Finance Commission is where all the heads turn towards to find policies that would make up a solution for the economy. The Finance Commission was built to restore the balance of the economy in India. However, with such an imbalance that is so vague to calculate but has put down the economy of India at so much lower of a situation, the Finance Commission will have to create policies that would aid in the development of the falling and failing economy. The Finance Commission would have to work through finding solutions for the slow down without even knowing when and how this pandemic would come to an end.

The only buffer that they have is the Internet. This modern piece of technology has helped many companies function, even at the quarter of their capacity. However, this shall not help in saving the collapsing economy. Driving forces of the world economy, including the US, Europe and Japan are also at stake. It will only be difficult for India to understand how it will boost its economy to not fall in the hands of its worst emergency, as stated by ex- RBI Governor, Mr. Raghuram Rajan.

Conclusion

The Finance Commission is a constitutional body that was created to balance out the imbalances that happen in the economy. Their main objectives were to look into the financial relationships between the Union and the various states. The commission was given a constitutional base through Article 280 of the Constitution. Division of taxes among states and dividing consolidated funds among Panchayats and Municipalities are among their major functions. The 15th Finance Commission was created in the year 2017 with the fiscal year of 2020 to 2021 as its current main agenda. However, the ongoing pandemic has created a whole downward shift of the economy, not just in India, but globally. This has caused the Commission to come up with newer calculation of projections and policies to cover up the deficit. However, what will happen once the economy starts working at its normal pace is something they cannot fully and accurately predict.

Author: Maitreyi Shishir from Symbiosis Law School, Hyderabad.

Editor: Yashika Gupta from Rajiv Gandhi National University of Law, Patiala.

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