Model Answer
0 min readIntroduction
Finance Commissions (FCs) are constitutionally mandated bodies (Article 280) tasked with recommending the distribution of tax revenues between the Union and the States, and among the States themselves. These recommendations significantly impact the fiscal capacity of states and their ability to implement development programs. The 15th FC (2020-2026), chaired by N.K. Singh, faced the unique challenge of navigating a slowing economy and the impending bifurcation of Jammu & Kashmir and Ladakh. Its recommendations, particularly regarding the use of demographic performance as a criterion, sparked considerable debate. This answer will critically examine the 15th FC’s criteria and trace the evolution of contentious issues since the 10th FC.
Criteria Adopted by the 15th Finance Commission
The 15th FC adopted a multi-criteria approach, departing from the predominantly needs-based approach of previous commissions. It used a composite index comprising several indicators, assigning weights to each. The key criteria were:
- Income Distance (45%): This measures the difference between a state’s per capita income and the highest per capita income among all states. It aims to reduce income disparities.
- Demographic Performance (45%): This assesses the states’ performance in controlling population growth and rewarding states that have made progress in achieving replacement levels of fertility. This was a highly contentious criterion.
- Forest and Ecology (10%): This incentivizes states to preserve forests and maintain ecological balance.
The Commission also considered tax effort, demographic change, and efficiency in revenue collection. It recommended a vertical devolution of 41% of the divisible pool of taxes to states – the same as the 14th FC, but with a significant shift in the horizontal distribution formula.
Critical Examination of the 15th FC Criteria
The 15th FC’s criteria have been both praised and criticized. The emphasis on demographic performance, while intended to address population control, was seen as penalizing states that have already achieved lower fertility rates, particularly in South India. Critics argued that this approach unfairly disadvantages states that have invested in social development and education, leading to better family planning outcomes. Furthermore, the reliance on 2011 census data was questioned, given the demographic shifts that have occurred since then.
The increased weightage to income distance was welcomed by less developed states, but concerns were raised about its potential to create a dependency culture. The inclusion of forest and ecology was a positive step towards environmental sustainability, but the methodology for assessing ecological performance was debated.
Major Issues of Contention Since the 10th Finance Commission
The issues of contention in Finance Commission allocations have evolved over time. Here’s a breakdown since the 10th FC:
| Finance Commission | Major Issues of Contention |
|---|---|
| 10th FC (1995-2000) | Shift from normative to formula-based approach; concerns about the weightage given to population, which favored larger states. |
| 11th FC (2000-2005) | Debate over the criteria for assessing fiscal discipline; concerns about the impact of debt levels on state allocations. |
| 12th FC (2005-2010) | Focus on fiscal consolidation and revenue augmentation; disagreements over the treatment of grants-in-lieu of Central schemes. |
| 13th FC (2010-2015) | Emphasis on inclusive growth and equity; concerns about the impact of the Goods and Services Tax (GST) on state finances (pre-GST implementation). |
| 14th FC (2015-2020) | Significant increase in the states’ share of the divisible pool (42%); debate over the criteria for assessing performance in areas like health and education. |
| 15th FC (2020-2026) | Controversy over the use of demographic performance as a criterion; concerns about the impact of the bifurcation of J&K and Ladakh on the overall allocation formula. |
A recurring theme has been the tension between equity and efficiency. States with lower levels of development often advocate for a greater share of resources to address their developmental deficits, while states with higher levels of development argue for a more performance-based allocation system. The introduction of GST further complicated matters, as it altered the revenue landscape and raised questions about the adequacy of compensation mechanisms.
The issue of ‘vertical devolution’ – the share of taxes devolved to states – has also been a point of contention. While states generally prefer a higher share, the Union government often argues for retaining a larger portion to meet its own commitments and address national priorities.
Conclusion
The 15th Finance Commission’s recommendations, while aiming for a more nuanced and equitable distribution of resources, sparked significant debate due to the inclusion of demographic performance as a key criterion. The historical trajectory of Finance Commission allocations reveals a persistent tension between equity, efficiency, and fiscal federalism. Future commissions must strive for a more balanced approach that addresses the diverse needs of states while promoting sustainable and inclusive growth. A transparent and consultative process, involving both the Union and State governments, is crucial for building consensus and ensuring the effective implementation of Finance Commission recommendations.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.