How the Finance Commission can be strengthened

A middle way compromise would be to strengthen the Finance Commission Division in the Department of Expenditure itself.

Article 280 of the Indian Constitution stipulates that a Finance Commission (FC) has to be constituted every five years to set the parameters for distribution of taxes between the Union and the states along with the distribution principles amongst the states themselves. While Prof Arvind Panagariya already stands notified as 16th FC Chairman, other members and office bearers’ appointment may also take place soon. By October 2025, the Commission would have submitted its report and shut shop in all probability. That brings a fundamental poser – should there be a permanent FC? If not, is there an alternative option?

Finance Commissions – Over The Years

Most economists and public policy practitioners favour the status quo. Part of the reason is that Article 280 has worked reasonably well. Beginning with the First FC in 1951, all FCs were commissioned in time. The FCs were dynamic, independent and progressive in resource distributive methodology. The Union Government’s flexible approach in terms of reference (ToR) also helped. Over the period, established economists and public finance professionals chaired successive FCs. KC Pant (10th FC) was the last politico to head an FC. This lent more credibility and respect to the FC recommendations.

However, in the last two decades, the states bargained for increased share in the distributable taxes and resources. The 11th Finance Commission had recommended 29.5 percent for states in the proceeds of Union taxes. The 12th FC raised this to 30.5 percent; 13th FC to 32 percent; and the 14th FC raised this to a whopping 42 percent. The 15th FC had retained the same, if the share of the Union Territories of J&K and Ladakh were to be factored in.

The result has been a definite shift towards States without accounting for their responsibility and weakening of North Block. One example would suffice. On the fifth floor of a building in New Delhi’s CGO complex, there lies a sleepy office called the Finance Commission Division (FCD). The division, functioning under the administrative control of the Department of Expenditure in the Ministry of Finance, is responsible for timely release of funds based on the FC awards. Until the 13th FC award, this office was a major hub of activities and State Resident Commissioners were frequent visitors to this place. However, since then, the number of central schemes and centrally-sponsored schemes came down drastically. Concurrently, the number of staff and the visibility of the office also reduced.Three Arguments For A Permanent FC

Additionally, multiple practical considerations related to the FC, right from its notification to the award implementation – warrant a debate on the permanency of FC. First, an early challenge for any FC is to search for a centrally located place closer to the North Block and other ministries. Rented accommodations are no match to the aura of North Block. Residential accommodation and other logistical arrangements are equally challenging. The 12th FC had recommended that adequate arrangements for office and residence of the chairman and members of the FC must be made before the notification of the commission, so that the FC’s time is not wasted in routine administrative matters.

Second, institutional memory and perpetuation of thought process matters! That way, subsequent FC might be losing out on the institutional wisdom, knowledge and experience of predecessor FCs. The records and files are sent to the FCD where they become part and parcel of the archival collection and serve no public purpose thereafter. These records are excellent primary sources and could lead to original PhDs and research papers on fiscal federalism and financing of disaster management.

Third, there are post implementation problems as well. For instance, the 15th FC had recommended a non-lapsable modernisation fund for defence and internal security (MFDIS) and had even made the allotments to the Ministry of Defence and Home Affairs. Unfortunately, not enough progress could take place. Many grants are tied; such as holding of elections in the local bodies and fulfilment of other conditions. These are only representative problems; there are many others that could have been better managed by a permanent FC.

Unfortunately, the entire debate on a permanent FC is under-developed. Perhaps, a middle way compromise would be to strengthen the Finance Commission Division in the Department of Expenditure itself. As the custodian of FC records and responsible for its award implementation, the FCD is best suited to carry forward the institutional legacy of outgoing FC in the interregnum. The 12th FC had indeed recommended that this division should be constituted into a full-fledged department, serving as the permanent secretariat for the Finance Commissions. While that is not possible, an expanded FCD with a larger mandate is the best way to perpetuate the spirit of FCs.

Bhartendu Kumar Singh is in the Indian Defence Accounts Service and had served as Director, FCD, between 2018-21. Views are personal, and do not represent the stand of this publication.