12 March 2025 : Daily Answer Writing
Q1) In what ways are the terms of reference of the 16th Finance Commission different from that of the previous Finance Commissions? Despite increasingly progressive devolution by subsequent Finance Commissions, examine the factors that propel economic disparities across various States. (15 marks, 250 words)
ANSWER
Article 280 provides for the establishment of the Finance Commission to make recommendations on distribution of net proceeds of taxes between the Union and the States. It is established by the President, once every 5 years.
THE TERMS OF REFERENCE OF THE 16TH FINANCE COMMISSION ARE:
HOW THE TERMS OF REFERENCE OF THE 16TH FINANCE COMMISSION
DIFFERENT FROM THE PREVIOUS FINANCE COMMISSION
1. Use of Article 280(3)(d): Article 280(3)(d) provides that the Finance Commission (FC) shall make recommendations to the President referred to it by the President in the interest of strong finance. This clause has been utilized during the constitution of previous Finance Commissions to provide several other terms of references.
However, in the TOR of the 16th FC, no such specific matter has been added which is a big departure from the earlier practices of overuse of this clause. For example, in 15th FC, the TOR included reviewing the current status of the finance, deficit, debt levels, cash balances and fiscal discipline efforts of the Union and the States, and recommended a fiscal consolidation roadmap for sound fiscal management.
2. Freedom to the Finance Commission: Since no specific TOR are there, the Finance Commission is free to devise its own work, approach and methodology. For example, the 16th FC will be free to use census data of whatever year it wishes (1971, or 2011) which was a major point of contention in the 15th FC.
3. Disaster Management: The TOR of the 16th FC includes review of the present arrangements on financing Disaster Management initiatives. However, similar provision was there in other FCs also.
4. War Time: In the last 2 years, the global economy has faced the brunt of slowdowns and wars. In this context, the TOR of the 16th FC are different in their circumstances which requires more attention.
5. Panchayats and Municipalities: The 15th FC provided the Panchayats and Municipalities separate funds for better management of the health infrastructure at the grassroot levels. The 16th Finance Commission is not required by the TOR to provide for any such arrangements.
WHY ECONOMIC DISPARITIES ARE THERE BETWEEN STATES DESPITE PROGRESSIVE DEVOLUTION
1. Historical Factors: Historical disparities in infrastructure, industrial development, and human capital formation across states have resulted in inequality. For example, Gujarat, West Bengal, Mumbai and Chennai have been growth centres since British India.
2. Geographical Factors: Geographical factors include the distribution of resources, geographical terrain, low infrastructural possibilities etc. States such as Himachal Pradesh, Arunachal Pradesh have tough terrain or barren lands, hence it is difficult for them to develop their human capital and run the sectors of the economy.
3. Infrastructure Bottlenecks: Issues such as inadequate power supply, poor connectivity, bureaucratic hurdles, and regulatory challenges can act as bottlenecks to economic growth. States facing these issues may struggle to attract investments and foster economic development.
4. Social and Cultural Factors: Socio-cultural factors, including social cohesion, caste dynamics, and gender disparities, technological deprivation etc can affect economic development. Inequities in access to resources and opportunities based on social identities contribute to economic disparities.
5. Lack of Effective Policies: Lack of effective policies such as lack of adequate labour laws, ease of doing business, holistic agricultural revolution leads to the skewed development or underdevelopment in certain parts of the country. Backward States, especially in eastern India, have comparative factor advantage for labour-intensive industries like textiles and leather.
6. Political Reasons: Due to opposition governments and electoral politics, State Governments are apprehensive of the Central Government’s intentions. For example, Kerala had approached the apex court arguing that the Centre’s shackles on the State’s borrowing powers was an attack on federalism. The mandate and role of the Sixteenth Finance Commission should be defined and enhanced to evolve models aimed at balanced regional development. Given the constraints of fiscal space, measures such as increasing the export readiness of states, fostering inter state competitions, reconceptualising the inter-state and zonal councils, and improving governance can be beneficial for a more holistic economic development of the country.
Read more- MAINS MODEL QUESTION: 11th March 2025
