Page 309 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 24: Fiscal Federalism in India

Finance Commission Versus Planning Commission Notes
According to Dr. P.V. Rajamanner, Chairman of the Fourth Finance Commission, the Planning
Commission has restricted the scope and functions of the Finance Commission. Plan grants are given
under various developmental heads. The discretionary grants made under the recommendations of
the Planning Commission have been much greater than the grants given under Article 275 (1).
Moreover, these grants are available only for the plan period at the end of which they become
committed expenditure for which the States are exclusively responsible. Therefore, the States approach
the Finance Commission and try to get a greater share of revenue and larger grants. It was greatly
intensified by the loans issued by the Centre. However, a considerable portion of these loans have
been spent for purposes which do not yield any income, and their burden of interest and repayment
fall on the State revenues. Due to planning, the federal financial relations have become seriously
distorted in our country.

Issues in Fiscal Federalism
The sprawling powers of the Central Government eroding the foundations of fiscal federalism have
been questioned from time to time. Now, under the changed circumstances, need for change in the
outlook of the Union towards the States and of the States towards the Union is being felt. The Central
Government is finding it difficult to impose its will or decision on the States. The root cause of States’
chorus of more and more demands is too much financial dependence on the Centre. Consequently, it
has caused demand for more financial powers. We have to find a satisfactory and enduring solution
to the problem of Centre and State relations through a rigorous and concerted drive against tax
evasion, tax avoidance and waste and extravagance in public expenditure. At the same time, we
must ensure all round efficiency in the deployment of public funds in particular, investments in
productive enterprises in the public sector. It may be seen that the appointment of the Sarkaria
Commission by the Centre reflected its recognition of the seriousness of the issue.
In the context of the States asking for greater decentralisation of powers to manage their economies,
the Centre-State economic relations have assumed special significance. The Finance Commission
alone cannot solve the difficult problems faced by it. Therefore, a harmonious, equitable and efficient
delegation of financial powers between Centre and States must be an integral part of the overall
investment and planning objectives of the economy. While the earlier arrangements have provided a
flexible mechanism for the operation of fiscal federalism, there is a widespread feeling that they have
proved inadequate. The issues in Union-States financial relations may identified as follows :
(i) The institutions to safeguard the fiscal autonomy of the States have not helped much.
(ii) Looking at the Constitution, we find that the distribution of responsibilities and powers as a
chronic imbalance with concentration of fiscal powers in the Centre.
(iii) The fact that the Planning Commission is not a statutory body is a point of discord.
(iv) Centre decides about one-fifth of the total transfers on its own discretion.
(v) Above all, the unitary elements further strength over the years with concentration of fiscal
powers in the Centre and growing dependence of the States on financial transfers.
For the improvement in the situation, a few suggestions may be given. The purpose is three-fold (i)
Due share of States in responsibilities and rights; (ii) A continuing system of communication and
clearing should be available; and (iii) The Centre has to discharge its coordinating, corrective and
lead functions in a truly federal system.
Recommendations of the Twelfth Finance Commission (TFC)
The Twelfth Finance Commission was incorporated in the year 2005. The commission made
recommendations for the distribution of the net proceeds of the taxes between the Union and the
States. It also recommended taking of certain measures for augmenting the Consolidated Fund of a
State. It also reviewed the financial status of the States and ensured macro-economic stability in the
same, evaluated the debt positions of the States and the schemes implemented by the Central

LOVELY PROFESSIONAL UNIVERSITY 303