Centre to roll out process to set up 16th finance commission soon

General Studies Paper 2

Context: 

• The government will soon kick off the process to set up the 16th Finance Commission, with the Finance Ministry likely to notify the terms of reference (ToR) of the constitutional body.

Background:

• The 15th Finance Commission(FFC chaired by NK Singh) was set up in (November 2017) with a mandate to make recommendations for the five-year period from 2020-21.
  • The Commission is usually granted about two years to deliberate on its terms of reference, consult States and frame its recommendations.
  • The government should ideally have its report by October 2025to consider it in time for Budget 2026-27, where it will have to place its action taken report on the Commission’s report.
• Despite the Constitution’s mandate to establish an FC every five years, breaking the trend, the 15th FC’s term was extended by a year, ending in 2025–2026.
• In late 2019, the Commission was asked to give a standalone report for 2020-21and another report for an extended five-year period till 2025-26.
• Since the FFC report covered six years(instead of five), the next FC must be selected this year.
• The last time an FC was granted a six-year time frame was for the 9th FC, formed in June 1987.
• The 10th FC was still constituted in June 1992within the five-year deadline specified by Article 280 of the Constitution, which has not been the case this time.

The first step towards establishing 16th FC:

• While the ToR (Terms of Reference) for the 16th FC will be worked out after internal government deliberations steered by the Finance Ministry, the appointment of an Officer on Special Duty to drive the process.
• This officer typically becomes the member-secretary of the Commission, once it is constituted.

The key challenges for the 16th FC:

• The co-existence of another permanent constitutional body – the GST Council.
  • The Council’s decisions on tax rate changes could alter the revenue calculations made by the FC for sharing fiscal resources.
• The government usually accepts recommendations on States’ share of tax devolution and the trajectory for fiscal targets and ignores most other suggestions. For instance,
  • The government ignored the FFC’s suggestion of creating a Fiscal Council where the Centre and States collectively work out India’s macro-fiscal management challenges.
  • The government has accepted the FFC’s recommendation to set up a non-lapsable fund for internal security and defence ‘in principle’, but its implementation still has to be worked out.

Way ahead:

• A recourse mechanism can be put in place for the Commission to revisit its numbers due to the GST Council’s decisions.
• The governments must rise beyond politics to deliberate and implement FC’s recommendations, which are sound in terms of policy and economics.