A tough balancing act: What 15th Finance Commission can and cannot do on deciding states’ shares
Abstract:
Collection of broad-based taxes is more efficient if done by the Centre than individual states. Expenditures on items such as education, health and local infrastructure require decentralisation. This calls for the Centre to collect the broad-based taxes and share them with the states.
But who is to decide how this divisible pool of revenue is to be shared between Centre and states? A neutral umpire is required. The Constitution designates the Finance Commission (FC) as that umpire. It calls for the appointment of an FC minimally every five years. The current FC is the 15th such commission.
The FC must perform a tough balancing act. If allocation to the states is disproportionately small, there is risk that expenditures on education, health and local infrastructure, which must be substantially locally provided, will go underfunded. Equally, if allocation to the Centre is unduly small, national public goods such as defence, internal security, highways, waterways and railways may go underfunded.