Finance panel has a tough job to do

The Sixteenth Finance Commission (SFC) has taken concrete shape with the appointment of Columbia University economist Arvind Panagariya, who was previously the first vice-chairman of Niti Aayog, as its the chairman. Other members of the commission are yet to be named. The government has perhaps made a statement and sent out a signal about the commission when it chose Panagariya for the position. He understands the financial and political environment in which the commission has to operate and make its recommendations. The government has not spelt out the terms of reference of the commission in detail. This is in contrast to the practice in the past when governments had given detailed mandates to the commission about what subjects and areas were to be covered. This may give much freedom and a wide scope to the commission and may also mean that government has enough confidence in the ability of the commission to decide its job.

The commission has to decide on the division of taxes between the Centre and the states and the norms for distribution of the taxes among the states. The SFC has to make its recommendations for the period 2026-31. It is a challenging task at a time of fraught fiscal federalism. States have to be assured a fair deal in devolution and sharing of fiscal resources. Lower income states get a larger share of the divisible pool of resources. Southern states, most prominently Karnataka, have expressed the grievance that they are being penalised for their development and better population and fiscal management and that North Indian states are getting a better deal at their expense. The states have felt increasingly constrained with the introduction of the Goods and Services Tax (GST), which has denied them an important source of income, and increasing imposition of norms and conditions by the Centre in their financial management. They are unhappy that their ability to raise resources is shrinking even as they are losing their freedom to decide on expenditure. The commission will have to frame policies on subsidies and fiscal deficit, which will become more important in the coming years. 

The commission will also have to deal with the problems of lack of data and faulty data. Population is an important factor in deciding the sharing of the divisible pool of resources. Since the 2021 census has not been conducted, the commission will have to rely on the 2011 census data and make its own projections and assumptions to base its recommendations on. Many other data, like those relating to per capita income, would also not be available. There are also questions about the correctness of some data. These issues will have to be addressed effectively if the commission is to do meaningful work.