Q. Discuss the role of the Finance Commission in Centre-State relations in India.
Ans: The Finance Commission of India, established under Article 280 of the Constitution, plays a pivotal role in shaping Centre-State financial relations. It is a constitutional body tasked with recommending the distribution of financial resources between the Union and the States, thereby acting as the balancing wheel of fiscal federalism.
Role of the Finance Commission in Centre-State Relations
- Vertical Devolution:
- Recommends the share of States in the divisible pool of central taxes, ensuring fiscal autonomy and equity.
- Balances the revenue-generating capacity of the Centre with the expenditure responsibilities of States.
- Horizontal Distribution:
- Allocates resources among States based on criteria like population, income distance, area, and forest cover.
- Promotes regional equity and balanced development.
- Grants-in-Aid:
- Suggests grants to States in need of financial assistance for specific purposes such as disaster relief, local governance, and revenue deficit bridging.
- Supports social welfare and inclusive growth.
- Strengthening Local Bodies:
- Recommends measures to augment the Consolidated Fund of States to empower Panchayats and Municipalities.
- Enhances grassroots governance and service delivery.
- Promoting Fiscal Discipline:
- Advises on maintaining fiscal stability, debt sustainability, and sound financial management.
- Encourages States to adopt reform-oriented policies through performance-linked incentives.
- Facilitating Cooperative Federalism:
- Acts as a platform for dialogue and negotiation between Centre and States.
- Builds trust and coordination in fiscal matters.
Conclusion: The Finance Commission is central to maintaining a harmonious fiscal relationship between the Centre and States. By ensuring equitable resource distribution, promoting fiscal discipline, and empowering local governance, it strengthens the foundation of India’s federal structure. However, its recommendations being advisory in nature and challenges like data gaps and political pressures call for greater transparency and institutional reforms.