11-January-2024-Special-Article

FINANCE PANEL SHOULD CURB POPULISM

The constitution of the 16th Finance Commission (FC) is imminent, charged with the critical task of recommending the devolution of central taxes and grants to states. A recent RBI report on state finances highlights potential challenges, such as states reverting to the Old Pension Scheme (OPS) and unsustainable subsidies tied to electoral promises.

Constitution of Finance Commission:

Constitutional Body:

• Established under Article 280 of the Indian Constitution.
• Comprises a chairman and four members appointed by the President.
• Mandated to make recommendations on tax revenue distribution and grants-in-aid between the Centre and states.

Five-Year Term:

• Constituted every five years or earlier, as deemed necessary by the President.

Need to Curb Populism in India:

Fiscal Imbalance:

• Rising state debts and fiscal deficits.
• Tax revenues lagging behind populist spending.

Economic Distortions:

• Decline in foreign direct investment and job growth stagnation.
• Market inefficiencies due to populist policies.

Erosion of Governance:

• Increase in corruption and declining transparency.
• Populist rhetoric undermining institutional checks and balances.

Populist Policies Aggravating the Debate:

Reversion to Old Pension Scheme (OPS):

• Some states abandoning the New Pension Scheme (NPS) for OPS.
• OPS incurs indefinite liabilities and results in 4.5 times more liability compared to NPS.

Rising States’ Fiscal Deficit:

• Deficits due to subsidies for populist measures like free electricity.
• Average spending on subsidies is 0.87% of Gross State Domestic Product (GSDP).

How the Finance Commission can Help Curb Populism:

Performance-Based Incentives:

• Link financial transfers to states with specific outcomes.
• Encourage responsible governance and discourage populist measures.

Objective Criteria for Populist Measures:

• Develop criteria in collaboration with Centre and States.
• Categorize schemes objectively as populist or non-populist.

Fiscal Efficiency Parameters:

• Give more weightage to fiscal efficiency in transfer criteria.
• Emphasize fiscal consolidation and tax effort measurement.

Public Awareness:

• Contribute to informed public discourse on populist measures.
• Highlight strains on finances and long-term impacts on economic growth.

Stress on Future Implications:

• Draw attention to long-term consequences of populist measures.
• Recommend measures preventing states from borrowing beyond capacity.

Consensus Building:

• Act as a mediator between Centre and States.
• Foster dialogue and cooperative federalism on fiscal matters.

Regular Review and Recommendations:

• Continually review financial health of states.
• Make periodic recommendations based on evolving economic scenarios.

Conclusion:

The rise of populism in India demands a strategic approach. The Finance Commission, with its constitutional mandate, can act as a guiding force to curb populist tendencies.

By linking financial transfers to performance, setting objective criteria, emphasizing fiscal efficiency, and promoting public awareness, the Finance Commission can contribute significantly to ensuring responsible governance.

The 16th Finance Commission has a pivotal role in addressing the challenges posed by populism and fostering sustainable fiscal practices for the well-being of states and the nation.

Mains Question:

1. Examine the contribution of the Finance Commission in mitigating populist trends within the Indian context. (150 WORDS).