Constituting the next Finance Commission4 min read . Updated: 26 Aug 2012, 08:23 PM IST
The appointment of the Commission is a very important vehicle to retain the country’s economic and political unity
The buzz has it that there was an attempt to hustle through the setting up of the 14th Finance Commission (FFC), the body created by the Constitution that will define the share of states in national tax revenue between 2010-15. Sotto voce we are told that it was to ensure the appointment of a select few in a very attractive and powerful parking post. Due to an unexpected change of circumstances, again buzz has it, the proposal was nixed on the grounds that in the hurry to announce the composition, the powers that be forgot to define the terms of reference—a prerogative of the Union government, but normally done in consultation with the states.
Indeed, for whatever reasons, it is a good thing that there has been a rethink; a godsend that should be grabbed. Not just because it has denied the efforts of some (an important, yet a side story) to park their favourites in a comfortable posting. Instead, it is because the appointment of the next Finance Commission should be done with considerable thought.
It is something unique and a very important vehicle to retain the country’s economic as well as political unity. Now more so than ever because the relationship of the Union government and the states is poised to become even more inter-linked. Not only are coalitions here to stay, but also almost every serious policy initiative (from foreign direct investment in multi-brand retail to the single goods and services tax) needs the concurrence and the participation of the states. There is time till November before the composition and the terms of reference and, presumably, the new blood in North Block will engage the states (an add-on is that it can serve to bridge the trust deficit that has crept in over the last few years); and, hence no need to scramble.
The terms of reference, therefore, is the starting point, just as important as selecting the chairman of the next Finance Commission. It provides the context in which the Commission will operate, independently though. In the case of the 13th Finance Commission, there were two key terms of reference—one original and one added after it was constituted—that provide perfect building blocks for the next.
The original terms of reference included that the Commission should consider measures to augment resources of the panchayats (village governance bodies) and municipalities—the third tier of governance in India. Later, it was amended to include a clause that required the Commission to define a blueprint for fiscal consolidation in the medium term (a solution that the United Progressive Alliance government accepted but largely ignored and continued on its fiscally wanton ways).
The next Commission will have to take into account the fact that India is at the crossroads. At one level, it has been unable to shake off the fundamental development problems such as poverty and joblessness even while inequality has worsened. At another, it has also, as a collective, achieved substantial progress and is now a $1.8 trillion economy—no mean achievement. It is at a stage when its politicians, despite endless quibbling and fears of losing out on their discretionary powers (the sine qua non of crony capitalism), are close to putting in place a new tax regime—the single goods and services tax and a direct tax regime—which, by its very structure, will not give too much room for tinkering.
More importantly, the country is on the threshold of a structural transformation, where, over the next two decades, urban areas will come to accommodate the larger share of the national population. So far, the urban areas have little say, either fiscally or politically (in terms of share of local parliamentarians), resulting in a perpetually lopsided governance structure that fosters neglect and urban rot.
So, if there is one futuristic agenda that should automatically select itself for the next Finance Commission, it should be the issue of urbanization. Indeed, over the tenure of the last few Commissions, its purview of urban local bodies has been gradually extended.
It began with the 10th Finance Commission (TFC), chaired by K.C. Pant, which came out with its pathbreaking proposal of the pooling of all revenue streams of the Union government. It also acknowledged the emergence of the third tier in government by earmarking funds for them through grants—the Constitution does not permit a direct devolution. It was in recognition of the fact that urban areas would act as magnets as they become the very first beneficiaries of rapid growth, just as at the village-level governance is best imparted through panchayats.
The TFC went a step further.
Not only did it grow the share of urban areas nearly five times, it also moved away from fixed transfers to a formula (as a percentage share of the divisible pool of taxes). It also put in place incentives linked to performance metrics. It was a good beginning, but much more needs to be done before urban India degenerates totally.
The next Finance Commission will be a good starting point.
Anil Padmanabhan is a deputy managing editor of Mint and writes on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org