Functions of the Finance Commission and Its Emerging Role in Fiscal Federalism

1. Functions of the Finance Commission:

• Distribution of Resources: The Finance Commission is responsible for recommending the distribution of tax revenues between the Centre and the States, ensuring a fair allocation of resources. For instance, the 15th Finance Commission recommended a 41% share of central taxes to states for the period 2021-26.
• Grants and Assistance: It determines the grants-in-aid for states in need, helping to address fiscal imbalances. This includes special grants for larger states or those with specific needs, such as the Northeastern states.
• Fiscal Management Recommendations: The Commission advises on fiscal management and debt management policies. It suggests measures to improve state fiscal health and reduce disparities.

2. Emerging Role in Fiscal Federalism:

• Strengthening Federal Structure: The Finance Commission plays a crucial role in strengthening fiscal federalism by ensuring a fair and balanced distribution of resources, which is vital for state autonomy and effective governance.
• Recent Example: The 15th Finance Commission emphasized performance-based incentives for states, such as rewarding states that implement tax reforms and improve tax collection efficiency. This approach aims to promote fiscal responsibility and efficiency.
• Addressing Emerging Challenges: With growing regional disparities and increased expenditure needs, the Finance Commission’s recommendations on equitable resource distribution and special assistance help states manage economic and social challenges, ensuring a more inclusive development.

Conclusion:
The Finance Commission’s functions are essential in resource distribution, grant allocation, and fiscal management. Its evolving role in fiscal federalism addresses regional disparities and promotes fiscal responsibility, crucial for maintaining a balanced Centre-State fiscal relationship and inclusive growth.