A difficult mandate

Sixteenth Finance Commission will have to do tough balancing

The government’s plans for the Sixteenth Finance Commission (SFC) are taking shape, and contain a few surprises. Most recently, it has announced that eminent economist Arvind Panagariya, who is at Columbia University and had served as vice-chairman of the NITI Aayog shortly after its formation, will take over the reins of the Finance Commission. The announcement related to other members of the Commission is awaited. Professor Panagariya is, of course, intimately familiar with the political constraints on technocratic preferences that operate in New Delhi, including under the current dispensation. Nevertheless, the job of chair of the Finance Commission requires a delicate political sensibility in order to aid in crafting a compromise between the various increasingly divergent political factions that are at play when it comes to fiscal federalism.

The fact is that Finance Commissions have an increasingly fraught role to play as federal tensions increase, between the Union and the state governments, but also between states with differing calls on financial resources and political power. Southern states, for example, are increasingly concerned about the size of the transfers to the governments of northern states. Other state governments are concerned that they have fewer and fewer degrees of freedom for their own policy:  The introduction of goods and services tax has taken away their ability to set sales taxes, while Union government welfare programmes are increasingly getting dominant.

Regional leaders no doubt see this as an intrusion into their ability to create and sustain political space. It also leaves less space for policy experimentation and for the fulfilment of specific state-level aspirations. Thus, the broader context of the SFC — which will be charged, after all, with determining the resources that will be available to these disgruntled state governments — is the preservation of a working federalism while also maintaining growth and development momentum in India. The other surprise associated with the SFC is that the government has chosen to issue a very minimal set of instructions to the Commission in its Terms of Reference, or ToR. Previous Finance Commissions were issued a fairly detailed set of subjects to review, from firewalling security spending to the protection of the finances accruing to the third tier of government. The Fifteenth Finance Commission’s ToR in fact wound up being somewhat controversial, given that they seemed to encourage the labelling of state welfare schemes “populist” as opposed to those from the Union.

The ToR for the SFC, however, has very obviously shied away from any such controversy. In fact, the terms are remarkably and unusually bare-bones and confine themselves to the required mandate for such commissions under the Constitution. Thus, even more discretion than normal will be granted to the chairman of the SFC, who will have to decide which issues in particular will take up a larger proportion of the body’s time. More than ever, the management of the SFC will be an exercise in national integration and not a simple technocratic or accounting exercise.