Tanmai KhannaAIR 61 · CSE 2022 · 224 wordsTheir whole copy
Opening · a constitutional or legal provision
The Finance Commission under Article 280 is set up by the President every 5 years to recommend devolution of funds to the states and local governments. It is called the "balancing wheel" of fiscal federalism in India.
Body · points and prose
While devolving funds, it needs to balance support for poorer states while not punishing states for performing. This can be seen in the 15th FC recommendations:
↳ Demographic performance: While population is still a parameter to calculate horizontal devolution, they
added a new parameter of 'demographic performance'. This rewards states like Kerala, T.N. for reducing their population and incentivises states like Bihar and U.P. to reduce their fertility rates.
↳ Income distance: It is a parameter that provides more funds to states with lower incomes compared to better performing states, ensuring inclusivity.
↳ Tax efforts and forests and ecology reward states that have made good strides in improving their tax base and reducing land degradation.
↳ Fund for million plus cities is attached to certain performance metrics incentivising better urban governance.
↳ local governments also receive a share of funds to build a grassroots democracy and effective service delivery network. for eg. kerala government devolves 35-40% of its income to local governments.
Close · a summary
Therefore, the Financial Commission rewards well-performing states, incentivises aspirational states, and supports states that are lagging behind - giving everyone a reason to support it.