Role of the Finance Commission

Role of the Finance Commission

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India’s economic growth measurement is done every quarter to ascertain the increase or decrease of its economy so that governments can frame policies accordingly for the betterment of its people. The measurement is done by using the GDP (Gross Domestic Product) figures although many countries also rely on GNP (Gross National Product) to measure their economic growth. The GDP is a measure of the value of goods and services that are produced by a country and it measures the same in terms of monetary expenditures. However, the productive capacity of the country is not highlighted by its GDP figures as effective economic growth should measure the relationship between total resource inputs and total economic outputs.

The economic growth in India reached 7.5% in the late 2000s which was expected to double the average income within a decade. The International Monetary Fund (IMF) states that if India endorsed more fundamental market reforms the country would have sustained the rate and even reached the targeted 10%. However, the nation has a federal structure and the states have huge responsibilities over their economies. Some states have higher annual growth rates while others have lower than the national average. The national economic growth has been mostly driven by the expansion of the services sector which has been consistently faster compared to other sectors. Thus, there are vertical and horizontal fiscal imbalances.

The finance commission in India setup from time to time has been trying to bridge this gap as it aims to distribute the net proceeds of taxes among the states and the center. They are to be divided according to the respective contributions to the taxes. It is also tasked with determining the factors that are responsible for the Grants-in-Aid to the states and the size of the same. The commission makes recommendations to the president for the measures that are needed to augment a state fund to supplement its resources for the panchayats and municipalities.

Thus, the Finance commission in Indian constitution defines the financial relations between the individual state governments and the central government of India. The 15th Finance commission was constituted in November 2017 and its main tasks were to boost cooperative federalism, help protect fiscal stability and improve public spending quality so that economic growth could be achieved meaningfully.