Evolving role of the Finance Commissions in India in the last 25 years

Abstract

India is the largest democratic federal polity in the world, with over a billion people. The key institutional arrangement that guides the sharing of resources between the various levels of government in India is entrusted to the Finance Commission. The Finance Commission determines a large part of the transfers in the form of tax devolution under global sharing and grants, requiring it to determine a significant part of the volume of the vertical transfers. The importance of Finance Commissions in India not only lies in shaping and recalibrating the Indian federalism from time to time but also in providing continuity that has been critical to the unity of the country. Since 1951, there have been 14 such Finance Commissions in India, the Fifteenth Finance Commission was constituted in 2017. Over the years the core mandate of the Commission has remained unchanged, though it has been given the additional responsibility of examining various issues depending on the challenges faced by Indian public finances from time to time. The history of Indian federalism is one of gradualism, resilience and change with continuity. In this backdrop, the various Finance Commissions have played an important role of serving as a glue in balancing the intergovernmental relationships and fiscal transfers in a multilevel government system for ensuring provision of public services to over a billion people. The India case presents an interesting transition from a market preserving federalism towards laboratory federalism in the light of the recommendations made by the Fourteenth Finance Commission.