Why 16th Finance Commission must think innovatively about fund allocation
The disaster occurred partly because of a path-dependent adherence to traditional shipbuilding techniques that couldn't support the heavy artillery. The recently constituted 16th Finance Commission (FC) must avoid the 'Vasa syndrome' of sticking to precedents at the cost of progress.
There are three critical areas in which the 16th FC must diverge from its predecessors' path:
Resource allocation
Initially, the 14th FC proposed an augmentation of states' share in vertical devolution from 32% to 42%.
The 15th FC adjusted the vertical devolution to 41% of the divisible tax pool. This reduction accounted for the bifurcation of J&K into two UTs.
The 16th FC faces a formidable challenge.
Is 41% the appropriate allocation, or does it warrant an increase or decrease? Shouldn't all central cesses be abolished if it is to be reduced, as a quid pro quo for states' acceptance?
In his 'Note of Dissent', the late Abhijit Sen, a part-time member of the 14th FC, outlined reasons for advocating a states' share of 38% in the divisible pool of taxes, instead of the proposed 42%.
Sen acknowledged the commission's significant shifts, including a substantial increase in tax devolution and steps towards 'cooperative federalism', which he supported. However, Sen expressed concern about the implications of these changes, particularly the strain on the Centre's net tax resources, which would shrink by nearly 1% of GDP.
Leg-up for local bodies
The Constitution mandates FCs to propose measures to augment the consolidated fund of a state, enhancing the financial resources of panchayats and municipalities based on state finance commissions' (SFCs) recommendations.
