“The Finance Commission is considered as the balancing wheel of fiscal federalism.” Comment.

[McGregor]

.

[McGregor]

Through Article 280 of the constitution Finance Commission(FC) is constituted by the President. It acts as a balancing wheel of fiscal federalism 

Functions.

1. Vertical devolution of net tax proceeds between union and states 

2. Horizontal devolution - among states 

3. To lay down principles to strengthen consolidated fund of state. 

Role 

1. FC enables  state to prevent low financial equilibrium trap thereby getting trapped in governance trap of poor service delivery and weak institutions. 

2. Secures balanced regional development as fiscal capacity distance covers the greatest weightage.

3. Incentivizes sudtainable development e.g. 14th FC covered Forest cover was assigned 7.5% weightage

4. Strenthens neo localism and principle of subsidiarity by promoting democratic decentralization . e.g. 14th FC gave 2.87 lakh grant to local bodies. 

5. Overcome Rural urban divide by adhering to principle of equity in devolution.

6. Promote financial discipline by incentivizing canon of financial propriety by the states. (17.5%)

7. Enable states to work as units of federalism and promoting cooperative and competitive federalism 

Inspite of all this, top down approach , minimal state participation in setting terms of  reference, north south divide over objectivity of weightages etc are posing threat to credibility of FC which needs to be overcome by greater participation of states in its functioning.