Centre-state financial relations and Finance Commission

Sol – 

Major challenges  – 

1. GST compensation 
   • Ex – Punjab govt demanding urgent GST compensation [Recently it got compensation which was due from July 2017] 
2. North-south divide 
   • Population and backwardness is given a higher weightage over performance 
   • Kerala Finance Minister KN Balagopal – State is not getting its due revenue share from the Centre, 
   • For every 1 rupee that Tamil Nadu gives the Centre, it gets back 29 paise only. On the other hand, Bihar gets back ₹7.06 for every 1 rupee
3. The increased use of cesses by the centre (Out of purview of divisible pool of taxes – A 271)
   • Swachh Bharat cess
   • Health and Education Cess
   • Road and Infrastructure Cess
4. Limited fiscal autonomy of states – 
   • Limit on borrowing (A 293)
5. Limited financial resources and taxation power 

Reforms – 

1. GST compensation payments during crisis
   • During FY23, the Government of India released ₹1.16 lakh crore towards the total GST compensation payable to States
2. Relaxing the fiscal Responsibility Legislation threshold 
   • Enhanced limit of borrowing for the States
   • This additional borrowing was linked to reforms
   • Ex FY21 – One Nation One Ration Card’ System, ease of doing business reform, urban Local body/utility reforms, and power sector reforms
   • FY 22 – For incremental capital expenditure
   • Fifteenth Finance Commission had recommended performance-based additional borrowing space of 0.50 per cent of Gross State Domestic Product (GSDP) to the States in the power sector
3. Scheme for Special Assistance to States for Capital Investment’
   • 50-year interest-free loans to state governments

4. Increase vertical devolution to states – 

5. Grants to states – 
   • State specific grant 
   • Sector specific grant 
   • Disaster management grant 
   • Local bodies grant 
6. Committees – 
   • Sarkaria commission (1983) – 
     • The states should be given greater power and more revenue 
     • Finance commission (Which is constituted every 5 year) should be made a permanent body 
   • Punchhi Commission (2007) – 
     • It advised to reduce cess and surcharges and hence devolve maximum to states
7. Better coordination through bodies like – 
   • GST council (Article 279A (1)) 
   • NITI Aayog 
   • Finance commission (A 280)
   • State finance commissions (Article 243 I)