Centre-State Financial Relations: A Study on the Role of Finance Commission

Abstract

A federal economy is usually characterised by the emergence of imbalances between functional responsibilities and financial resources of different tiers of government. Vertical imbalances in terms of resources and expenditure responsibilities emerge between different levels of government calling for transfer of resources from the Centre to the States. Thus, intergovernmental transfers are an inherent part of a multi-level fiscal system. In India, Finance Commission constitutes an important channel of Central transfers to the states. This paper looks at the role of Finance Commission regarding the devolution of taxes between the Center and the States from the divisible pool. In particular, the paper focuses on the Fourteenth Finance Commission FFC that has made far-reaching changes in tax devolution that will move the country towards greater cooperative as well as competitive federalism.