Most federations in the world have arrangements for mobilisation and devolution of resources. In India, Article 280 of the Constitution provides for appointment of a Finance Commission (SC) every five years to recommend methodology to share fiscal resources between the centre and states. There is asymmetry in India's fiscal federalism. The Centre's capacity to mobilize resources is far greater than that of States, but the latter are required to undertake development expenditures that far exceed their revenue generating capabilities. The Constitution entrusts PC with the responsibility of addressing this anomaly.

In this context, the FC has following recommendatory functions :

• Distribution of proceeds of taxes between centre and states.
• Principles which should govern grants-in-aid to be given to states.
• Any other matter referred to it by President in the interest of sound finance.

Its recommendations can be grouped under three heads, namely: division and distribution of taxes and duties, grants-in-aid to states and union loan to states. These recommendations are generally accepted by the Government.

Recent modifications in Terms of References (ToR) :

• The Centre has urged the Commission to finalize its tax-devolution formula after factoring in the impact on Union's fiscal situation, keeping in mind the objective of national development Programme.
• Its mandate includes formulating performance-linked incentives for States on a range of desirable outcomes such as attaining a replacement rate in population growth deepening GST net and improving ease of doing business.
• Use of 2011 Census figures for devolution of taxes.
• The Commission may also examine whether revenue deficit grants be provided at all.

The terms of reference (ToR) have created apprehension among States about principles of fairness and equity in distribution of public resources for development.

Using population data of 2011 as a base for tax devolution should not reduce allocation of resources to States that have successfully reduced rate of population growth. There is apprehension that more resources would be diverted to northem states due to huge increase in population while southern states will be punished for controlling their population.

Concerns raised by the States about ToR :

• Freedom of states to raise resources has been restricted by introduction of GST. They now have hardly any major tax left with them to make a difference to State resources.
• Current ToR go far beyond constitutional mandate of FC. There have been arguments that FC is being used as an instrument of fiscal consolidation and to impose ideological and economic agenda of Central government on States.
• To discontinue post-tax devolution of revenue deficit grants would go against the principle of cooperative federalism.
• ToR are unprecedented in asking 15th FC to consider proposing performance-based incentives beyond those relating to fiscal responsibility, population and devolution to local bodies. This reflects an attempt to micro-manage fiscal domain of states.

States follow diverse paths of development and developmental challenges before each state are different. FC must facilitate diversity and a democratic path of development by respecting principles of equity and fairness in allocating resources between the Centre and States in India by taking into account the concerns raised by states before finalizing ts recommendations.