Answer:

Introduction:

The Finance Commission, established under Article 280 of the Indian Constitution, is a pivotal body responsible for recommending the distribution of tax revenues between the Central and State governments. Its role becomes increasingly significant in the context of populist measures adopted by various states.

Body:

Role and Challenges

• Fiscal Management: The Commission recommends the devolution of Central taxes and grants to States. It is currently focusing on fiscal efficiency and discipline in its formula to curb populist tendencies of state governments, which often lead to fiscal imbalances. For instance, the average debt-to-GDP ratio of Indian states increased significantly due to populist spending (e.g., free electricity, loan waivers)​​.
• Economic Implications: Populist policies can lead to economic distortions such as a decline in foreign investment, stagnation in job growth, and market inefficiencies. For example, the Foreign Direct Investment in India declined by 10% in 2022, partially attributed to these populist measures​​.
• Governance Erosion: Populist rhetoric has been linked to an increase in corruption and a decline in transparency, as evidenced by India’s drop in Transparency International’s Corruption Perception Index and the Public Affairs Index​​.
• Pension and Subsidy Schemes: States reverting to the Old Pension Scheme (OPS) and large subsidies for populist measures like free electricity are other concerns. These result in substantial fiscal liabilities and inefficiencies​​​​.

Strategies to Curb Populism

• Performance-Based Incentives: The 15th Finance Commission proposed linking financial transfers to States with specific outcomes, such as improved health, education, and agricultural indicators. This encourages responsible governance and discourages short-sighted populist measures​​​​​​.
• Defining Populist Policies: For the first time, the Finance Commission has been tasked with defining what constitutes a populist measure and recommending incentives for states that avoid such measures​​​​.
• Public Awareness: The Commission can play a vital role in educating the public about the consequences of populist measures, thereby influencing more responsible fiscal policies among political parties​​.
• Consensus Building and Regular Review: The Commission acts as a mediator in fostering dialogue between the Centre and States on controlling populist expenditure. Additionally, it continually reviews the financial health of States and makes recommendations based on evolving economic scenarios​​.

Conclusion:

The Finance Commission’s role in curbing populism is integral to India’s fiscal health. It should ensure that states bear the consequences of their financial choices, promoting reforms and fiscal responsibility. This approach not only addresses immediate financial imbalances but also sets the foundation for long-term economic stability and growth​​.