Although the Finance Commission plays a very important role in formulation of fiscal policies of India, there are concerns regarding the transparency of the Commission. Fiscal transparency which guarantees the public access to financial information and decision making processes is a pre-requisite for systemic stability. The Finance Commission which is constituted every five years recommends tax transfers from the Union to the states but does so without much fanfare. The process is carried out internally and is not open to the public.
The absence of a single portal that contains all the information also adds to this problem. Although each Commission develops a large number of statistics, the information is not collected and made available to the public in one place. This was recently confirmed by Professor Arvind Panagariya, the Chairman of the 16th Finance Commission who advocated for the creation of a data bank which other experts also welcomed. The Fourteenth Finance Commission also recognized the problem of reconciling the scope of the review with the need for clarity of documentation.
For example, Indira Rajaraman and others have for a long time now complained of the lack of clarity in regard to tax sharing formulae. The transitions from one commission to another are often times made without much explanation which makes it difficult to determine the effectiveness and fairness of the changes that have been made. Moreover, the total costs of any given Finance Commission, including both central and state costs, are not disclosed to the public. M Govinda Rao has also previously stressed on the need for more transparency in the deliberations on equity and efficiency aspects.
The current debate on fiscal transparency in India can be traced back to 1998 after the East Asian financial crisis. India is a signatory to the IMF’s Codes of Good Practices; nevertheless, there are problems with regard to state-level fiscal disclosure. The 16th Finance Commission has to address issues of transparency in tax sharing formulas and therefore, establish a permanent data portal to enhance access. Opening the fiscal policy is important for increasing the trust and stability of the financial system.
