Previous Year Question
With reference to the Finance Commission of India, which of the following statements is correct?
It encourages the inflow of foreign capital for infrastructure development.
It facilitates the proper distribution of finances among the public sector undertakings.
It ensures transparency in financial administration.
None of the statements (a), (b) and (c) given above is correct in this context.
Correct Answer: D
Detailed Solution
The Finance Commission is a constitutional body. It is constituted by the President under Article 280 of the Constitution every fifth year or earlier when considered necessary.
Its principal responsibility is to recommend how financial resources should be distributed between the Union and the States. Its major constitutional functions include recommending:
The distribution of the net proceeds of divisible taxes between the Union and the States and the allocation of the States’ shares among them.
The principles governing grants-in-aid to the States from the Consolidated Fund of India.
Measures needed to augment the Consolidated Fund of a State to supplement the resources of Panchayats and Municipalities, based on the recommendations of the State Finance Commission.
Any other matter referred to it by the President in the interests of sound finance.
Option (a) is incorrect. Encouraging foreign-capital inflows for infrastructure development is not a constitutional function of the Finance Commission. It relates mainly to economic and foreign-investment policies administered by the concerned ministries and departments of the Union Government.
Option (b) is incorrect. The Finance Commission does not distribute financial resources among Public Sector Undertakings. Its principal distributional function concerns tax devolution between the Union and the States and allocation among the States.
The distinction between Public Sector Undertakings and Union-State fiscal relations is crucial. The Finance Commission deals with the latter.
Option (c) is incorrect. Transparency in financial administration may be a broader objective of good governance, but Article 280 does not prescribe it as an independent principal function of the Finance Commission.
The Commission may recommend measures concerning fiscal discipline, debt, deficits or grants, but its constitutional purpose is not simply to ensure transparency in financial administration.