The Fourth Finance Commission: A Pivotal Period in Indian Fiscal Federalism

Established in 1964 under the chairmanship of Dr. P.V. Rajamannar, the Fourth Finance Commission played a crucial role in shaping the fiscal relationship between the Union and the States in India. Operating against the backdrop of the Third Five-Year Plan and the aftermath of the 1962 Sino-Indian War, the commission’s recommendations reflected the pressing need for both developmental spending and defense preparedness.

The Commission’s core mandate was to determine the principles governing the distribution of net proceeds of taxes between the Union and the States, and to lay down the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India. Unlike previous commissions, the Fourth Finance Commission had a longer period to deliberate, submitting its report in 1965 for the period spanning 1966-1971.

Key Recommendations:

• Share of Taxes: The Commission recommended increasing the States’ share in the divisible pool of income tax from 75% to 80%. This significant increase aimed to provide the States with greater financial autonomy and resources for development.
• Excise Duties: Regarding the Union excise duties, the Commission maintained the share of States at 20%. However, they broadened the coverage of divisible excise duties to include all excise duties levied by the Union, except those earmarked for specific purposes. This move provided a more stable and predictable source of revenue for the States.
• Principles of Distribution: While reaffirming population as a major factor in the distribution of tax proceeds among states, the Commission also acknowledged the need to consider factors like economic backwardness. However, population continued to hold significant weight, influencing the resource allocation mechanism.
• Grants-in-Aid: Recognizing the diverse financial needs of the states, the Commission recommended grants-in-aid under Article 275 of the Constitution to bridge the revenue gaps of certain states. The Commission meticulously assessed the revenue and expenditure projections of each state to determine the quantum of grants.

Significance and Impact:

The Fourth Finance Commission’s recommendations had a significant impact on the fiscal landscape of India. The increased share of taxes allocated to the States provided them with greater financial resources, enabling them to undertake developmental programs more effectively. The widening of the divisible pool of excise duties contributed to a more stable revenue stream for the States. The focus on grants-in-aid helped address the fiscal disparities among states, promoting equitable development across the country.

However, the continued reliance on population as the primary criterion for tax distribution faced criticism for potentially disincentivizing population control measures. Furthermore, the Commission’s approach to assessing revenue gaps was sometimes seen as conservative, potentially underestimating the actual financial needs of some states.

Despite these criticisms, the Fourth Finance Commission played a vital role in strengthening the fiscal federalism in India. Its recommendations paved the way for a more balanced and equitable distribution of resources between the Union and the States, fostering economic development and social progress across the nation. The principles and methodologies established by the Commission continue to influence the deliberations and recommendations of subsequent Finance Commissions, shaping the evolution of India’s fiscal federal structure.