. The Constitution of India envisages the Finance commission as the balancing wheel of fiscal federalism in India. However, its role in the Centre–state fiscal relations has been undermined by the emergence of the Planning Commission, a non-constitutional and a non-statutory body. Dr P V Rajamannar, the Chairman of the Fourth Finance commission, highlighted the overlapping of functions and responsibilities between the Finance Commission and the Planning Commission in federal fiscal transfers in the following way.
It is the setting up of the Planning Commission that has in practice restricted the scope and functions of the Finance Commission. I say ‘in practice’ because there has been no amendment of the Constitution to confine the functions of the Finance Commission to merely ascertain and cover the revenue gap of each state, on a review of the forecast of revenue and expenditure furnished by the state.
We, therefore, recommend that in future the Finance Commission may be asked to make recommendations on the principles which should govern the distribution of plan grants to the states. In order that the Finance Commission may be able to make such recommendations, it will be necessary that it should have before it an outline of the Five Year Plan as prepared by the Planning Commission. The appointment of the Finance Commission will, therefore, have to be so timed that it will have before it this outline before it finalises its recommendations. While the principles governing the distribution of the plan grants will be set out by the Finance Commission, the application of these principles from year to year will be left to the Planning Commission and the Government.