The Report Nobody Debated: Why the 16th Finance Commission Cannot Ignore India’s Monetary Standard
Last week, Parliament witnessed a familiar spectacle.
The Union Budget was tabled, dissected, praised, criticised, televised, and argued over endlessly.
At the same time—almost unnoticed—the report of the 16th Finance Commission was placed before the House.
There was no serious debate.
No sustained media explanation.
No public interrogation of its implications.
That silence is not incidental.
It is consequential.
Because Finance Commission reports matter more than Budgets—and because this silence conceals a deeper constitutional failure: India continues to design fiscal federalism without confronting its own monetary standard.
Budgets Allocate Intent. Finance Commissions Allocate Power.
A Union Budget is an annual policy statement.
A Finance Commission report is a five-year constitutional settlement.
Budgets decide what the Union plans to do this year.
Finance Commissions decide what States are able to do for half a decade.
Every State government—regardless of ideology—operates inside the fiscal space created by the Finance Commission. No Budget speech can override that.
To treat the Finance Commission as a technical appendix to the Budget is to misunderstand India’s constitutional design.
The Expanding Blind Spot: Monetary Standards and Fiscal Design
Finance Commissions are mandated to decide:
- Vertical devolution between Centre and States
- Horizontal distribution across States
- Grants, deficits, and fiscal responsibility norms
But all these decisions are shaped—often unconsciously—by an assumed monetary standard.
In practice, fiscal design continues to rest on three implicit beliefs:
- That the Union government is financially constrained like a household
- That deficits are primarily a solvency concern
- That State borrowing capacity must be rationed as a matter of prudence
Yet India is a sovereign currency issuer.
The rupee is:
- Issued by a consolidated sovereign system
- Non-convertible and floating
- Backed by domestic productive capacity, not prior tax collections
Ignoring this reality does not make it disappear.
It merely embeds designed scarcity into constitutional fiscal architecture.
“Not in the Terms of Reference” Is Not a Defence
It is often argued that:
“Monetary issues are outside the Finance Commission’s Terms of Reference.”
This is a procedural excuse, not a constitutional answer.
The Finance Commission is not a line ministry.
It is a constitutional body tasked with maintaining fiscal balance within the Union.
Fiscal balance cannot be meaningfully assessed without understanding the monetary framework in which fiscal operations occur.
To separate money from fiscal capacity is to design policy in abstraction.
No serious macroeconomic system functions that way.
Catching Up Is Not Optional: The Peer Comparison India Avoids
India no longer operates in isolation.
We now have a true demographic peer—a country with comparable population scale, complexity, and regional diversity. What that peer demonstrates is not perfection, but possibility.
It shows what can be achieved when fiscal design:
- Expands capacity instead of rationing it
- Treats development as a systems challenge, not a moral one
- Uses scale as an advantage rather than a constraint
In this context, underutilisation is not a neutral choice.
It is a historical loss.
Lost Days Are Lost Wealth
Development is not a stock.
It is a flow.
- A year of delayed infrastructure is not fully recovered later
- A year of underemployment does not compound
- A year of suppressed State investment is a year of wealth never created
When fiscal architecture constrains States unnecessarily, the loss is real:
- Factories not built
- Skills not formed
- Supply chains not stabilised
- Domestic demand not sustained
Each day lost is produced-wealth that never comes into existence—and therefore can never be distributed.
No future acceleration can reclaim it fully.
The Gravest Error: Strangulating the Better Performer
Perhaps the most damaging feature of India’s fiscal design today is this:
The strongest States are treated as fiscal risks rather than national assets.
States that:
- Invest more
- Build stronger administrative capacity
- Generate higher revenues
are frequently:
- Penalised through redistribution formulas
- Constrained by borrowing limits
- Discouraged from scaling faster
This is a fundamental strategic error.
In large, diverse economies, leaders pull the system forward. They:
- Absorb labour and migration
- Create markets for lagging regions
- Expand the tax base that enables redistribution itself
Strangulating better performers in the name of balance does not produce equity.
It produces mediocrity at scale.
Why Strong States Are the Only Path to Convergence
No continental economy develops by forcing all regions to move at the same pace.
Progress occurs when:
- High-capacity regions surge ahead
- Their demand, technology, and investment spill over
- Lagging regions are pulled forward, not dragged sideways
A Finance Commission that caps momentum in leading States:
- Weakens the national growth engine
- Reduces internal demand transmission
- Shrinks the pool available for redistribution
This is not cooperative federalism.
It is self-limiting restraint.
⬛ What the 16th Finance Commission Could Have Done Differently
Without exceeding its mandate, the Finance Commission could have:
-
Explicitly acknowledged monetary sovereignty
Clarified that Union solvency is not the binding constraint in fiscal design. -
Designed counter-cyclical State fiscal space
Allowed States to expand deficits during downturns without stigma. -
Protected high-capacity States from momentum caps
Enabled leading States to invest ahead of the curve. -
Anchored employment as a fiscal stabiliser
Treated employment not as welfare, but as macroeconomic infrastructure. -
Shifted inflation control toward supply-side coordination
Rather than blunt fiscal compression.
None of this required control over monetary policy.
It required monetary literacy.
Why This Matters for Poverty Eradication
Poverty is not merely low income.
It is institutional incapacity.
When States lack fiscal room:
- Hospitals understaff
- Schools underinvest
- Procurement systems weaken
- Local employment dries up
These failures are later blamed on inefficiency, when the real constraint is designed fiscal scarcity.
A Finance Commission that avoids the monetary question does not preserve discipline.
It enforces underutilisation.
Time, Capacity, and Choice
Budgets come and go.
Finance Commission decisions echo for years.
India stands at a moment where possibility is visible, capacity exists, and time is scarce.
Every year of delayed utilisation is wealth lost forever.
Every constraint imposed on strong States weakens the Union as a whole.
Every silence on the monetary standard hardens artificial scarcity into constitutional practice.
This is no longer a technical oversight.
It is a choice.
A country serious about convergence, employment, and poverty eradication cannot afford silent fiscal architecture.
If fiscal power is designed in whispers, its consequences will be felt loudly.
And history will record not just what was debated—but what was left unspoken.
Rajendra Rasu,
The author writes on monetary systems and political economy.