UPSC Essentials | Mains Answer Practice GS 2 : Questions on Finance Commission and India-EU FTA (Week 140)

QUESTION 2

Discuss how the EU’s evolving rules are challenging India’s small and medium-sized businesses (SMEs) to do business with the EU.

QUESTION 1: Discuss how the Finance Commission helps keep fiscal federalism alive in India. Based on the 16th Finance Commission’s recommendations, examine how the southern states and other states have found a balance between fairness and efficiency.

Relevance: This question evaluates comprehension of Centre-State financial relations, equality vs performance arguments, and modern federal difficulties identified by the 16th Finance Commission—all of which are fundamental to Polity and Governance.

Note: This is not a model UPSC answer. It only provides you with thought process which you may incorporate into the answers.

Introduction:

— The Finance Commission of India is a constitutional body established under Article 280.

— The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President.

Body:

You may incorporate some of the following points in your answer:

Role of the Finance Commission in maintaining fiscal federalism

— It shall be the duty of the Commission to make recommendations to the President as to-

(i) the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under this Chapter and the allocation between the States of the respective shares of such proceeds;

(ii) the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.

16th Finance Commission’s recommendations

— The Commission, which covers the period from 2026 to 2031, has kept the vertical devolution intact, retaining the states’ share in the divisible pool at 41 per cent. But, in determining the horizontal devolution, it has deviated from the previous Commission on the criteria and weights to be used. For instance, it has reworked the weights assigned to some criteria such as population, while also adding the criterion of the state’s contribution to GDP.

— The share of the southern states has increased from 15.8 per cent under the 15th FC to 17 per cent. Others that have also seen an increase are Gujarat, Maharashtra, Punjab and Jharkhand, while states like Uttar Pradesh, Bihar, Madhya Pradesh and Rajasthan have seen a decline.

— The Finance Commission has also made some welcome recommendations in areas such as state finances. For instance, it has argued that states should discontinue the practice of incurring off-budget borrowings, while keeping the deficit capped at 3 per cent of GSDP.

— The Commission has recommended the rationalisation of subsidy schemes and the introduction of “sunset clauses” for schemes that give subsidies on non-merit private goods and unconditional transfers.

Conclusion:

— The Commission has also sought to move the needle on privatising power distribution companies and on the closure or privatisation of loss-making or inactive public sector enterprises. These are reasonable recommendations that should be acted on urgently.

— As recommended by the Commission, the government has provided ₹1.4 lakh crore to the States for the FY 2026-27 as Finance Commission Grants. These include Rural and Urban Local Body and Disaster Management Grants.

(Source: Finance Commission strikes a balance – addresses southern states’ concerns, and equity, fincomindia.nic.in, http://www.pib.gov.in)

Points to Ponder

Read more about Finance Commission

Read about other allocations of the Budget 2026-27

Related Previous Year Questions

How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position? (2021)

How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss. (2018)

QUESTION 2: Discuss how the EU’s evolving rules are challenging India’s small and medium-sized businesses (SMEs) to do business with the EU.

Relevance: This subject relates international relations to trade governance, non-tariff barriers, and the effects of global regulatory regimes (CBAM, sustainability requirements) on India’s export competitiveness—all important GS-II current affairs.

(ANI Photo)

Note: This is not a model UPSC answer. It only provides you with thought process which you may incorporate into the answers.

Introduction:

— India and the European Union (EU) have concluded negotiations for a free trade agreement (FTA) to secure regulatory certainty amid a fast-changing international trade environment that has threatened to slow global trade growth and forced countries to reevaluate trade strategies and alliances.

— From food and chemicals to engineering goods, the EU has implemented a wide net of strict regulations that tend to discourage exporters due to the steep compliance burden.

Body:

You may incorporate some of the following points in your answer:

— The India-EU FTA offers India a legal opportunity to leverage its fast-growing consumer market to find a solution to the EU standards that could reverse the gains made under the trade deal. The lack of resolution of EU regulations under the legal agreement could result in considerable asymmetry in the India-EU trade, as per the trade experts.

— Indian shipments must be protected from excessive environmental rules, as these rules are already straining Small and Medium-sized Enterprises (SMEs) within the union.

— The European Union began introducing the world’s first carbon tax on January 1, this year. In its current form, CBAM would levy a carbon-related charge on imports of goods from the power and energy-intensive industrial sectors, such as cement, steel, aluminium, oil refinery, paper, glass, chemicals, and fertilisers, from countries with lower environmental ambitions and regulations than the European Union.

— However, CBAM allows parliamentarians in the bloc to broaden the list of commodities subject to a charge. The law is projected to have an influence on India’s exports of aluminium, iron, and steel to the EU.

— The European Union’s Deforestation Regulation (EUDR), aimed at preventing products sold in the EU from being sourced from deforested land, was scheduled for implementation in December 2024. The European Parliament decided to extend the regulation’s timeline to December 2026.

Conclusion:

— The EU Directive on Corporate Sustainability Due Diligence (CSDD) entered into force in July 2024 and will begin coming into effect from 2027, and by 2029, will require companies to analyse their value chains and identify potential risks and impacts, such as human rights violations, environmental pollution, and corruption.

— The Industrial Accelerator Act, expected to be proposed in January this year, is likely to introduce local content norms that mandate minimum domestic value addition, which could put pressure on imports.

— India currently does not have compliance standards in place, and the EUDR could pose challenges in exports of food products as the regulation requires extensive compliance procedures, including supplier details as well as addresses of production.

(Source: India-EU FTA: Why EU’s ever-growing regulations are India’s biggest challenge & deal needs to address them)

Points to Ponder

Read more about India-EU relations

Read about Indian diaspora in the Europe

Related Previous Year Question

‘Indian diaspora has a decisive role to play in the politics and economy of America and European Countries’. Comment with examples. (2020)

Previous Mains Answer Practice

UPSC Essentials: Mains answer practice — GS 3 (Week 140)

UPSC Essentials: Mains answer practice — GS 3 (Week 139)

UPSC Essentials: Mains answer practice — GS 2 (Week 138)

UPSC Essentials: Mains answer practice — GS 2 (Week 139)

UPSC Essentials: Mains answer practice — GS 1 (Week 138)

UPSC Essentials: Mains answer practice — GS 1 (Week 139)

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