In addition, the President, at his discretion, may refer any other matter to the Finance Commission in the public interest. In a departure from the past, the EFC, for instance, was asked to review the finances of the Centre and the states and suggest ways to restructure public finances and restore macro economic stability. In a last-minute addition to its terms of reference, in May this year, it was also asked to draw up a monitorable fiscal reforms programme aimed at reducing the revenue deficits of states. Vertical balance refers to the balance between resources and responsibilities between Centre and states. The idea is that the Centre should have enough resources to discharge its responsibilities while the states in turn should have enough to discharge theirs.
Horizontal balance refers to the balance between states.
While economic efficiency is the main criterion in deciding the assignment of taxes to the different levels of government or vertical balance, equity is the main consideration while deciding the sharing pattern among the different states. The EFC report has recently come in for flak primarily from a number of richer states mainly because their relative shares in the shareable tax kitty have come down. This has happened because the EFC has altered the weights given to different criteria in the devolution formula used to determine the inter-se pattern of distribution of resources between states. The EFC has used six criteria population, income, area, availability of infrastructure, tax effort and fiscal discipline. At the same time, the weightage given to each of these criteria has also been altered.