Finance Commission: Role, Functions & Recommendations
1. What is the Finance Commission?
Constitutional Basis: Article 280 of the Indian Constitution mandates its formation every 5 years.
Composition: A President-appointed body with 1 Chairman + 4 members.
2. Key Functions
- Vertical Devolution: Recommends share of central taxes to states.
- Horizontal Distribution: Allocates funds among states using formulas (population, area, etc.).
- Grants-in-Aid: Recommends grants to needy states (Article 275).
- Fiscal Consolidation: Suggests measures to improve finances of Centre & States.
3. Major Recommendations (Recent Commissions)
| Finance Commission |
Key Recommendations |
Implementation Period |
14th FC (2015-20)
Chairman: Y.V. Reddy |
- Increased states' share from 32% to 42%
- Introduced Forest Cover as a criterion
|
2015-2020 |
15th FC (2020-25)
Chairman: N.K. Singh |
- Retained 41% states' share (1% allocated to UTs)
- Added Demographic Performance criterion
- Created COVID-19 emergency fund
|
2020-2025 |
4. Criteria for Fund Allocation
The 15th Finance Commission used:
- Income Distance (45% weight): Favors poorer states
- Population (2011) (15% weight)
- Area (15% weight)
- Forest & Ecology (10% weight)
- Demographic Performance (12.5% weight)
- Tax Effort (2.5% weight)
5. Important Concepts (Prelims Focus)
- Divisible Pool: Central taxes shared with states (excludes cess/surcharge)
- Fiscal Federalism: Financial relations between Centre & States
- GST Compensation: 14th FC recommended 100% compensation for 5 years (ended 2022)
6. Recent Developments
- 16th Finance Commission: Constituted in 2023 (Chairman: Dr. Arvind Panagariya)
- Terms of Reference: Includes review of disaster management funding
- New Challenges: Climate change adaptation funding, municipal finances
Conclusion
The Finance Commission is crucial for UPSC Prelims (Polity & Economy). Focus on its constitutional basis, latest recommendations, and allocation criteria.