Article 2: Finance Commission
Why in news: Debates on Centre–State fiscal relations and resource sharing, along with discussions on recommendations of recent Finance Commissions, have brought renewed attention to the role of the Finance Commission.
Key Details
- Finance Commission recommendations are advisory but generally accepted by the government
- It submits its report to the President, who lays it before Parliament
- Plays a role in disaster management funding through dedicated funds
- Encourages fiscal discipline and accountability among States
- Uses evolving criteria like demographics and performance indicators in allocations
Finance Commission of India – Overview
- The Finance Commission of India is a constitutional body established under Article 280 of the Indian Constitution.
- It is constituted by the President of India every five years or earlier if needed.
- Its primary role is to ensure fair distribution of financial resources between the Centre and States.
- It acts as a neutral arbiter in Centre–State fiscal relations.
Composition
- Consists of a Chairman + four other members.
- Members are appointed by the President.
- Qualifications are determined by Parliament.
- Experts usually include those with knowledge of public finance, economics, and administration.
Functions
- Recommends distribution of taxes between Centre and States (vertical devolution).
- Suggests allocation among States (horizontal devolution).
- Recommends grants-in-aid to States from the Consolidated Fund of India.
- Advises on measures to augment State finances, especially for Panchayats and Municipalities.
- Can address any other matter referred by the President.
Types of Devolution
- Vertical Devolution → Sharing of revenue between Centre and States.
- Horizontal Devolution → Distribution of States’ share among different States.
- Criteria include population, income distance, area, forest cover, tax effort, etc.
Significance
- Promotes fiscal federalism in India.
- Ensures equity and balanced regional development.
- Helps reduce inter-state disparities.
- Enhances financial stability of States.
- Strengthens cooperative federalism.
Trends (Example: 15th Finance Commission)
- Chaired by N. K. Singh.
- Recommended 41% tax devolution to States.
- Emphasised performance-based incentives.
- Focused on sectors like health, defence, and disaster management.
Challenges
- Rising demands from States vs limited resources.
- Concerns over conditional grants affecting autonomy.
- Balancing equity vs efficiency in allocation.
- Increasing role overlap with bodies like NITI Aayog.
Conclusion
The Finance Commission continues to play a crucial role in maintaining fiscal balance in India’s federal structure. By adapting its criteria and addressing emerging challenges, it ensures equitable and efficient resource distribution. Strengthening its independence, improving data transparency, and aligning with cooperative federalism principles will enhance its relevance in managing evolving economic demands and intergovernmental fiscal relations effectively.