Finance commission -ForumIAS Blog

Finance Commission is a constitutional body established under Art 280 of the Indian constitution.

It is a non-permanent body and is constituted by President for a term of 5 years/earlier.

Contents

Finance Commission: Composition

It constitutes of one chairman and four members.
Qualification of the members of the commission is decided by the parliament.
Accordingly, the Chairmen should have expertise in public affairs.
Other 4 members – should be/qualified to be judge of high court; person with special knowledge in finance; person with experience in financial matters; person with special knowledge in economics.

To decide on net distribution of taxes between centre and states and among the states
Demarcate principle for grant in aid to states
Measures to augment consolidated fund of states
To supplement resources to Local bodies based on State finance commission recommendations.

15th finance commission tenure is from 2020-26.
The recommendations for FY 2020-21 & 2021-26 include vertical devolution of 41% to the states and 1% for erstwhile state of J&K.
The only change for 2020-21 and 2021-26 is: Income distance reference period for 2020-21 is 2015-2018 and for 2021-26 is 2016-19.
Horizontal devolution is based on 6 indicators: (i) 45% to income distance (ii)5% for demographic performance (iii)15% to population [2011 census] (iv) Area 15% (v)10% to forest and ecology (vi)5% to tax and fiscal efforts.
Principles for grant in aids/performance incentives to states are based on 4 areas: (i) Social sector such as health, education (ii) Rural economy such as agriculture, roads (iii)Governance and administrative reforms (iv) Reforms in power sector
Local body grants include total grants Rs 4.36 lakh crore with 2.4 lakh crore for rural and 1.2 lakh for urban.
Disaster Risk management corpus fund by Centre and the states in the ratio of 90:10 percent for NE and Himalayan states and 75:25 for other states.
Modernisation Fund for Defence and Internal Security (MFDIS) with the total corpus of 2.4 lakh crore and 1.5 lakh crore from consolidated fund of India.

It is a non-permanent body and a mere advisory body whose recommendations are not binding on the government
TOR [terms and reference] for FC are decided only by centre, states have no role.
One time recommendation for 5 years becomes difficult, as economic conditions are changing rapidly in the globalised era.

Finance commission should be made as a permanent body [Rajamannar committee] so as to address implementation issues arising from its recommendations in intervening time.
Government should mandatorily agree to recommendations of Finance commission in spirit.