Finance commission

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.

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.

Finance Commission: Role

  • 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.

Finance Commission: Recommendations of 15th Finance Commission

  • 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.

Finance Commission: Issues

  • 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: Reforms

  • 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.


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