{"id":346483,"date":"2025-09-18T19:17:18","date_gmt":"2025-09-18T13:47:18","guid":{"rendered":"https:\/\/forumias.com\/blog\/?p=346483"},"modified":"2025-09-18T19:17:18","modified_gmt":"2025-09-18T13:47:18","slug":"finance-commission-functions-achievements-challenges-explained-pointwise","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/finance-commission-functions-achievements-challenges-explained-pointwise\/","title":{"rendered":"Finance Commission &#8211; Functions, Achievements &#038; Challenges &#8211; Explained Pointwise"},"content":{"rendered":"<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 100%; text-align: center;\"><strong>Table of Content<\/strong><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 100%;\"><a href=\"#h1\">Introduction<\/a><br \/>\n<a href=\"#h2\">Functions of the Finance Commission<\/a><br \/>\n<a href=\"#h3\">Composition of Finance Commission<\/a><br \/>\n<a href=\"#h4\">Implementation &amp; monitoring of finance commission\u2019s recommendations<\/a><br \/>\n<a href=\"#h5\">Recommendations of 15th Finance Commission<\/a><br \/>\n<a href=\"#h6\">Achievements of the Finance Commission<\/a><br \/>\n<a href=\"#h8\">Challenges\/Limitations of Finance Commission<\/a><br \/>\n<a href=\"#h9\">Way Forward<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2><span style=\"text-decoration: underline;\"><b><a id=\"h1\"><\/a>Introduction:<\/b><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Finance Commission is a constitutional body established under Art 280 of the Indian constitution.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It is a non-permanent body and is constituted by the President for a term of 5 years or earlier.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Its function is to maintain fiscal federalism by recommending the distribution of tax revenues between the central and state governments.<\/span><\/li>\n<\/ul>\n<h2><span style=\"text-decoration: underline;\"><b><a id=\"h2\"><\/a>Functions of the Finance Commission:<\/b><\/span><\/h2>\n<ul>\n<li><b>Tax Revenue Distribution:<\/b><span style=\"font-weight: 400;\"> Recommends the sharing of net tax proceeds between the Union and States, and among the States themselves (income tax, GST, etc.):<\/span>\n<ul>\n<li><b>Vertical Devolution:<\/b><span style=\"font-weight: 400;\"> Recommending the percentage of central taxes and duties that should be shared with the states. This is the division of funds between the Union and the states.<\/span><\/li>\n<li><b>Horizontal Devolution:<\/b><span style=\"font-weight: 400;\"> Laying down the principles for the distribution of the shared funds among the individual states. The commission uses a formula based on various criteria, such as population, area, forest and ecology, and tax effort, to ensure a fair allocation.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Grants-in-Aid:<\/b><span style=\"font-weight: 400;\"> Suggests principles for grants-in-aid to support states that may not generate adequate revenue, ensuring essential services like health and education and promoting social welfare.<\/span><\/li>\n<li><b>Strengthening Local Governance: <\/b><span style=\"font-weight: 400;\">Advises measures to augment the Consolidated Fund of States to support Panchayats and Municipalities, strengthening local self-government.<\/span><\/li>\n<li><b>Fiscal Discipline &amp; Stability:<\/b><span style=\"font-weight: 400;\"> Reviews and recommends policies for fiscal consolidation, expenditure efficiency, and sustainable debt management at both Union and State levels.<\/span><\/li>\n<li><b>Contemporary Fiscal Challenges:<\/b><span style=\"font-weight: 400;\"> Addresses emerging issues such as disaster management financing, impact of GST, and public sector reforms, as referred by the President.<\/span><\/li>\n<li><b>Promotes Cooperative Federalism:<\/b><span style=\"font-weight: 400;\"> Encourages consultation and collaboration between Centre and States on financial matters for balanced development. <\/span><\/li>\n<\/ul>\n<h2><span style=\"text-decoration: underline;\"><b><a id=\"h3\"><\/a>Composition of Finance Commission:<\/b><\/span><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">It consists of 1 chairman and 4 members.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Qualification of the members of the commission is decided by the Parliament.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The chairman must have had experience in public affairs. <\/span><\/li>\n<li><span style=\"font-weight: 400;\">Other 4 members:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Should be qualified to be a judge of a High Court.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Have special knowledge of finance and government accounts.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Have wide experience in financial matters and in administration.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Have special knowledge of economics. <\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2><span style=\"text-decoration: underline;\"><b><a id=\"h4\"><\/a>Implementation &amp; monitoring of finance commission\u2019s recommendations:<\/b><\/span><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">The recommendations of FCs are<\/span><b> advisory in nature and not binding<\/b><span style=\"font-weight: 400;\"> on the Union government. However, they are <\/span><b>usually accepted with minor modifications<\/b><span style=\"font-weight: 400;\"> or deviations.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The Union government <\/span><b>notifies the acceptance<\/b><span style=\"font-weight: 400;\"> of the recommendations<\/span><b> through a Presidential Order,<\/b><span style=\"font-weight: 400;\"> which also specifies the period for which they are valid (usually five years).<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The Union government also <\/span><b>tables an explanatory memorandum in Parliament,<\/b><span style=\"font-weight: 400;\"> stating the action taken on the recommendations and the reasons for any deviation.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The implementation and monitoring of the recommendations are <\/span><b>done by various ministries and departments<\/b><span style=\"font-weight: 400;\"> at the Union and state levels, <\/span><b>depending on the subject matter and the conditions<\/b><span style=\"font-weight: 400;\"> attached to the transfers.<\/span><\/li>\n<\/ul>\n<h2><span style=\"text-decoration: underline;\"><b><a id=\"h5\"><\/a>Recommendations of 15<\/b><b>th<\/b><b> Finance Commission:<\/b><\/span><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">15th finance commission tenure is from 2020-26.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The recommendations for FY 2020-21 &amp; 2021-26 include vertical devolution of 41% to the states and 1% for the erstwhile state of J&amp;K.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">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.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Horizontal devolution is based on 6 indicators: <\/span>\n<ol>\n<li><span style=\"font-weight: 400;\">45% to income distance.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">5% for demographic performance.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">15% to population [2011 census] <\/span><\/li>\n<li><span style=\"font-weight: 400;\">10% to Area <\/span><\/li>\n<li><span style=\"font-weight: 400;\">10% to forest and ecology <\/span><\/li>\n<li><span style=\"font-weight: 400;\">5% to tax and fiscal efforts<\/span><\/li>\n<\/ol>\n<\/li>\n<li><span style=\"font-weight: 400;\">Principles for grant-in-aids\/performance incentives to states are based on 4 areas: <\/span>\n<ol>\n<li><span style=\"font-weight: 400;\">Social sector such as health, education <\/span><\/li>\n<li><span style=\"font-weight: 400;\">Rural economy such as agriculture, roads <\/span><\/li>\n<li><span style=\"font-weight: 400;\">Governance and administrative reforms <\/span><\/li>\n<li><span style=\"font-weight: 400;\">Reforms in power sector<\/span><\/li>\n<\/ol>\n<\/li>\n<li><span style=\"font-weight: 400;\">Local body grants include total grants Rs 4.36 lakh crore with 2.4 lakh crore for rural and 1.2 lakh for urban.<\/span><\/li>\n<li><b>Disaster Risk Management Corpus Fund<\/b><span style=\"font-weight: 400;\"> by Centre and the States in the ratio of 90:10 percent for NE and Himalayan states and 75:25 for other states.<\/span><\/li>\n<li><b>Modernisation Fund for Defence and Internal Security (MFDIS)<\/b><span style=\"font-weight: 400;\"> with the total corpus of 2.4 lakh crore and 1.5 lakh crore from consolidated fund of India.<\/span><\/li>\n<\/ul>\n<p><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-346494 size-full\" src=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/09\/Screenshot-2025-09-18-185954.png?resize=750%2C811&#038;ssl=1\" alt=\"finance commission \" width=\"750\" height=\"811\" srcset=\"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/09\/Screenshot-2025-09-18-185954.png?w=844&amp;ssl=1 844w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/09\/Screenshot-2025-09-18-185954.png?resize=277%2C300&amp;ssl=1 277w, https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2025\/09\/Screenshot-2025-09-18-185954.png?resize=768%2C831&amp;ssl=1 768w\" sizes=\"auto, (max-width: 750px) 100vw, 750px\" \/><\/p>\n<h2><span style=\"text-decoration: underline;\"><b><a id=\"h6\"><\/a>Achievements of the Finance Commission:<\/b><\/span><\/h2>\n<ol>\n<li><span style=\"font-weight: 400;\">Introducing tax devolution as a major component of vertical transfers, <\/span><b>increasing the share of states from 10% to 42% over time.<\/b><\/li>\n<li><span style=\"font-weight: 400;\">Introducing performance-based incentives for states to encourage<\/span><b> fiscal discipline, population control, forest conservation, power sector reforms, etc.<\/b><\/li>\n<li><b>Introducing disaster relief funds for states and local bodies<\/b><span style=\"font-weight: 400;\"> for enhancing their preparedness and response capacity for natural calamities.<\/span><\/li>\n<li><b>Introducing grants for local bodies<\/b><span style=\"font-weight: 400;\"> strengthening their fiscal autonomy and accountability for delivering basic services.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Introducing<\/span><b> grants for specific sectors<\/b><span style=\"font-weight: 400;\"> such as health, education, justice delivery, statistical system, etc. addressing critical gaps and needs in these areas.<\/span><\/li>\n<\/ol>\n<h2><span style=\"text-decoration: underline;\"><b><a id=\"h8\"><\/a>Challenges\/Limitations of Finance Commission:<\/b><\/span><\/h2>\n<ol>\n<li><b>Data Gaps and Quality Issues: <\/b><span style=\"font-weight: 400;\">The finance commission relies on official data sources to assess the fiscal situation and performance of the Union and states, but these data are often incomplete, inconsistent or outdated.<\/span><\/li>\n<li><b>Centre v\/s State:<\/b>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"font-weight: 400;\">The Commission must navigate conflicting interests between central and state governments, local bodies, civil society, etc.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Rising centralization and demands for more state fiscal autonomy create tensions in resource sharing.<\/span><\/li>\n<\/ol>\n<\/li>\n<li><b>Limited Implementation &amp; Monitoring Power:<\/b>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"font-weight: 400;\">Finance Commission recommendations are advisory and not binding. Actual implementation depends on the Union and states, often leading to delays, non-compliance, or misuse of recommended grants.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The Commission has no direct enforcement or oversight ability; accountability is limited.<\/span><\/li>\n<\/ol>\n<\/li>\n<li><b>Resource v\/s Responsibility imbalances:<\/b>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"font-weight: 400;\">Frequently faces situations where states have growing expenditure responsibilities but limited revenue mobilization capacity, making equitable sharing highly complex.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Handling vertical and horizontal imbalances, especially with newer challenges like GST revenue sharing and compensation, adds complexity.<\/span><\/li>\n<\/ol>\n<\/li>\n<li><b>Overlap with GST Council:<\/b><span style=\"font-weight: 400;\"> Intersecting jurisdictions with the GST Council, especially in tax pool size and distribution, pose coordination challenges for effective fiscal federalism.<\/span><\/li>\n<li><b>Limited Role in 3rd-tier Governments:<\/b><span style=\"font-weight: 400;\"> Recommendations regarding Panchayats and Municipalities are based only on State Finance Commission reports, restricting the Finance Commission\u2019s direct impact on grassroots fiscal empowerment.<\/span><\/li>\n<li><b>Changing Economic Contexts &amp; Inequality:<\/b><span style=\"font-weight: 400;\"> Balancing regional disparities, post-pandemic fiscal health, disaster response, and new urban infrastructure demand requires dynamic and sometimes contentious negotiations. <\/span><\/li>\n<\/ol>\n<h2><span style=\"text-decoration: underline;\"><b><a id=\"h9\"><\/a>Way Forward:<\/b><\/span><\/h2>\n<ol>\n<li><b>Improve Data Quality:<\/b>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"font-weight: 400;\">Establish robust, comprehensive data-sharing mechanisms between the Centre, States, and local bodies for accurate, timely fiscal and economic data.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Leverage technology and auditing to ensure transparency and reliability of data underpinning recommendations.<\/span><\/li>\n<\/ol>\n<\/li>\n<li><b>Enhance Accountability &amp; Compliance Mechanisms:<\/b>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"font-weight: 400;\">Introduce mechanisms to promote adherence to the Finance Commission\u2019s recommendations, such as monitoring frameworks, fiscal performance audits, and incentive-linked transfers.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Strengthen Parliamentary oversight and involve independent fiscal institutions in evaluating compliance and impact.<\/span><\/li>\n<\/ol>\n<\/li>\n<li><b>Strengthen Fiscal Federalism through Balanced Approach:<\/b>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"font-weight: 400;\">Balance revenue sharing and expenditure responsibilities transparently, considering states\u2019 fiscal capacity, needs, and development levels.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Foster cooperative federalism by regularly consulting states and stakeholders to reconcile conflicts and expectations.<\/span><\/li>\n<\/ol>\n<\/li>\n<li><b>Improve Coordination with GST Council &amp; Local Bodies:<\/b>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"font-weight: 400;\">Develop integrated fiscal management frameworks involving the GST Council to harmonize revenue sharing and policy coherence.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Increase the Finance Commission\u2019s role in empowering Panchayats and Urban Local Bodies through better mandates and funding models.<\/span><\/li>\n<\/ol>\n<\/li>\n<li><b>Focus on Outcome-oriented &amp; Developmental Measures:<\/b>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"font-weight: 400;\">Align transfers with performance and developmental outcomes to ensure effective use of resources.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Encourage states to adopt long-term fiscal sustainability plans and reform agendas through incentivized grants.<\/span><\/li>\n<\/ol>\n<\/li>\n<li><b>Institutional Strengthening:<\/b>\n<ol style=\"list-style-type: lower-alpha;\">\n<li><span style=\"font-weight: 400;\">Expand the Commission\u2019s secretariat capacity with fiscal, economic, and legal experts for deeper analysis.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Engage academic and policy research institutions for evidence-based recommendations and impact assessments.<\/span><\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 100%;\"><strong>UPSC: GS-3: Economics<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n","protected":false},"excerpt":{"rendered":"<p>Table of Content Introduction Functions of the Finance Commission Composition of Finance Commission Implementation &amp; monitoring of finance commission\u2019s recommendations Recommendations of 15th Finance Commission Achievements of the Finance Commission Challenges\/Limitations of Finance Commission Way Forward Introduction: Finance Commission is a constitutional body established under Art 280 of the Indian constitution. It is a non-permanent&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/finance-commission-functions-achievements-challenges-explained-pointwise\/\">Continue reading <span class=\"screen-reader-text\">Finance Commission &#8211; Functions, Achievements &#038; Challenges &#8211; Explained Pointwise<\/span><\/a><\/p>\n","protected":false},"author":10391,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130],"tags":[],"class_list":["post-346483","post","type-post","status-publish","format-standard","hentry","category-7-pm","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/346483","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10391"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=346483"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/346483\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=346483"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=346483"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=346483"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}