{"id":3510,"date":"2026-08-11T22:11:31","date_gmt":"2026-08-11T16:41:31","guid":{"rendered":"https:\/\/forumias.com\/psir\/notes\/finance-commission\/"},"modified":"2026-08-11T23:01:37","modified_gmt":"2026-08-11T17:31:37","slug":"finance-commission","status":"publish","type":"psir_note","link":"https:\/\/forumias.com\/psir\/notes\/finance-commission\/","title":{"rendered":"Finance Commission"},"content":{"rendered":"<div class=\"n-wrap\">\n<div class=\"n-shell\">\n<div class=\"n-crumb\"><a href=\"\/psir\/psir-notes\/\">PSIR Notes<\/a><span class=\"sep\">\u203a<\/span><a href=\"\/psir\/psir-notes\/#i-b\">I-B Indian Government and Politics<\/a><span class=\"sep\">\u203a<\/span><span>Finance Commission<\/span><\/div>\n<header class=\"n-head\">\n<div class=\"n-eyebrow\">Paper I \u00b7 Indian Government and Politics<\/div>\n<h1 class=\"n-title\">Finance Commission<\/h1>\n<div class=\"n-syl\"><b>Syllabus \u00b7 Paper I-B \u00b7 6<\/b> \u2014 Statutory Institutions\/Commissions : Election Commission, Comptroller and Auditor General, <span class=\"cur\">Finance Commission<\/span>, Union Public Service Commission, National Commission for Scheduled Castes, National Commission for Scheduled Tribes, National Commission for Women; National Human Rights Commission, National Commission for Minorities, National Backward Classes Commission.<\/div>\n<\/header>\n<div class=\"n-grid\">\n  <main class=\"n-body\"><\/p>\n<h3 id=\"finance-commission-of-india\">Finance Commission of India<\/h3>\n<p><em><span class=\"n-law\">Article 280<\/span> \u00b7 the balance-wheel of fiscal federalism<\/em><\/p>\n<p>A <span class=\"n-term\">quasi-judicial constitutional body<\/span> under <span class=\"n-term\"><span class=\"n-law\">Article 280<\/span><\/span>, appointed by the President every five years (or earlier). Established 1951 \u2014 inspired partly by Australia\u2019s Commonwealth Grants Commission, but broader. The framers deliberately avoided a fixed transfer formula: a flexible, periodic, impartial mechanism was preferred.<\/p>\n<p><span class=\"n-term\">Composition &amp; powers<\/span><\/p>\n<ul>\n<li>Chairman + four members (President-appointed); <span class=\"n-law\">Finance Commission Act, 1951<\/span> sets qualifications &amp; terms.<\/li>\n<li>Chairman: experience in public affairs; members from judiciary, finance\/accounts, administration, economics.<\/li>\n<li>Powers of a civil court \u2014 summon witnesses, require documents and public records.<\/li>\n<\/ul>\n<p><span class=\"n-term\">Two imbalances it corrects<\/span><\/p>\n<div class=\"n-tw\">\n<table>\n<thead>\n<tr>\n<th><\/th>\n<th><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><span class=\"n-term\">Vertical<\/span><\/td>\n<td>Centre has revenue capacity; States carry expenditure \u2192 transfers down<\/td>\n<\/tr>\n<tr>\n<td><span class=\"n-term\">Horizontal<\/span><\/td>\n<td>States differ in capacity &amp; cost disability \u2192 equalisation<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p><span class=\"n-term\">Evolution of methodology \u2014 from filling gaps to setting norms.<\/span> <span class=\"n-term\">Gap-filling<\/span> (first six FCs \u00b7 Niemeyer method (<span class=\"n-law\">GoI Act 1935<\/span>)) \u2192 <span class=\"n-term\">Gap-filling + Service Upgradation<\/span> (block grants for essential services) \u2192 <span class=\"n-term\">Normative<\/span> (9th FC \u00b7 reduce unequal service levels). <em>Each step tried to move beyond leaving surpluses with better-off states toward a guaranteed standard of public services.<\/em><\/p>\n<p><span class=\"n-term\">Grants &amp; devolution:<\/span> Revenue Deficit \u00b7 Special \u00b7 Sector-Specific \u00b7 Performance-Based \u00b7 Local Bodies \u00b7 Disaster Risk (75:25 \/ 90:10)<\/p>\n<p>The <span class=\"n-term\">15th FC<\/span> (chair <span class=\"n-sch\">N.K. Singh<\/span>) recommended <span class=\"n-term\">41% devolution<\/span> \u2014 down from 42% under the 14th FC, reflecting the creation of J&amp;K and Ladakh as Union Territories.<\/p>\n<p><span class=\"n-term\">FC and GST<\/span><\/p>\n<ul>\n<li>GST subsumed many state indirect taxes \u2192 states now depend on timely devolution &amp; compensation;<\/li>\n<li>delay in compensation hits state development; horizontal imbalance persists (richer states, stronger bases);<\/li>\n<li>FC\u2019s role grew more central after GST. Key amendments: 80th, 88th, 101st.<\/li>\n<\/ul>\n<p><span class=\"n-term\">16th FC &amp; State FCs<\/span><\/p>\n<ul>\n<li><span class=\"n-lab\">16th FC<\/span> \u2014 constituted 31 Dec 2023, chair <span class=\"n-sch\">Arvind Panagariya<\/span>; report due 31 Oct 2025, to apply from 1 April 2026.<\/li>\n<li><span class=\"n-lab\">State Finance Commissions<\/span> \u2014 Art. 243-I (<span class=\"n-law\">73rd Amendment<\/span>); review Panchayat finances; Governor tables recommendations.<\/li>\n<\/ul>\n<p><span class=\"n-sch\">Vijay Kelkar<\/span> (<em>Towards India\u2019s New Fiscal Federation<\/em>) argues tax reform and coordination among NITI Aayog, the Finance Commission, constitutional provisions and GST law are needed to improve Indian federalism.<\/p>\n<blockquote class=\"n-quote\">\n<p><em>FCs need to become agents of change \u2014 examining suggestions and making recommendations to empower local governments, enable good governance and support sustainable development.<\/em><\/p>\n<p><cite>Pradeep S. Mehta<\/cite><\/p><\/blockquote>\n<p><span class=\"n-term\">Challenges:<\/span> vague qualification criteria \u00b7 politically framed Terms of Reference \u00b7 no clear guidelines for vertical\/horizontal split \u00b7 data reliability \u00b7 overlap with the GST Council \u00b7 weak coordination with State FCs \u00b7 balancing equity vs efficiency \u00b7 new demands from debt, climate and demography.<\/p>\n<h3 id=\"fiscal-federalism\">Fiscal Federalism<\/h3>\n<p><span class=\"n-term\">Design.<\/span> Distribution of taxation, expenditure, grants, borrowing, transfers, equalisation, fiscal autonomy. India: strong Union revenue authority + major State expenditure burden + FC transfers + CSS + GST Council + Art 293 borrowing control + cesses\/surcharges as friction.<\/p>\n<h4 id=\"finance-commission\">Finance Commission<\/h4>\n<div class=\"n-tw\">\n<table>\n<thead>\n<tr>\n<th>Commission<\/th>\n<th>Key feature<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><span class=\"n-term\">14th FC<\/span><\/td>\n<td>raised States&#8217; divisible-pool share <span class=\"n-term\">32%<\/span> \u2192 <span class=\"n-term\">42%<\/span>; strengthened fiscal autonomy in principle.<\/td>\n<\/tr>\n<tr>\n<td><span class=\"n-term\">15th FC<\/span><\/td>\n<td>high devolution at <span class=\"n-term\">41%<\/span>; sector-linked grants (health, power reforms); criticised by Southern States over population criteria.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p><span class=\"n-term\">Concerns:<\/span> devolution % alone insufficient \u00b7 cesses\/surcharges shrink divisible pool \u00b7 conditional grants cut flexibility \u00b7 poorer States need equalisation \u00b7 richer States seek performance recognition.<\/p>\n<h4 id=\"gst-council-the-planning-shift\">GST Council &amp; the planning shift<\/h4>\n<p><span class=\"n-lab\">GST Council (Art 279A)<\/span> \u2014 joint tax decision-making, shared sovereignty, one-nation-one-tax, unified market; problems: reduced State tax autonomy, compensation disputes, manufacturing-State losses, pandemic revenue stress, post-compensation vulnerability. Fiscal federalism is now <span class=\"n-term\">also negotiated in a permanent fiscal council<\/span>, not only FC-based.<\/p>\n<p><span class=\"n-term\">From directive planning to cooperative\u2013competitive coordination.<\/span> Planning Commission 1950 (Five-Year Plans, plan grants, top-down) \u2192 National Development Council (consultation, still Centre-heavy) \u2192 NITI Aayog 2015 (think tank, no grant power, indices, CMs&#8217; council).<\/p>\n<ul>\n<li><span class=\"n-sch\">Durga Das Basu<\/span> \u2014 Planning Commission &#8220;the economic cabinet of the country.&#8221; <span class=\"n-sch\">Arun Maira<\/span> \u2014 &#8220;a force for allocation of money, not for persuasion of change.&#8221;<\/li>\n<li><span class=\"n-sch\">Arvind Panagariya<\/span> \u2014 the new model is &#8220;competitive cooperative federalism.&#8221; <span class=\"n-sch\">Bibek Debroy<\/span> \u2014 &#8220;NITI Aayog is better suited for a rapidly evolving economy, where the Centre no longer imposes a single plan on diverse regions.&#8221;<\/li>\n<li>NITI criticism: advice without funds; opposition boycotts; rankings as pressure; fiscal imbalance persists.<\/li>\n<\/ul>\n<h4 id=\"the-fc-gst-council-niti-triangle\">The FC \u2014 GST Council \u2014 NITI triangle<\/h4>\n<p><span class=\"n-sch\">Pinaki Chakraborty<\/span> \u2014 three changes reshape Union-State fiscal relations: abolition of Planning Commission, higher tax devolution, creation of GST Council. FC sets transfer norms &amp; uses performance criteria; GST Council shapes the tax base &amp; revenue available for devolution; NITI supplies rankings\/data that indirectly influence grant criteria. Result: fiscal federalism is more interactive; cooperation &amp; conditionality coexist; fiscal trust = federal trust. <span class=\"n-sch\">Maram Govinda Rao<\/span> \u2014 cooperative federalism is tested most during fiscal stress.<\/p>\n<div class=\"n-next\"><a href=\"\/psir\/notes\/comptroller-and-auditor-general\/\"><em>Previous<\/em><b>Comptroller and Auditor General<\/b><\/a><a class=\"r\" href=\"\/psir\/notes\/union-public-service-commission\/\"><em>Next<\/em><b>Union Public Service Commission<\/b><\/a><\/div>\n<p><\/main><\/p>\n<aside class=\"n-rail\">\n<h4>On this page<\/h4>\n<p><a href=\"#finance-commission-of-india\">Finance Commission of India<\/a><a href=\"#fiscal-federalism\">Fiscal Federalism<\/a><\/aside>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Finance Commission for the UPSC PSIR optional \u2014 PSIR Notes \u203a I-B Indian Government and Politics \u203a Finance Commission Paper I \u00b7 Indian Government and Politics Finance Commission Syl<\/p>\n","protected":false},"template":"","meta":{"jetpack_post_was_ever_published":false,"fx_note_key":"I-B.6.3","fx_note_sec":"I-B","fx_note_point":"6","fx_note_desc":"Finance Commission for the UPSC PSIR optional \u2014 PSIR Notes \u203a I-B Indian Government and Politics \u203a Finance Commission Paper I \u00b7 Indian Government and Politics Finance Commission Syl","footnotes":""},"class_list":["post-3510","psir_note","type-psir_note","status-publish","hentry"],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/psir\/wp-json\/wp\/v2\/psir_note\/3510","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/psir\/wp-json\/wp\/v2\/psir_note"}],"about":[{"href":"https:\/\/forumias.com\/psir\/wp-json\/wp\/v2\/types\/psir_note"}],"version-history":[{"count":1,"href":"https:\/\/forumias.com\/psir\/wp-json\/wp\/v2\/psir_note\/3510\/revisions"}],"predecessor-version":[{"id":3703,"href":"https:\/\/forumias.com\/psir\/wp-json\/wp\/v2\/psir_note\/3510\/revisions\/3703"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/psir\/wp-json\/wp\/v2\/media?parent=3510"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}