How often is the Finance Commission constituted?

The Finance Commission is constituted once every five years. Its term aligns with the five-year plan periods to ensure consistent and periodic recommendations.

How many Finance Commissions have been constituted so far, and who chaired them?

As of now, fifteen Finance Commissions have been constituted in India. Some of the past chairpersons include K.C. Neogy, K. Santhanam, Y.B. Chavan, Dr. Vijay Kelkar, Y.V. Reddy, and N.K. Singh.

What is the significance of the Finance Commission in India's fiscal federalism?

The Finance Commission plays a crucial role in India's fiscal federalism by ensuring a fair distribution of resources between the Central and State Governments. It helps maintain a balance of financial powers and resources among different tiers of governance, ensuring inclusive development and addressing regional disparities.

What is the Finance Commission of India?

The Finance Commission of India is a constitutional body mandated by Article 280 of the Indian Constitution. It is responsible for recommending the division of certain revenue sources between the Union (Central) Government and the State Governments.

Finance Commission of India, Qualifications, Functions, and Responsibilities

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Finance Commission of India: Finance Commissions play a crucial role in the fiscal federalism of India by making recommendations on vertical devolution, horizontal distribution, and grants-in-aid between the Union and state governments. These recommendations are expected to bring about meaningful reforms and address pressing issues.

However, over the years, it has been observed that many of these normative and prescriptive recommendations have remained on paper, failing to translate into concrete action. This article explores the reasons behind this phenomenon and sheds light on the challenges faced in implementing the recommendations of the Finance Commission of India.

Finance Commission

A constitutionally mandated agency called the Finance Commission is in charge of dividing up certain revenue sources in India between the Union and State Governments. It was established in 1951 by the Indian President in accordance with Article 280 of the Indian Constitution. The Finance Commission’s main goal is to specify the financial relationships and funding allocations between the Central and State Governments.

Finance Commission of India

The Indian Constitution is one of the world’s longest written constitutions. The Finance Commission of India has a crucial role within the context of one of its parts, which focuses on Constitutional Bodies. This constitutional body is tasked with making recommendations regarding how money should be split between the Union and State Governments. It is established by the Indian President once every five years.

The 15th Finance Commission, led by NK Singh, is now in effect from 2021 to 2026. The laws and duties of the Finance Commission are described in detail in Articles 280 and 281 of Part XII, Chapter I (Finance) of the Indian Constitution.

Finance Commission Detailed Reports

Finance Commissions submit comprehensive reports that contain numerous recommendations and proposals. The sheer volume of these reports, often spanning multiple volumes, can be overwhelming for policymakers and administrators. Consequently, many of the recommendations tend to get lost or overlooked in the bureaucratic machinery, reducing their impact on policy formulation and implementation.

Finance Commission Functions

On the following matters, the Finance Commission advises the President of India:

Functions of the Finance Commission	Explanation
Net tax proceeds distribution between the Centre and states	Recommends the division of tax revenue between the central and state governments, and allocates the same among the states.
Principles governing grants-in-aid to states	Formulates principles for providing financial assistance to states from the Consolidated Fund of India.
Extending consolidated fund of a state for local bodies	Suggests measures to augment the resources of Panchayats and Municipalities based on the state Finance Commission’s input.
Recommendations on matters referred by the president	Provides advice on any issue referred to it by the President in the interest of maintaining sound finance.
Deciding the basis for sharing divisible taxes and grants-in-aid every five years	Determines the criteria for sharing divisible taxes between the Centre and states and principles for grants-in-aid.
Exercising sufficient powers within its activity domain	Empowered to carry out its functions effectively and independently.
Possessing powers of a Civil Court	Has the authority to summon witnesses, request the production of documents, and conduct investigations akin to a Civil Court.

Challenges of the Finance Commission of India

Challenges faced by the Finance Commission of India are ensuring the effective implementation of its recommendations and striking a balance between the fiscal needs of the central and state governments. Below you can check the details overview of the Challenges of the Finance Commission of India.

Ignoring Homilies and Pious Intentions

Finance Commissions frequently propose reforms at both the Union and state levels, including performance-based grants. Unfortunately, these well-intentioned suggestions are often disregarded or treated merely as pious intentions without the necessary follow-through. The focus remains primarily on the availability of resources rather than the comprehensive implementation of recommended reforms.

Conditionalities and Sectoral Focus

One of the reasons for the limited implementation of Finance Commission recommendations is the presence of conditionalities attached to grants-in-aid. Some states have raised objections to these conditionalities, as they restrict the flexibility of expenditure options. This leads to a partial implementation of grants, undermining the intended impact of these funds. Additionally, when recommendations focus on specific sectors, the overall impact on the broader economy may be diminished.

Unrealized Expectations and Rhetorical Promises

Finance Commissions have, at times, set high expectations with their recommendations, envisioning significant transformations in various sectors. However, reality often falls short of these grand visions. For instance, the 13th Finance Commission proposed initiatives to address the pending cases in the judicial system and improve the statistical system. Despite the allocation of funds and the formulation of action plans, the actual implementation of these reforms has been far from satisfactory.

Challenges in Statistical Framework and Data Availability

Finance Commissions rely on accurate and comprehensive data to make informed recommendations. However, there are challenges in obtaining reliable data across various sectors and states. The absence of quantifiable measures and unit costs for services, as well as gaps in inter-regional trade data, hinder the accurate assessment of cost disabilities and equitable distribution. Consequently, the lack of robust statistical frameworks limits the effectiveness of Finance Commission recommendations.

Areas on which the 16th Finance Commission should concentrate

Horizontal distribution:

The 16th Finance Commission should focus on ensuring a fair horizontal distribution of resources among states.
It should address the challenge of balancing the compensation from richer states to poorer states without deepening the divide, particularly between North and South states.

Restraining levying of cesses and surcharges:

The Commission should emphasize the need to restrain the imposition of cesses and surcharges as a means to increase revenue.
It should establish conditions for their imposition and develop a mechanism to cap the amount that can be raised through these measures.

Restraint on freebies

The 16th Finance Commission should address the issue of excessive and unsustainable populist spending by governments.
Despite the Fiscal Responsibility and Budget Management (FRBM) Act, governments have found ways to increase debt without proper accountability.
The Commission should provide guidelines and restraints on spending to ensure long-term fiscal sustainability.

List of Finance Commission Chairman

In this part, you can check the List of Finance Commission Chairman.

List of Finance Commission Chairman
Finance Commissions	Chairman	Establishment Year
1st Finance Commission	K.C. Neogy	1951
2nd Finance Commission	K. Santhanam	1956
3rd Finance Commission	A.K. Chanda	1960
4th Finance Commission	Dr. P.V. Rajamannar	1964
5th Finance Commission	Mahavir Tyagi	1968
6th Finance Commission	Brahamananda Reddy	1972
7th Finance Commission	J.M. Shelat	1977
8th Finance Commission	Y.B. Chavan	1982
9th Finance Commission	N.K.P. Salve	1987
10th Finance Commission	K.C. Pant	1992
11th Finance Commission	A.M. Khusro	1998
12th Finance Commission	Dr. C. Rangarajan	2002
13th Finance Commission	Dr. Vijay Kelkar	2007
14th Finance Commission	Y.V. Reddy	2013
15th Finance Commission	N.K Singh	2017

Finance Commission UPSC

For aspirants preparing for the UPSC examination, understanding the importance of Finance Commissions and their impact on fiscal policies is crucial. It is essential to grasp the complexities of resource distribution and the significance of effective implementation to contribute to the nation’s progress and welfare.

While Finance Commissions serve as important institutions in shaping fiscal policies and ensuring a fair distribution of resources, the gap between normative recommendations and actual implementation remains a persistent challenge. Overcoming this gap requires a concerted effort from policymakers, administrators, and all stakeholders involved.

It is crucial to move beyond rhetoric and focus on the comprehensive and timely implementation of Finance Commission recommendations to address the pressing issues faced by our nation. Only then can we realize the true potential of fiscal federalism and ensure inclusive development across all states and sectors.