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Picture Courtesy:  PIB

Context

The Sixteenth Finance Commission submitted its report, covering the award period from 2026-27 to 2030-31, to the President of India, and this report will be made public once the Union Finance Minister tables it in Parliament under Article 281.

What is Finance Commission?

It is a constitutional body established under Article 280 of the Constitution, to recommend the distribution of financial resources between the Union government and the State governments.

It is constituted by the President of India every five years, or earlier if required, and functions as a quasi-judicial body.

The recommendations are submitted to the President, who tables them in Parliament along with an 'Explanatory Memorandum' detailing the action taken by the government.

The 16th Finance Commission was constituted via a notification in December 2023, under the chairmanship of Dr. Arvind Panagariya (Former Vice-Chairman, NITI Aayog).

Qualifications of Members

The Constitution empowers Parliament to decide the qualifications, and the 5 members are chosen based on the following expertise:

• Chairman: Must be a person with experience in public affairs.
• Four Members:
• A person qualified to be a High Court judge.
• A person with specialized knowledge of government finances and accounts.
• A person with wide experience in financial matters and administration.
• A person with special knowledge of economics.

Core Functions and Recommendations

Vertical Devolution: The distribution of net tax proceeds between the Centre and the States.

Horizontal Devolution: The allocation of these proceeds among the States themselves. This is based on a formula considering factors like population, area, demographic performance, and forest cover.

Grants-in-Aid: The principles that should govern the grants-in-aid to States from the Consolidated Fund of India, especially under Article 275.

Augmenting State Funds: Measures needed to supplement the resources of Panchayats and Municipalities, based on the recommendations of the State Finance Commissions.

Disaster Management Financing: The recent commissions have also been tasked to review the financing structures for disaster management initiatives.

Other Matters: Any other issue referred by the President in the interest of sound finance.

Nature of Recommendations

The recommendations made by the Finance Commission are advisory in nature and are not legally binding on the Union Government. However, they are given significant weight, and the government generally accepts them. 

The government must table the report in Parliament along with an 'Explanatory Memorandum' detailing the action taken on the recommendations. 

Highlights of the 15th Finance Commission (2021-26)

The 15th Finance Commission, chaired by Shri. N. K. Singh, had made recommendations for the 2021-26 period:

• Vertical Devolution: It recommended a share of 41% of the divisible pool of central taxes for states, a 1% adjustment from the 14th FC's recommendation of 42% to account for the newly formed Union Territories of Jammu & Kashmir and Ladakh.
• Horizontal Devolution Criteria: The criteria and weights were: Income Distance (45%), Population (15%), Area (15%), Forest & Ecology (10%), Demographic Performance (12.5%), and Tax Effort (2.5%).
• Fiscal Deficit: Recommended a fiscal deficit limit for states at 4% of GSDP in 2021-22, 3.5% in 2022-23, and 3% for the period 2023-26. For the Centre, it suggested bringing the fiscal deficit down to 4% of GDP by 2025-26.

Source: PIB