NEWS – NITI Aayog Vice-Chairman Arvind Panagariya Chairman to head 16th Finance Commission

THE FINANCE COMMISSION OF INDIA

• Constitutional body – Article 280
• Appointed every five years or at such intervals as the President may determine

 Composition:

• Chairperson: By a person with significant experience in public affairs – not necessarily an economist or financial expert
• Members: Decided by President
• Criteria: Decided by President based on factors such as experience in public affairs, knowledge of economics etc

Functions and Responsibilities:

• Vertical Distribution of Taxes: Recommend the distribution of the net proceeds of taxes between the Union (central government) and the states, and among the states themselves.
• Horizontal Distribution: Recommends the principles governing the grants-in-aid to states and other local authorities from the Consolidated Fund of India.
• Reviews the financial position of the states and the Union, taking into consideration various factors such as population, area, infrastructure, and economic development.
• Suggests measures to augment the consolidated fund of a state to supplement the resources of local bodies.
• Other Matters as asked by the Union Government

Significance:

• Promotes fiscal federalism by ensuring a fair and equitable distribution of financial resources between the central government and the states
• Aids in the allocation of resources to states based on their needs and performance
• Encourages decentralization and empowers local governance structures.
• Contributes to the fiscal autonomy of states by recommending the principles governing the grants and allocations, reducing dependency on the central government

Recent Finance Commissions:

• 15th Finance Commission (2020-2025): The 15th Finance Commission, chaired by N.K. Singh, focused on reviewing the fiscal and economic positions of the Union and the states.
• 14th Finance Commission (2015-2020): The 14th Finance Commission, under the chairmanship of Y.V. Reddy, recommended a record increase in the share of states in the divisible pool of central taxes to 42%.

Challenges and Criticisms:

• Accuracy and availability of data for assessing the financial needs and performance of states have been a challenge
• Some argue for a shift towards performance-based criteria rather than need-based
• While the Finance Commission addresses fiscal federalism, some argue that it should play a more proactive role in strengthening local governance structures