‘Finance Commission is the lynchpin of Fiscal Federalism in India’. Elaborate with regard to the recent constitution of the 15th Finance Commission.

Q. ‘Finance Commission is the lynchpin of Fiscal Federalism in India’. Elaborate with regard to the recent constitution of the 15th Finance Commission.

Ans. Article 280 of the Indian constitution provides for creation of a Finance Commission every five years.

It consists of a chairman and four members that are specialists with wide experience in public domain.

It is a quasi-judicial body that lies at the heart of Indian fiscal federalism.

Its core responsibilities are as follows:

  • To evaluate the state of finances of the Union and State Governments.
  • To recommend the sharing of taxes between them.
  • To lay down the principles determining the distribution of these taxes among States.

The commission submits its report to the president, which then lays it before the parliament. Recently, government has constituted 15th Finance Commission under the Chairmanship of NK Singh to decide the formula for devolution of revenue between Centre and States, for a period of 5 years – April, 2020 to March, 2025.

Its ‘Terms of reference’ are as follows:

  • To examine whether revenue deficit grants should be provided at all.
  • To consider the impact of fiscal situation of the Union government of substantially enhanced devolution by the 14th Finance Commission from 32% to 42%.
  • To look at the conditions that may be imposed by the Central government while providing consent to States when they borrow under Article 293(3).
  • To reduce the role of Article 275 and asks the Commission to leave it more fiscal space to expand grants under Article 282. To enhance quality of public spending.
  • To encourage state to maintain fiscal discipline.

Since, Finance commissions working is characterised by extensive and intensive consultations with all levels of governments. Thus it plays a key role in strengthening and promoting cooperative and competitive federalism.

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