Model Answer
0 min readIntroduction
The Finance Commission is a constitutionally mandated body in India, playing a crucial role in shaping the fiscal federalism of the country. Established under Article 280 of the Constitution, it provides recommendations on the distribution of tax revenues between the Union and the States, and amongst the States themselves. The recently constituted 16th Finance Commission, chaired by Dr. Arvind Panagariya, is tasked with recommending financial arrangements for the five-year period commencing April 1, 2026, and aims to address evolving economic challenges and ensure equitable resource allocation.
Constitutional Provisions & Composition
Article 280 of the Constitution outlines the constitution of the Finance Commission. Key provisions include:
- Presidential Appointment: The Finance Commission is constituted by the President on every five years, or earlier if deemed necessary.
- Membership: The Commission consists of a Chairman and four other members.
- Eligibility Criteria: Members should be distinguished individuals with experience in public affairs, finance, and economics. At least one member must be a judge of a High Court.
The 16th Finance Commission, notified on December 22, 2023, comprises:
- Chairman: Dr. Arvind Panagariya
- Members: Shri Ajay Narayan Jha, Dr. Anup Singh, Dr. Soumya Kanti Ghosh, and Smt. Rita Talwar.
Terms of Reference of the 16th Finance Commission
The terms of reference (ToR) for the 16th Finance Commission, as notified by the Union Government, are comprehensive and cover a wide range of fiscal matters. These ToR build upon the previous commissions while incorporating new considerations.
Key Areas of Focus:
- Devolution of Taxes: Determining the principles governing the distribution of net proceeds of taxes between the Union and the States. This includes recommending the percentage of divisible pool to be devolved to states.
- Principles of Grant-in-Aid: Suggesting principles for grants-in-aid to the States out of the Consolidated Fund of India.
- State Finance Situation: Assessing the resources of the States, considering their revenue and expenditure, and suggesting measures to augment the Consolidated Fund of each State.
- Impact of Fiscal Responsibility Legislation: Examining the impact of the Fiscal Responsibility Legislation (FRL) on the finances of the Union and the States.
- Performance Incentives: Recommending measures to incentivize States to adopt sound fiscal practices and improve their performance in areas like education, healthcare, and infrastructure.
Significant Additions & Changes in ToR (compared to 15th FC):
- Demographic Shift Consideration: The 16th FC has been asked to consider the impact of demographic shifts on the financial position of the Union and the States. This is a new addition reflecting the changing population dynamics of India.
- Climate Change Mitigation: The Commission is tasked with recommending performance-based incentives for States in the area of climate change mitigation and adaptation. This reflects the growing importance of environmental sustainability.
- Review of Disaster Risk Financing: The ToR includes a review of disaster risk financing arrangements, aiming to strengthen the resilience of States to natural disasters.
- Long-Term Debt Sustainability: The Commission is expected to analyze the long-term debt sustainability of both the Union and the States, providing recommendations to ensure fiscal prudence.
- Efficiency of Revenue Collection: The Commission is asked to examine the efficiency of revenue collection by both the Union and the States and suggest measures for improvement.
The Commission is also expected to review the existing formula for determining the share of States in the divisible pool of central taxes, considering factors like population, income distance, forest and geography, and demographic performance. The 15th Finance Commission (2020-2026) had used the 2011 census data, and the 16th FC will likely consider the updated data from the 2021 census (when available) for a more accurate assessment of population distribution.
Conclusion
The Finance Commission remains a cornerstone of India’s fiscal federalism, ensuring a balanced and equitable distribution of resources between the Union and the States. The terms of reference for the 16th Finance Commission reflect the evolving economic landscape and the need for sustainable and inclusive growth. By incorporating considerations like demographic shifts, climate change, and disaster risk financing, the Commission aims to address contemporary challenges and strengthen the financial stability of the nation. Its recommendations will be crucial in shaping the fiscal policies of India for the next five years.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.