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FINANCE COMMISSION
Article 280 of the Constitution of India provides for a Finance Commission as a quasi-judicial body. It is constituted by the president of India every fifth year or at such earlier time as he considers necessary.

COMPOSITION:
The Finance Commission consists of a chairman and four other members to be appointed by the president. They hold office for such period as specified by the president in his order. They are eligible for reappointment. The Parliament has specified the qualifications of the chairman and members of the commission. The chairman should be a person having experience in public affairs and the four other members should be selected from amongst the following:

  1. A judge of high court or one qualified to be appointed as one.
  2. A person who has specialised knowledge of finance and accounts of the government.
  3. A person who has wide experience in financial matters and in administration.

FUNCTIONS: The Finance Commission is required to make recommendations to the president of India on the following matters:

  1. The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states of the respective shares of such proceeds.
  2. The principles that should govern the grants-in-aid to the states by the Centre (i.e., out of the consolidated fund of India).
  3. The measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and the municipalities.

ADVISORY ROLE

  • To put it in other words, Tt is nowhere laid down in the Constitution that the recommendations of the commission shall be binding upon the Government of India or that it would give rise to a legal right in favour of the beneficiary states to receive the money recommended to be offered to them by the Commission.
  • The Constitution of India envisages the Finance commission as the balancing wheel of fiscal federalism in India. However, its role in the Centre- state fiscal relations was undermined by the emergence of the erstwhile Planning Commission, a non-constitutional and a non-statutory body.

NEED TO SET UP STATE FINANCE COMMISSION

The 15th Finance Commission (headed by N K Singh) recently held a detailed meeting with RBI.

Key issues that were discussed

  • Continuity of the Finance Commission: A permanent status to Finance Commission and a robust expenditure planning is the need of the hour. This is required, in view of the fiscal management requirements of the States.
  • State Finance Commissions (SFCs): States have not been setting up their State Finance Commissions every five years as mandated by 73rd Constitutional Amendment Act. Therefore, they discussed the necessity of SFCs to rationalize and systematize State/sub-state fiscal relations in India.
  • Expenditure codes: Expenditure norms vary from state to state; therefore there is a need of uniform standard expenditure codes across the country.
  • Public Sector Borrowing Requirement (PSBR): It is defined as borrowing by not just Central and State governments but also by all public sector corporations and agencies. This consolidated figure will more or less put an end to the manipulation the fiscal deficit by the government. The main issues discussed are the increasing orientation of State governments’ borrowing from markets, improving secondary market liquidity and cash management.
  • Importance of States in the economy: The role of states in the growth of Indian economy has increased given the Shift in composition of government finances’. States are now getting much higher share of transfer (devolution of 42%) from Centre, on the recommendation of 15th FC.
  • Factors driving fiscal slippage: These factors include UDA, farm loan waivers and income support schemes; rising outstanding debt as a percentage of GDP despite moderation in interest payments as a percentage of revenue receipts.

15th Finance Commission (FC)

  • Finance Commission is a constitutional body under Article 280 created every five years to recommend the transfer of financial resources from the Centre to the States.
  • The Commission also decides the principles on which grants-in-aid will be given to the States.
  • The 15th FC was constituted on November 27, 2017 and is headed by Mr. N.K. Singh.
  • The recommendations, to be observed for a period of five years, will kick in from April 1, 2020.

State Finance Commissions (SFCs)
The State Finance Commission (SFC) is an institution created by the 73rd and 74th Constitutional Amendments (CAs) to rationalize and systematize State/sub-State-level fiscal relations in India.
(i) Article 2431 of the Constitution mandated the State Governor to constitute a Finance Commission every five years.
(ii) Article 243Y of the Constitution states that the Finance Commission constituted under article 243 I shall also review the financial position of the Municipalities and make recommendations to the Governor.
(iii) Concerns:

  • States have not been setting up their SFCs regularly as mandated.
  • They are not submitting the reports in time, lacking the proficiency.
  • They have huge task of considering large number of local governments,
  • They face a crucial problem of reliable data.
  • SFCs and local governments are seen to be of inferior constitutional status than the Union FC.
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FAQs on Laxmikanth Summary: Finance Commission - Indian Polity for UPSC CSE

1. What is the Finance Commission?
Ans. The Finance Commission is a constitutional body in India that is responsible for recommending the distribution of financial resources between the central government and the state governments. It is established every five years and consists of a chairman and four other members.
2. What is the role of the Finance Commission?
Ans. The main role of the Finance Commission is to make recommendations regarding the sharing of tax revenues between the central and state governments, as well as the distribution of grants-in-aid to states. It also suggests measures to improve the financial position of states and reviews the fiscal performance of the central and state governments.
3. How is the Finance Commission appointed?
Ans. The Finance Commission is appointed by the President of India. The chairman is selected from individuals who have held high office in the government or who have had experience in financial matters. The other members of the commission are appointed by the President in consultation with the chairman.
4. What factors does the Finance Commission consider in making its recommendations?
Ans. The Finance Commission takes into account various factors, including the needs of the states, the resources available to the central government, the expenditure requirements of the central government, and the debt levels of the states. It also considers the need for a stable and predictable flow of funds to the states and the need to maintain a balance between the needs of the center and the states.
5. How are the recommendations of the Finance Commission implemented?
Ans. The recommendations of the Finance Commission are not binding on the government. However, they are usually accepted by the government and form the basis for the devolution of funds to the states. The recommendations are implemented through the finance ministry and other relevant ministries and departments, which take necessary actions to allocate funds based on the commission's recommendations.
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