Finance Commission
Finance Commission of India
The Finance Commission is a key constitutional body established under Article 280 of the Constitution of India. It plays a crucial role in the distribution of financial resources between the Central Government and the states, ensuring fiscal stability and equitable resource allocation.
Composition
The Finance Commission consists of:
- A Chairman: Appointed by the President of India, who should have experience in public affairs.
- Four Other Members:
- A judge of a High Court or someone qualified to be appointed as one.
- A person with specialized knowledge of government finance and accounts.
- A person with extensive experience in financial matters and public administration.
- A person with special knowledge in economics.
The members hold office for a period specified by the President in their appointment order and are eligible for reappointment.
Functions
The Finance Commission is tasked with making recommendations to the President of India on several important matters, including:
1. Distribution of Tax Proceeds:
- Recommendations regarding the distribution of net proceeds of taxes between the Centre and the states.
- Allocation of these proceeds among the states according to their respective shares.
2. Grants-in-Aid Principles:
- Guidelines for the grants-in-aid that the Centre should provide to the states from the Consolidated Fund of India.
3. Augmentation of State Resources:
- Suggestions on measures to enhance the financial resources of states to support the Panchayati Raj institutions (panchayats and municipalities) based on recommendations made by the State Finance Commissions.
4. Additional Matters:
- The Commission may also address any other matters referred to it by the President pertaining to sound financial management.
Historical Context
Before 1960, the Finance Commission had the responsibility to recommend grants to certain states (Assam, Bihar, Odisha, and West Bengal) in lieu of their share of export duties on jute and related products. These grants were intended to last for a period of ten years from the commencement of the Constitution.
Reporting Process
- The Finance Commission submits its report to the President of India, who then presents it to both Houses of Parliament along with an explanatory memorandum outlining the actions taken on the Commission’s recommendations.
The Finance Commission serves as a critical mechanism in ensuring equitable distribution of financial resources among the different levels of government, maintaining fiscal federalism and addressing regional disparities in financial capabilities. Its recommendations influence the fiscal policies that underpin the stability and development of India’s economy.
Advisory Role of the Finance Commission
The recommendations made by the Finance Commission are advisory in nature, meaning they do not have a binding effect on the Government of India. This fundamental aspect is essential for understanding the dynamics between the Finance Commission and the government, particularly regarding fiscal distributions and allocations to the states.
Key Points on the Advisory Role
1. Non-Binding Recommendations:
- The Constitution does not mandate that the Government must adhere to the Finance Commission’s recommendations.
- Therefore, states do not possess a legal entitlement to the funds recommended by the Commission.
2. Importance of Compliance:
- According to P.V. Rajamannar, former Chairman of the Fourth Finance Commission, it is expected that the Government of India should respect the recommendations unless there are compelling reasons to reject them. This emphasizes the advisory function while recognizing the need for consideration of the Commission’s insights.
3. Balancing Wheel of Fiscal Federalism:
- The Finance Commission is envisioned as a critical component of fiscal federalism in India, aiding in the equitable distribution of resources between the Centre and the states.
- However, its influence was historically diminished by the Planning Commission, a non-constitutional entity that operated alongside it until its replacement by NITI Aayogin 2015.
4. Overlap of Functions:
- Rajamannar pointed out the overlapping roles between the Finance Commission and the Planning Commission regarding fiscal transfers and resource allocation, indicating potential inefficiencies in the system.
Finance Commissions Appointed So Far
Here is a list of the Finance Commissions that have been established to date:
Finance Commission | Chairman | Appointed in | Submitted Report in | Period of Implementation of Report |
First | K.C. Neogy | 1951 | 1952 | 1952–57 |
Second | K. Santhanam | 1956 | 1957 | 1957–62 |
Third | A.K. Chanda | 1960 | 1961 | 1962–66 |
Fourth | Dr. P.V. Rajamannar | 1964 | 1965 | 1966–69 |
Fifth | Mahavir Tyagi | 1968 | 1969 | 1969–74 |
Sixth | Brahamananda Reddy | 1972 | 1973 | 1974–79 |
Seventh | J.M. Shelat | 1977 | 1978 | 1979–84 |
Eighth | Y.B. Chavan | 1982 | 1984 | 1984–89 |
Ninth | N.K.P. Salve | 1987 | 1989 | 1989–95 |
Tenth | K.C. Pant | 1992 | 1994 | 1995–2000 |
Eleventh | A.M. Khusro | 1998 | 2000 | 2000–2005 |
Twelfth | Dr. C. Rangarajan | 2002 | 2004 | 2005–2010 |
Thirteenth | Dr. Vijay Kelkar | 2007 | 2009 | 2010–2015 |
Fourteenth | Y.V. Reddy | 2013 | 2014 | 2015–2020 |
Fifteenth | N.K. Singh | 2017 | 2020 (expected) | 2020–2026 |
Articles Related to Finance Commission
Article No. | Subject-matter |
280 | Finance Commission |
281 | Recommendations of the Finance Commission |
The Finance Commission serves a vital advisory role in India’s fiscal federalism, contributing to the equitable allocation of resources. While its recommendations are not mandatory for implementation, they carry significant weight in guiding the central government’s financial policies and budgetary allocations to states. The establishment of NITI Aayog has created a new landscape for planning and resource distribution, further defining the relationship between federal and state authorities in India.