15th Finance Commission: Key Facts For UPSC Mains

by Alex Braham 50 views

Hey guys! Preparing for the UPSC Mains? You've got to get your head around the 15th Finance Commission. It's super important for understanding the fiscal dynamics between the Union and the States in India. Let's break it down in a way that's easy to remember and perfect for acing your exam.

What is the Finance Commission?

Think of the Finance Commission as the referee in a fiscal tug-of-war between the central government and the states. It's a constitutional body, formed every five years, that suggests how the taxes collected by the Union should be divided among the States. Article 280 of the Constitution lays down the provisions for it. The recommendations made by this commission carry significant weight in shaping India's fiscal federalism.

The commission's main job is to make recommendations on the distribution of tax revenues between the Union and the States. It also looks into the principles that should govern the grants-in-aid to States out of the Consolidated Fund of India. These grants help states meet their financial needs, especially those lagging in development or facing specific challenges. The Finance Commission ensures a balanced and equitable distribution of resources, keeping in mind the diverse needs and capacities of different states. Its suggestions are instrumental in maintaining fiscal stability and promoting inclusive growth across the country.

The Finance Commission also delves into measures to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities, based on the recommendations made by the Finance Commission of the State. This ensures that local bodies have adequate financial resources to carry out their functions effectively. By strengthening the financial position of Panchayats and Municipalities, the Finance Commission contributes to grassroots democracy and decentralized governance. The commission's involvement in this area highlights its commitment to promoting fiscal decentralization and empowering local communities.

The recommendations of the Finance Commission are presented to the President of India, who then lays them before both Houses of Parliament. Along with the recommendations, the government also presents an explanatory memorandum outlining the action taken on these recommendations. While the recommendations are not binding on the government, they carry significant weight and are generally accepted. This is because the recommendations are based on thorough analysis and consultations with various stakeholders. The government's acceptance of the recommendations demonstrates its commitment to cooperative federalism and ensures smooth fiscal relations between the Union and the States.

Key Recommendations of the 15th Finance Commission

The 15th Finance Commission, headed by N.K. Singh, made some pivotal suggestions that you should know about. These recommendations cover the period from 2021-22 to 2025-26. Let’s dive in!

Vertical Devolution

Vertical devolution refers to the portion of taxes the Union government shares with the States. The 15th Finance Commission recommended that 41% of the divisible pool of taxes should be devolved to the States. This is slightly lower than the 42% recommended by the 14th Finance Commission, mainly because the erstwhile State of Jammu and Kashmir was converted into two Union Territories.

This adjustment ensures that the Union government retains sufficient resources to meet its own needs while also providing adequate funds to the States. The divisible pool consists of all Union taxes, excluding cesses, surcharges, and costs of collection, which are distributed between the Union and the States. By recommending a devolution rate of 41%, the 15th Finance Commission aimed to strike a balance between the financial needs of the Union and the States, promoting fiscal stability and cooperative federalism.

The 15th Finance Commission also emphasized the importance of timely and predictable transfers of funds to the States. This helps States plan their budgets effectively and implement developmental programs without delays. The commission recommended that the Union government should adhere to a fixed schedule for the transfer of funds to the States, ensuring greater transparency and accountability in fiscal management. By promoting predictability in fund transfers, the commission aimed to enhance the efficiency and effectiveness of public spending at the State level.

Moreover, the commission underscored the need for States to improve their own revenue mobilization efforts. While devolution from the Union government is crucial, States should also focus on strengthening their tax base and enhancing their revenue collection mechanisms. This would reduce their dependence on the Union government and promote greater fiscal autonomy. The commission suggested that States should explore innovative ways to generate revenue, such as property taxes, user charges, and tourism taxes, while ensuring that these measures are equitable and do not burden the poor.

Horizontal Devolution

Horizontal devolution deals with how the 41% is distributed among the States. The Commission uses a formula that takes into account various factors. Here’s the breakdown of the criteria and their weights:

  • Income Distance (45%): This is the biggest chunk. It’s the difference between a State’s income and the State with the highest income. The larger the distance, the more the State gets. This ensures that States with lower income levels receive more support to bridge the gap with wealthier States. Income distance is a crucial criterion for promoting equity and reducing regional disparities in development. By giving higher weight to income distance, the commission aims to provide targeted assistance to States that need it the most.

  • Population (15%): Based on the 2011 Census. Population is a key factor in determining the needs of a State. States with larger populations require more resources to provide essential services such as education, healthcare, and infrastructure. The use of the 2011 Census ensures that the distribution of funds is based on the most up-to-date population data. The commission recognized that population is a dynamic factor and may need to be revisited in future assessments.

  • Area (15%): States with larger areas often have higher administrative and infrastructure costs. This criterion ensures that these States receive adequate compensation for their larger geographical size. Area is particularly relevant for States with difficult terrain or sparse populations, where providing public services can be more challenging and expensive. The commission acknowledged that area is an important factor in determining the overall resource needs of a State.

  • Demographic Performance (12.5%): This criterion rewards States that have worked on controlling their population. It encourages States to invest in family planning and reproductive health programs. Demographic performance is measured by the total fertility rate (TFR) of a State. States with lower TFRs receive higher scores under this criterion. The commission aimed to incentivize States to adopt policies that promote sustainable population growth.

  • Forest & Ecology (10%): This rewards States that have a higher forest cover. It promotes environmental conservation and recognizes the ecological services provided by forests. Forest and ecology are crucial for maintaining environmental sustainability and mitigating the effects of climate change. The commission recognized that States with larger forest cover deserve to be compensated for the ecological services they provide to the nation. This criterion encourages States to protect and enhance their forest resources.

  • Tax and Fiscal Efforts (2.5%): This incentivizes States to improve their tax collection and manage their finances prudently. It rewards States that have demonstrated good fiscal management and revenue mobilization efforts. Tax and fiscal efforts are essential for promoting fiscal sustainability and reducing dependence on the Union government. The commission aimed to incentivize States to strengthen their tax base and improve their revenue collection efficiency. This criterion encourages States to adopt sound fiscal policies and manage their finances responsibly.

Grants-in-Aid

Besides tax devolution, the Commission also recommended grants-in-aid to States. These grants are intended to address specific needs and promote balanced development. The 15th Finance Commission recommended several types of grants:

  • Revenue Deficit Grants: These grants are provided to States that have a revenue deficit after devolution. The aim is to help these States cover their essential expenditures and maintain fiscal stability. Revenue deficit grants are crucial for ensuring that States can meet their basic needs and provide essential services to their citizens. The commission carefully assessed the revenue and expenditure projections of each State to determine the appropriate level of revenue deficit grants. These grants are intended to be temporary and are gradually reduced over time as States improve their fiscal performance.

  • Local Government Grants: These are grants for rural and urban local bodies. They are meant to improve basic services like sanitation, water supply, and infrastructure at the grassroots level. Local government grants are essential for strengthening decentralized governance and empowering local communities. The commission recommended that these grants should be used to improve the quality of public services and promote sustainable development at the local level. The grants are distributed among local bodies based on a formula that takes into account population, area, and other relevant factors. The commission also emphasized the importance of transparency and accountability in the use of these grants.

  • Disaster Management Grants: Given the increasing frequency of natural disasters, the Commission recommended grants to help States manage and mitigate disasters. These grants are used for preparedness, relief, and rehabilitation efforts. Disaster management grants are crucial for enhancing the resilience of States to natural disasters and minimizing their impact on the economy and society. The commission recognized that disaster management requires a coordinated approach involving the Union government, State governments, and local communities. The grants are allocated based on a vulnerability assessment and the specific needs of each State. The commission also emphasized the importance of investing in preventive measures to reduce the risk of disasters.

  • Sector-Specific Grants: The commission has also recommended sector-specific grants for health, education, agriculture, and other priority sectors, aimed at improving outcomes and addressing specific challenges faced by the States. These grants provide targeted support for key sectors that are critical for human development and economic growth. Sector-specific grants are allocated based on the specific needs and priorities of each State, taking into account their performance and potential for improvement. The commission also emphasized the importance of monitoring and evaluation to ensure that these grants are used effectively and achieve their intended outcomes.

Key Issues Addressed

The 15th Finance Commission had to tackle some tough issues. Here are a few:

  • Balancing Equity and Efficiency: How to distribute resources fairly while also encouraging States to perform better. This is a perennial challenge in fiscal federalism. The commission aimed to strike a balance between equity and efficiency by using a formula that takes into account both the needs and the performance of States. The commission also recognized that equity and efficiency are not mutually exclusive and that investing in human development and infrastructure can improve both outcomes.

  • Impact of GST: The introduction of the Goods and Services Tax (GST) has changed the fiscal landscape. The Commission had to assess its impact on State finances and suggest ways to compensate States for any revenue losses. The commission noted that GST has the potential to improve tax compliance and increase revenue collection but that it has also created some challenges for States. The commission recommended that the Union government should continue to provide compensation to States for any revenue losses arising from GST until 2026.

  • Fiscal Discipline: Encouraging States to maintain fiscal discipline and avoid excessive borrowing. The Commission emphasized the importance of fiscal responsibility and sustainability. The commission recommended that States should adhere to fiscal targets and avoid excessive borrowing. The commission also suggested that the Union government should provide incentives to States that maintain fiscal discipline and penalize those that do not.

How to Prepare for UPSC Mains

  1. Understand the Basics: Get a clear understanding of the Finance Commission's role, its constitutional basis, and its functions.
  2. Study the Recommendations: Know the key recommendations of the 15th Finance Commission, especially regarding vertical and horizontal devolution and grants-in-aid.
  3. Analyze the Impact: Think about the implications of these recommendations for different States and for the overall economy.
  4. Stay Updated: Keep an eye on any developments related to the implementation of the recommendations.
  5. Practice Writing: Practice writing answers to potential questions. Focus on clarity, structure, and presenting a balanced view.

By understanding these key aspects, you'll be well-prepared to tackle any questions related to the 15th Finance Commission in your UPSC Mains exam. Good luck, and keep studying hard!

Conclusion

So, to wrap it up, the 15th Finance Commission plays a crucial role in shaping the fiscal relations between the Union and the States in India. Its recommendations cover various aspects of fiscal management, including tax devolution, grants-in-aid, and fiscal discipline. By understanding the key recommendations and their implications, you can gain a deeper insight into the challenges and opportunities facing Indian federalism. Keep studying, stay updated, and you'll be well-prepared to tackle any questions related to the 15th Finance Commission in your UPSC Mains exam. You've got this!