What is the Finance Commission?
A constitutional body under Article 280 that defines the financial relations between the Union and States, mainly through:
- Tax devolution (share of Union taxes)
- Grants-in-aid to States
- Measures to improve fiscal stability and public finance management
Constitution timeline: President constitutes it every 5 years (or earlier).
15th Finance Commission: Basics
- Constituted: November 2017 (with President’s approval)
- Chairman: N. K. Singh
- Reports:
- Interim report: For 2020–21 (submitted Feb 2020)
- Final report: For 2021–26 (submitted Feb 1, 2021)
- Broad goals: Cooperative federalism, quality public spending, fiscal stability
Key Recommendations
1) Vertical Devolution (Union → States)
- States’ share in divisible pool of central taxes (2021–26): 41%
- This is lower than 14th FC’s 42%
- The 1% adjustment was due to the creation of UTs of J&K and Ladakh
2) Horizontal Devolution (Among States): Criteria & Weightage
Allocation among States based on the following weights:
- Income Distance: 45%
Supports equity by giving more to lower per-capita income states - Demographic Performance: 12.5%
Rewards efforts in population control (2011 population-based evaluation) - Area: 15%
Larger area → higher service delivery costs - Population (2011): 15%
Reflects demand for public services - Forest & Ecology: 10%
Based on share of dense forest area; incentivises ecological services - Tax & Fiscal Efforts: 2.5%
Rewards states that improve own tax efficiency
Grants Recommended by 15th FC (2021–26)
1) Revenue Deficit Grants
- For states whose post-devolution revenues remain insufficient
- 17 states recommended revenue deficit grants in 2021–22
2) Sector-Specific Grants
For targeted reforms across eight areas, including:
- Health
- School education & higher education
- Agricultural reforms
- PMGSY road maintenance
- Judiciary
- Statistics
- Aspirational districts & blocks
A part of these grants is performance-linked.
3) Grants to Local Bodies
- A large share earmarked for rural and urban local bodies
- Includes a performance-linked component
- Strong emphasis on health-related local initiatives to strengthen grassroots health delivery
Non-health grants distribution:
- Population: 90%
- Area: 10%
Eligibility conditions (examples):
- Publishing audited accounts
- Minimum property tax rates (for urban bodies)
4) Disaster Risk Management
Recommended continuing cost-sharing:
- 90:10 for North-Eastern and Himalayan states
- 75:25 for other states
Fiscal Roadmap (Fiscal Discipline Plan)
- Target: Centre’s fiscal deficit to 4% of GDP by 2025–26
- States’ fiscal deficit path:
- 4% in 2021–22
- 3.5% in 2022–23
- 3% from 2023–26
Key fiscal governance suggestions:
- FRBM review: High-level inter-governmental group to propose a revised FRBM framework
- Carry forward unutilised borrowing space: If states don’t use borrowing limits initially, they can carry it forward
- Extra borrowing (0.5% of GSDP) for states implementing power sector reforms
- Reduce liabilities: Centre and states to bring down total liabilities over the period
- Enhance revenue mobilisation: stronger income/asset-based taxation
- GST reforms: address inverted duty structure + rationalise rate structure
- Independent Fiscal Council: recommended to improve fiscal oversight
- Harmonise fiscal responsibility laws across states with the Centre
Other Major Recommendations
Health
- States should allocate >8% of budgets to health by 2022
- Two-thirds of health spending should focus on primary healthcare
- More flexibility in centrally sponsored schemes: focus on outcomes, not inputs
- Recommended creation of an All India Medical and Health Service
Defence & Internal Security
- Proposed a non-lapsable fund for defence and internal security modernisation
Centrally Sponsored Schemes (CSS)
- Suggested minimum funding threshold
- Phase out schemes with limited impact
- Regular third-party reviews + stable and transparent funding pattern
Education
- Recommended ₹4,800 crore (2022–23 to 2025–26) to incentivise states to improve learning outcomes
Agriculture
- Recommended ₹45,000 crore as performance-based incentive for agricultural reforms
