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