Answer.
APPROACH AND STRUCTURE
THE INTRODUCTION: Introduce with Defining the Finance Commission and its constitutional basis (Article 280).
THE BODY
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- Mention its purpose in India’s fiscal federalism
- Constitution of the Finance Commission
- Terms of Reference (ToR) of the Recently Constituted Finance Commission
- Specific ToRs (using the 15th Finance Commission as example)
THE CONCLUSION: Conclude by Summarizing the importance of the Finance Commission and Highlighting how recent ToRs reflect evolving national priorities
THE INTRODUCTION:
The Finance Commission of India is constituted under Article 280 of the Indian Constitution. It is established by the President of India every five years or earlier if needed. The Finance Commission is a quasi-judicial body responsible for distributing financial resources between the Union and state governments.
THE BODY:
CONSTITUTION OF THE FINANCE COMMISSION
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- Appointment: The President appoints the Finance Commission. It is typically headed by a chairman and supported by four other members.
- Composition: The chairman is usually someone with experience in public affairs, while the other four members are selected from among experts in economics, public finance, or administration.
- Qualifications: The Parliament determines the qualifications of the members, and typically, they must have expertise in finance, economics, law, or administration.
- Advisory Role: The Finance Commission is an advisory body. While its recommendations are not binding, they hold significant weight and are generally accepted by the government.
TERMS OF REFERENCE (TOR) OF THE FINANCE COMMISSION
The Terms of Reference (ToR) define the scope and issues the Finance Commission should address while making its recommendations. The President sets the terms of reference when the Finance Commission is constituted. The 15th Finance Commission had some specific terms of reference that stirred debates. The general and specific (ToRs) are as follows:
GENERAL TERMS OF REFERENCE
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- Distribution of Tax Revenues: The Commission suggests how the net proceeds of taxes should be shared between the Union and the states and among the states themselves.
- Grants-in-Aid to States: To ensure balanced regional development, it recommends grants- in-aid to the states from the Consolidated Fund of India.
- Enhancing Fiscal Capacity: The Commission also considers measures needed to augment the state’s Consolidated Fund to supplement the resources of panchayats and municipalities.
- Debt and Fiscal Prudence: It advises on issues relating to state debt levels, measures to ensure fiscal responsibility, and the use of public sector funds.
SPECIFIC TERMS OF REFERENCE OF THE 15TH FINANCE COMMISSION:
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- Special Funding for Defense and Internal Security: Allocate a portion of the divisible pool of taxes specifically for states to enhance their capabilities in defense-related infrastructure and internal security measures, recognizing the increasing demands in these areas.
- Performance-Based Incentives for States: Design incentive mechanisms based on criteria such as revenue generation, digitization initiatives, natural resource management, ease of doing business, and achievements in the health and education sectors.
- Environmental and Climate Change Considerations: Integrate environmental sustainability into fiscal planning. Recommend financial measures and incentives for states to invest in renewable energy, climate resilience projects, and sustainable development initiatives.
- Disaster-Resilient Infrastructure: Provide financial support for developing and maintaining disaster-resilient infrastructure, including flood defenses, earthquake-resistant buildings, and emergency response systems, ensuring that states are better prepared for natural and man- made disasters.
- Pollution Control and Environmental Health: Allocate funds for pollution control initiatives, such as air and water purification projects, waste management systems, and regulations to reduce industrial emissions. Encourage states to adopt sustainable practices that protect public health and the environment.
- Urbanization and Smart Cities Development: Allocate funds for the development of smart cities, focusing on sustainable urban planning, smart infrastructure, efficient public transportation, and enhanced public services to improve the quality of urban life.
THE CONCLUSION:
The 15th Finance Commission of India marked a significant evolution in fiscal federalism by introducing targeted, performance-based, and sustainability-focused recommendations. Departing from the 14th Finance Commission, it addressed contemporary challenges such as defence funding, digital governance, environmental sustainability, and COVID-19 response, reflecting the dynamic needs of a rapidly changing nation.
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