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Finance Commission and Fiscal Federalism in India

PYQs

8

Articles

1

Momentum

21

Phase IFoundation

Background

Overview

Understanding the constitutional architecture of India's financial system, the dynamics of Centre-State relations, and the role of a key constitutional body in ensuring equitable development and fiscal stability across the federation.

The Finance Commission is a constitutional body (Article 280) established to define the financial relations between the Centre and the States. It plays a crucial role in India's fiscal federalism by recommending the distribution of tax revenues and grants-in-aid, aiming to address vertical and horizontal imbalances.

Phase IIStatic core

Facts & tables

Key facts

Constitutional Basis

Established under Article 280 of the Indian Constitution.

Primary Mandate

Recommend distribution of net proceeds of taxes between Union and States (vertical devolution) and among States (horizontal devolution).

Grants-in-Aid

Recommends principles governing grants-in-aid to States (Article 275).

Role in Federalism

Acts as a corrective institution to mediate asymmetry between Union and States and address horizontal inequalities.

Reference table

Key Shifts in Grants-in-Aid: FC-15 vs. FC-16

FeatureFC-15 (2020-25)FC-16 (2026-31)
Total Grants-in-Aid₹10.1 lakh crore₹9.47 lakh crore
Share in FC Transfers19.4%8.3%
Revenue Deficit GrantsRetainedEliminated
Sector/State-Specific GrantsRetainedEliminated
Focus of GrantsEqualisation, specific needsLocal bodies, disaster management, performance-based

Reference table

Static syllabus anchors

TypeReference
Conceptual areaIndian Polity & Governance
Conceptual areaIndian Economy

Reference table

Institutions & roles

BodyRole
Finance CommissionRecommends fiscal transfers
Phase IIIExam lens

Prelims angle

Overview

Prelims angle: Factual recall

Prelims angle: Institutional roles and functions

Quick revision

  • Constitutional body (Art 280) for Centre-State financial relations.
  • Recommends vertical & horizontal tax devolution.
  • Determines principles for grants-in-aid (Art 275).
  • Aims to correct fiscal imbalances and inequalities.
  • FC-16 shifts focus towards efficiency/performance over equity.

Elimination traps

Constitutional vs statutory — Distinguish Finance Commission (constitutional) from other statutory bodies.

Check if created by Constitution or by Parliament.

High-confidence PYQs

2025Multi-statement analysis, Factual recall

Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct? I. It has recommended grants of ₹4,800...

EconomyOpen question

Consider the following statements: With reference to the Constitution of India, if an area in a State is declared as Scheduled Area under the Fifth Schedule...

Indian PolityOpen question
2025Multi-statement analysis, Factual recall

Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct? I. It has recommended grants of ₹4,800...

EconomyOpen question

Consider the following statements: With reference to the Constitution of India, if an area in a State is declared as Scheduled Area under the Fifth Schedule...

Indian PolityOpen question
2023Factual recall, Institutional roles and functions

Consider the following: 1. Demographic performance 2. Forest and ecology 3. Governance reforms 4. Stable government 5. Tax and fiscal efforts For the horiz...

EconomyOpen question
2019Factual recall, Institutional roles and functions

Which one of the following suggested that the Governor should be an eminent person from outside the State and should be a detached figure without intense pol...

Indian PolityOpen question
2018Multi-statement analysis, Factual recall

Consider the following statements 1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 6...

EconomyOpen question

If the President of India exercises his power as provided under Article 356 of the Constitution in respect of a particular State, then -

Indian PolityOpen question
2018Conceptual understanding, Institutional roles and functions

Consider the following statements 1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 6...

EconomyOpen question

If the President of India exercises his power as provided under Article 356 of the Constitution in respect of a particular State, then -

Indian PolityOpen question
2015Multi-statement analysis, Factual recall

With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct? 1. It has increased the share of States in the central...

Indian PolityOpen question
2013Multi-statement analysis, Institutional roles and functions

Consider the following statements: 1. National Development Council is an organ of the Planning Commission. 2. The Economic and Social Planning is kept in the...

Indian PolityOpen question

Topic timeline

Indian Polity & GovernanceIndian Economy
Prelims 2013· Multi-statement analysis, Institutional roles and functions

Consider the following statements: 1. National Development Council is an organ of the Planning Commission. 2. The Economic and Social Planning is kept in the...

Open question
Prelims 2015· Multi-statement analysis, Factual recall

With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct? 1. It has increased the share of States in the central...

Open question
Prelims 2018· Multi-statement analysis, Factual recall

Consider the following statements 1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 6...

Open question

If the President of India exercises his power as provided under Article 356 of the Constitution in respect of a particular State, then -

Open question
Prelims 2018· Conceptual understanding, Institutional roles and functions

Consider the following statements 1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 6...

Open question

If the President of India exercises his power as provided under Article 356 of the Constitution in respect of a particular State, then -

Open question
Prelims 2019· Factual recall, Institutional roles and functions

Which one of the following suggested that the Governor should be an eminent person from outside the State and should be a detached figure without intense pol...

Open question
Prelims 2023· Factual recall, Institutional roles and functions

Consider the following: 1. Demographic performance 2. Forest and ecology 3. Governance reforms 4. Stable government 5. Tax and fiscal efforts For the horiz...

Open question
Prelims 2025· Multi-statement analysis, Factual recall

Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct? I. It has recommended grants of ₹4,800...

Open question

Consider the following statements: With reference to the Constitution of India, if an area in a State is declared as Scheduled Area under the Fifth Schedule...

Open question
Prelims 2025· Multi-statement analysis, Factual recall

Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct? I. It has recommended grants of ₹4,800...

Open question

Consider the following statements: With reference to the Constitution of India, if an area in a State is declared as Scheduled Area under the Fifth Schedule...

Open question

Fiscal federalism, efficiency versus equity concerns

06 Aug 2026 · The Finance Commission, a constitutional body, is pivotal to India's fiscal federalism, mediating financial relations between the Centre and States through tax devolution and grants-in-aid to ensure equity and efficiency.

Read article

Related topics

Current topic

Finance Commission and Fiscal Federalism in India

Often confused with

State Autonomy in Indian Federalism

Open notesOften confused with

Grants-in-Aid under Article 275

Open notesOften confused with

Federalism and Mineral Resources Governance

Open notes

Practice writing on this topic

UPSC has asked 8 linked questions on Finance Commission and Fiscal Federalism in India in Mains. Write an answer to one — and get it evaluated.

See Mains PYQsEvaluate an answer

UPSC Prelims PYQs on Finance Commission and Fiscal Federalism in India

Practice official previous year questions asked by UPSC related to this concept.

Consider the following: 1. Demographic performance 2. Forest and ecology 3. Governance reforms 4. Stable government 5. Tax and fiscal efforts For the horiz...

2023·Economy
Solve

Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct? I. It has recommended grants of ₹4,800...

2025·Economy
Solve

With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct? 1. It has increased the share of States in the central...

2015·Indian Polity
Solve

Consider the following statements: 1. National Development Council is an organ of the Planning Commission. 2. The Economic and Social Planning is kept in the...

2013·Indian Polity
Solve

Consider the following statements: With reference to the Constitution of India, if an area in a State is declared as Scheduled Area under the Fifth Schedule...

2025·Indian Polity
Solve

Which one of the following suggested that the Governor should be an eminent person from outside the State and should be a detached figure without intense pol...

2019·Indian Polity
Solve

Consider the following statements 1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 6...

2018·Economy
Solve

If the President of India exercises his power as provided under Article 356 of the Constitution in respect of a particular State, then -

2018·Indian Polity
Solve

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