How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss.
Introduction
The Finance Commission (FC) is a quasi-judicial constitutional body, constituted by the President under Article 280, typically every five years. It recommends the distribution of financial resources between the Union and State governments and among States.
Constitution of the Finance Commission
The FC comprises a Chairman and four members, appointed by the President. Parliament prescribes their qualifications: the Chairman should have public affairs experience, while members require expertise in High Court judiciary, government finance and accounts, financial administration, or economics.
Terms of Reference of the 15th Finance Commission
The ToR guide the Commission's recommendations. For the 15th FC, key mandates included:
- Vertical and horizontal devolution of Union taxes between the Union and States, and among States.
- Principles for grants-in-aid to States and local bodies from the Consolidated Fund of India.
- Examining GST's impact on the economy.
- Using 2011 population data for devolution.
- Recommending performance-based incentives for States (e.g., ease of doing business, health, education).
- Considering funding for defense and internal security.
Significance and Implications
These ToR enable the FC to recommend a balanced approach to fiscal federalism. They address the evolving financial landscape, promote fiscal discipline, and ensure equitable resource distribution, strengthening Union-State financial relations.
Conclusion
The Finance Commission, through its constitutional mandate and comprehensive terms of reference, is crucial for fostering cooperative fiscal federalism and ensuring financial stability across India.
204 words · target ~250
The directive 'Discuss' requires presenting various aspects, details, and implications of the Finance Commission's constitution and its recent terms of reference.
Suggested structure
Introduction to the Finance Commission (Article 280)
Constitution of the Finance Commission (Composition, Qualifications, Appointment)
Terms of Reference (ToR) of the recently constituted Finance Commission (e.g., 15th FC for 2018 exam)
Key mandates and specific considerations within the ToR
Significance and implications of the ToR for fiscal federalism
Conclusion: Role in strengthening Union-State financial relations
Key points
Finance Commission is a quasi-judicial constitutional body constituted by the President under Article 280 every five years or earlier.
Comprises a Chairman and four other members, appointed by the President, with specific qualifications (e.g., judge, finance, administration, economics expertise).
Terms of Reference (ToR) for the 15th FC (relevant for 2018 exam) included vertical and horizontal devolution of taxes, grants-in-aid to states and local bodies.
Specific ToR for 15th FC included examining the impact of GST, using 2011 population data, performance-based incentives, and funding for defense and internal security.
The ToR guide the FC in recommending the distribution of net proceeds of taxes between the Union and states, and among states.
The recommendations aim to balance fiscal needs, promote fiscal discipline, and ensure equitable resource distribution in a federal setup.
Common mistakes
Not mentioning Article 280 or the specific constitutional basis.
Providing generic terms of reference instead of those specific to the 'recently constituted' (15th) Finance Commission.
Failing to elaborate on the 'discuss' part by merely listing points without explaining their significance or implications.
Incorrectly stating the composition or qualifications of the members.
Difficulty: Medium — The question requires both static knowledge (constitution of FC) and dynamic/current affairs knowledge (ToR of the recently constituted FC), along with analytical discussion.