Subject: Indian Polity

India's Finance Commission, a constitutional body established under Article 280, plays a pivotal role in ensuring equitable distribution of financial resources between the Union and States, making its constitution and terms of reference crucial for cooperative federalism.

Constitutional Provisions for Constitution

• The President appoints the Finance Commission every five years or earlier if deemed necessary, comprising:

  • A Chairperson with experience in public affairs.
  • Four other members selected from fields like finance, economics, public administration, and accounts.

• The members must possess:

  • High moral integrity and expertise in their respective domains.
  • Professional experience in financial matters and public affairs.
  • Qualifications prescribed by the Parliament through the Finance Commission Act, 1951.

Terms of Reference of 16th Finance Commission

• Vertical Devolution:

  • Recommending distribution of net tax proceeds between Union and States.
  • Determining principles governing Grants-in-Aid to States from Consolidated Fund of India.

• Local Governance:

  • Suggesting measures to augment State Consolidated Funds to supplement resources of:
    • Panchayats (Article 243G).
    • Municipalities (Article 243W).

• Fiscal Management:

  • Reviewing current arrangements for financing Disaster Management initiatives.
  • Proposing measures for maintaining fiscal deficit targets.

• Special Considerations:

  • Examining impact of previous Finance Commission recommendations.
  • Suggesting roadmap for fiscal consolidation.

The 16th Finance Commission builds upon the foundation laid by its predecessor, the 15th Finance Commission, which recommended a 41% share of central taxes for states (2021-26), adjusted from previous 42% due to the reorganization of Jammu and Kashmir into Union Territories.

The Finance Commission's constitution and terms of reference reflect India's commitment to cooperative federalism and balanced regional development, as evidenced by its focus on strengthening both central and state finances while ensuring equitable resource distribution.