16th Finance Commission of India, Article, Chairman, Constitutional Provisions

Context: The 16th Finance Commission (FC) of India has commenced its operations.

Recommendations for the 16th Finance Commission

The Government of India has set up the 16th Finance Commission under Article 280(1) of the Constitution, with Dr. Arvind Panagariya as the Chairman.

• The previous guiding principles of the 15th FC, including enhancements in property tax collection and other fiscal strategies, need revisiting and updating.
• The 16th FC is encouraged to double the IGTs to urban areas to better align with the dynamic urbanisation of India.
• According to a McKinsey Global Institute report, without substantial investments, urban infrastructure deficits will exacerbate, leading to severe urban issues like water scarcity and untreated sewage problems.

Read this article below to know all about the Finance Commission of India in detail.

Finance Commission of India

The Finance Commission of India has been mentioned under Part XII, Chapter I (Finance) in Articles 280 and 281 of the Indian Constitution. The Finance Commission is a quasi-judicial body which recommends the Indian President in matters related to financial distribution between union and state government by demarcating the set of formulas and mechanisms as needed to the situation in the country and Constitution.

Facts about Finance Commission

Composition of Finance Commission of India

The Finance Commission of India has five members, including one Chairman and four others, all appointed by the President of India. The Parliament determines their qualifications and appointment process.

• The Chairman must have expertise in public affairs; currently, Mr. Arvind Panagariya holds this position. The four members can be a high court judge, a finance expert, someone with diverse financial and administrative experience, or a person with special knowledge in economics.
• The 15th Finance Commission consists of Mr. N.K. Singh as Chairman, with members Mr. Ajay Narayan Jha, Prof. Anoop Singh, Mr. Ashok Lahiri, and Prof. Ramesh Chand, along with Mr. Arvind Mehta as Secretary.

Qualification of Finance Commission Members

The Parliament has been empowered by the Indian Constitution in order to determine the qualification and manner required through which the member of the Finance Commission is selected. The Chairman should be a person with good experience in the field of public affairs and the other four members need to be from the following:

• High Court Judge or qualified to be the HC Judge
• Need to have specialized Knowledge of Accounts and Finance of the Indian Government.
• Vastly experienced in the field of administration and finance
• Specialised knowledge in the field of economics

Functions of Finance Commission

The Finance Commission of India has specific functions set by the President. Its main job is to make recommendations to the President, which include:

• Tax Distribution: The Commission recommends how to share tax revenues between the Union and states, as well as among states.
• Grants-in-Aid: It suggests how grants-in-aid should be given to states and Union Territories from the Consolidated Fund of India.
• Support for Local Bodies: The Commission advises on ways to increase state funds to support local governments and panchayats, based on state finance commission recommendations.
• Reporting: After fulfilling its duties, the Commission submits a report to the President, who then presents it to Parliament with an explanation of the Commission’s actions.

Interestingly, until 1960, the Finance Commission also advised certain states to share export duty revenues from jute products for a temporary period of up to 10 years.

List of Finance Commission Chairman

In India since 1951 till date, a total of fifteen Finance Commissions have been constituted. The List of Finance Commissions Chairman has been mentioned in the table below:  

What are the Challenges Associated?

• Financial Allocation To Urban Areas: Despite their crucial economic role, financial allocation to urban areas remains insufficient.
  • Cities are pivotal to India’s economic landscape, contributing approximately 66% of the nation’s Gross Domestic Product (GDP) and about 90% of total government revenues.

• Challenges in Fiscal Devolution to Urban Local Bodies (ULBs): Despite the constitutional mandates and the efforts of previous finance commissions since the 11th FC, the fiscal devolution to cities has been inadequate.
  • Urban Local Bodies (ULBs) face a financial shortfall, which impacts city productivity and the quality of life.
  • Currently, Intergovernmental Transfers (IGTs) to ULBs are merely about 5% of GDP, significantly lower than in other developing countries like South Africa (2.6%), Mexico (1.6%), the Philippines (2.5%), and Brazil (5.1%).
• Taxation Challenges Post-GST Implementation: The introduction of the Goods and Services Tax (GST) has notably reduced the tax revenues of ULBs, excluding property tax, from about 23% in 2012-13 to roughly 9% in 2017-18.
  • The financial support from states to ULBs, recommended by State Finance Commissions, is also notably low, constituting only about 7% of states’ own revenue in 2018-19.
• Impact of Parallel Agencies on Local Governance: The 13th Finance Commission highlighted the detrimental effect of parallel agencies which financially and operationally weaken local governments.
  • Notable programs like the Member of Parliament Local Area Development Scheme (MPLADS) and the Member of Legislative Assembly Local Area Development Scheme (MLALADS) further complicate this distortion in the federal structure.
• Outdated 2011 Census Data: The reliance on outdated 2011 Census data for fiscal devolution is increasingly problematic, especially in the absence of the 2021 Census.
  • Accurate and current demographic data is crucial for the 16th FC to consider the significant urban migration and the emerging urban centres in Tier-2 and Tier-3 cities.

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