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Home / IAS Preparation / Finance Commission of India

Finance Commission of India: Background, Functions & Members

Last Updated on Jan 06, 2025
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The Finance Commission is a constitutional body in India that was founded by the President of India with the sole purpose of determining the financial relations between the central government and the individual state governments. Empowered by Article 280 of the Indian Constitution, the Finance Commission basically aims at recommending the distribution of tax revenues between the centre and the states, and among the states themselves. This body ensures fair and just fiscal federalism, leaving much room for devolving finances towards public welfare throughout the country.

The topic fits in with the general studies paper II of the UPSC Civil Services Examination that addresses the issues of governance, constitution, polity, social justice, and international relations. Knowing about the role and function of the Finance Commission, hence, is very important toward gaining a proper understanding regarding fiscal federalism and the financial governance setup in India.

GS Paper

General Studies Paper II

Topics for UPSC Prelims

Indian Constitution, Tax distribution

Topics for UPSC Mains

Fiscal Policy in India, Fiscal federalism

What is the Finance Commission of India?

The Finance Commission of India is a constitutional body which is formulated every five years. The commission analyses the financial condition of the Indian federal system. The net proceeds of tax distribution between the Centre and the States on their respective shares are some other functions. It advises the states for granting grants-in-aid and other matters relating to finances referred by the President to the commission. Recommendations of the finance commission help to decrease the fiscal imbalances between centre and states so that states should have adequate resources to meet the fundamental public services rendered to the citizens.

History of the Finance Commission of India

The Finance Commission was created under Article 280 of Indian Constitution that came into existence on November 26, 1949. The first Finance Commission was instituted in 1951 under K.C. Neogy as its head. Since then, successive commissions have given critical advice which has helped mold the fiscal policy and federal finance of India. Emerging from the changed economic scenario comes a significantly enlarged scope and complexity of work at the Finance Commission. Each of the commissions faced unique problems - some of the issues included those in the plan and non-plan expenditure, introduction of GST, and the impact of their recommendations on the long-term fiscal health of both central and state governments.

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Articles Related to the Finance Commission

There are various articles in the Indian Constitution that specify the mandates and working structure of the Finance Commission. The following section elaborates on the explanation of key articles related to the Finance Commission:

  • Article 280: Article 280 is the bedrock provision under which the Finance Commission is constituted. It directs the President of India to constitute a Finance Commission every five years or at earlier intervals if necessary.
  • Article 270: Article 270 provides provisions for the distribution of particular taxes which a Union levies on that, between the Union and states. Finance Commission's role as per Article 270 in the process of devolution of taxes is an important duty as it looks after all such income requirements and economic variations prevalent in various states for its balanced regional development.
  • Article 275: Grant-in-aid to states in need of financial support from the center. This is for the development of other regions of different states along with meeting all the expenses of the administration.
  • Article 281: Article 281 relates to the procedure for submitting the Finance Commission's report to the Parliament. Thus, it ensures openness while implementing it as well as an oversight of the process through parliament that ensures accountabilities in financial governance.
  • Article 293: Article 293 elaborates upon the powers that states can borrow, that is, under which conditions they can exercise it. The Finance Commission could make recommendations on the borrowing at the state level also to ensure that this continues to be in a financial discipline and not burdened by unsustainable debt levels.

Other Relevant Provisions

In addition to the above key articles, there are a few other provisions and legal frameworks that impact the working and the implications of the Finance Commission:

  • Article 266: Discusses the Consolidated Funds, which the finance commission utilizes to make a recommendation for fiscal disbursement as well as grants.
  • Article 268 and 269: Discusses the allocation and imposition of some taxes and expands in relation to the financial obligations and rights of the state.

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Members of the Finance Commission

The Finance Commission of India is typically composed of a Chairman and four other members. The members are appointed by the President of India. They hold expertise in various fields such as finance, economics, or public administration. The President also appoints a Secretary to the Commission to assist in its functioning. The tenure of the Chairman and members is specified by the President. The Commission is established every five years. Some of the members of the 16th Finance Commission are as follows:

  • Chairman: Arvind Panagariya, former Chief Economist of the Asian Development Bank was appointed chairman.
  • Members: The members of the finance commission include the following:
    • Shri Ajay Narayan Jha
    • Smt. Annie George Mathew, 
    • Dr. Manoj Panda, &
    • Dr. Soumya Kanti Ghosh.

The members are experts in diversified fields; hence their suggestions on any issue would be comprehensive enough to cover every angle of fiscal and economic management.

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Functions of the Finance Commission

The Finance Commission of India plays a crucial role in our country's financial system. Its main functions include:

  • The Commission recommends the distribution of tax revenue between the central and state governments, ensuring a fair share for each.
  • It suggests the principles for providing grants to states from the center to address fiscal disparities and promote balanced development.
  • The Commission examines the financial positions of the center and states. It then recommends measures for fiscal consolidation.
  • It provides guidance on how states can manage their debts efficiently, ensuring fiscal stability.
  • The Commission assesses the financial needs of local governments. It suggests measures to strengthen their finances.
  • The Finance Commission may address any other related matter referred to it by the President in the interest of sound financial management.

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List of Finance Commissions in India

The table below shows the finance commissions formed in India with their chairman and the dates of establishment.

List of Finance Commissions in India

Finance Commission

Chairman

Tenure

First Finance Commission

K.C. Neogy

1951-1952

Second Finance Commission

K. Santhanam

1956-1957

Third Finance Commission

A.K. Chanda

1960-1961

Fourth Finance Commission

P.V. Rajamannar

1964-1966

Fifth Finance Commission

Mahavir Tyagi

1968-1969

Sixth Finance Commission

K. Brahmananda Reddy

1972-1974

Seventh Finance Commission

J.M. Shelat

1977-1979

Eighth Finance Commission

Y.B. Chavan

1984-1989

Ninth Finance Commission

N.K.P. Salve

1989-1995

Tenth Finance Commission

V. Ramakrishna

1995-2000

Eleventh Finance Commission

A.M. Khusro

2000-2005

Twelfth Finance Commission

C. Rangarajan

2005-2010

Thirteenth Finance Commission

Vijay L. Kelkar

2010-2015

Fourteenth Finance Commission

Y.V. Reddy

2015-2020

Fifteenth Finance Commission

N.K. Singh

2020-2025

Sixteenth Finance Commission

Arvind Panagariya

2025-2030

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About the Finance Commission (Miscellaneous Provisions) Act, 1951

The Finance Commission (Miscellaneous Provisions) Act 1951 is a crucial legislative framework in India. It empowers the Finance Commission with specific responsibilities. It was enacted to enhance the effectiveness of the Finance Commission. It outlines the Commission's powers and functions. It addresses various aspects, including:

  • the principles governing the distribution of finances between the central and state governments,
  • grant-in-aid mechanisms, and
  • the factors considered in determining financial allocations.

The Act plays a pivotal role in ensuring transparency, fairness, and fiscal equilibrium in the distribution of resources.

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Key Takeaways for UPSC Aspirants

  • Constitutional Mandate: The Finance Commission is a constitutional body instituted under Article 280 of the Indian Constitution after every five years or earlier if so determined by the President.
  • Primary Functions: The Finance Commission is expected to advise the distribution of net proceeds of taxes between the Centre and the States, and amongst the States themselves. The Finance Commission also submits recommendations needed to augment the Consolidated Fund of a State in order to supplement the resources of Panchayats and Municipalities.
  • Composition: There is a Chairman and other four members that the Finance Commission comprises. Appointments are made by the President.
  • Advisory role: The recommendations that a Finance Commission makes have a highly advisory nature and are not compulsive. Yet they hold substantial weight and are ordinarily followed by the Union and the State Governments.
  • Vertical and Horizontal Devolution: The Finance Commission takes up vertical devolution which divides tax revenue between Centre and States and horizontal devolution by divesting it on principles of need, equity, and performance upon the States.
  • Grants-in-Aid: Except for tax sharing, grants-in-aid to the States from the Consolidated Fund of India are prescribed by the Finance Commission for specific needs and emergencies to bridge revenue gaps.
  • Fiscal Policy and Reforms: The Finance Commission reviews the financial health of the Union and States and makes recommendations to improve the fiscal policy and reforms in order to strengthen revenue mobilization effectiveness and proper public expenditure.
  • Impact on Economic Planning and Governance: This would directly impact on economic planning and governance in the light of proper distribution of resources so that balanced regional development would be carried out with a higher degree of fiscal discipline amongst the governments.

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Frequently Asked Questions

The recommendations made by the Finance Commission are only advisory in nature. It is up to the President and the Union Government to accept, reject, or modify the recommendations.

The Finance Commission ensures a balanced fiscal federalism in India by recommending the distribution of net proceeds of taxes between the Centre and the States, and among the States.

Yes, under Article 275 of the Constitution, the Finance Commission has the power to recommend grants-in-aid to the states from the Consolidated Fund of India for any specific purposes.

The Chairman and the members of the Finance Commission are appointed by the President of India.

The Finance Commission is established every five years. However, it can also be constituted earlier, as per the needs of the President of India.

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