The 15th Finance Commission holds significant importance for the UPSC Mains examination. Understanding its recommendations, impact, and the debates surrounding them is crucial for aspirants. This article dives deep into the commission's key aspects, providing a comprehensive overview to aid your preparation.

What is the Finance Commission?

Before we delve into the specifics of the 15th Finance Commission, let's understand the role of the Finance Commission in India's fiscal federalism. Guys, the Finance Commission is a constitutional body (Article 280) formed every five years. Its primary task? To recommend how tax revenues should be distributed between the Union and the States and among the States themselves. It also looks at the principles governing grants-in-aid to the States by the Union.

The Finance Commission ensures fair distribution of resources, addressing vertical and horizontal imbalances between the Union and the States. Vertical imbalance refers to the mismatch between the revenue-raising capacity of the Union and the States and their expenditure responsibilities. Horizontal imbalance arises from the differences in the resource base of different States, leading to disparities in their capacity to provide public services.

The recommendations of the Finance Commission are crucial for maintaining fiscal stability and ensuring equitable development across the country. They influence the financial health of both the Union and the States, affecting public services, infrastructure development, and overall economic growth. The commission's work is essential for promoting cooperative federalism, where the Union and the States work together to achieve common goals.

Key Recommendations of the 15th Finance Commission

The 15th Finance Commission, headed by N.K. Singh, submitted its report for the period 2021-22 to 2025-26. Its recommendations cover a wide range of issues related to fiscal federalism. Understanding these recommendations is vital for your UPSC Mains preparation.

Vertical Devolution

The commission recommended that the share of States in the divisible pool of Union taxes be 41%. This is the same as what was recommended by the 14th Finance Commission. However, it's important to note that this is after adjusting for the newly formed Union Territories of Jammu and Kashmir and Ladakh, which were previously part of the erstwhile State of Jammu and Kashmir. So, while the percentage remains the same, the context has changed slightly.

Horizontal Devolution

The commission uses a formula to determine the share of each State in the 41% divisible pool. This formula takes into account various factors, aiming to balance equity and efficiency. The criteria used by the 15th Finance Commission and their respective weights are:

• Income Distance (45%): This is the most significant criterion. It measures the distance of a State's income from the State with the highest income. States with lower per capita income receive a larger share.
• Population (15%): Based on the 2011 population census, this criterion reflects the demographic needs of the States.
• Area (15%): This factor recognizes the cost of providing services in larger States, which often have higher administrative overheads.
• Forest & Ecology (10%): This criterion rewards States that have a higher forest cover, promoting environmental conservation.
• Tax & Fiscal Efforts (2.5%): This incentivizes States to improve their tax collection and manage their finances prudently.
• Demographic Performance (12.5%): This criterion was introduced to reward States that have made progress in controlling their population growth. It uses the Total Fertility Rate (TFR) as an indicator.

It's important to understand how these criteria work and their implications for different States. For example, States with lower per capita income benefit from the income distance criterion, while States with larger forest cover benefit from the forest & ecology criterion. The demographic performance criterion has been a subject of debate, as some Southern states have expressed concerns about being penalized for their success in controlling population growth.

Grants-in-Aid

The commission also recommended various types of grants-in-aid to the States. These grants are intended to address specific needs and promote balanced development.

• Revenue Deficit Grants: These grants are provided to States that have a revenue deficit after devolution. The 15th Finance Commission recommended revenue deficit grants for several States to help them cover their fiscal gaps.
• Local Government Grants: These grants are earmarked for local bodies (Panchayats and Municipalities) to improve their infrastructure and service delivery. The commission has emphasized the importance of strengthening local governments for decentralized development.
• Disaster Management Grants: These grants are provided to States to enhance their capacity to deal with natural disasters. Given India's vulnerability to various types of disasters, these grants are crucial for disaster preparedness and mitigation.
• Sector-Specific Grants: The commission also recommended grants for specific sectors such as health, education, and agriculture. These grants are intended to address critical gaps in these sectors and promote sustainable development.

Other Recommendations

Besides devolution and grants, the 15th Finance Commission made several other important recommendations.

• Fiscal Consolidation: The commission emphasized the need for both the Union and the States to pursue fiscal consolidation. It recommended that the Union government should reduce its debt levels and the States should manage their finances prudently.
• Public Sector Enterprises (PSEs): The commission suggested that the Union and the States should review the performance of their PSEs and take steps to improve their efficiency. It also recommended that loss-making PSEs should be either restructured or closed down.
• Goods and Services Tax (GST): The commission examined the impact of GST on the finances of the Union and the States. It recommended that the GST system should be simplified and made more efficient. It also suggested that the GST Council should address the concerns of the States regarding revenue losses.
• Health Sector: The commission highlighted the importance of strengthening the health sector. It recommended that the Union and the States should increase their investment in health infrastructure and human resources. It also suggested that the National Health Mission should be strengthened to improve healthcare delivery.
• Data Availability: The commission stressed the need for improving the availability and quality of data. It recommended that the Union and the States should invest in improving their statistical systems. It also suggested that the Ministry of Statistics and Programme Implementation (MOSPI) should play a more proactive role in coordinating data collection and dissemination.

Controversies and Criticisms

The recommendations of the 15th Finance Commission have been subject to debate and criticism. Some States have raised concerns about the criteria used for horizontal devolution, particularly the demographic performance criterion.

Demographic Performance Criterion

Southern States, which have made significant progress in controlling their population growth, have argued that the demographic performance criterion penalizes them for their success. They contend that this criterion is unfair and that it could discourage States from pursuing population control measures.

The commission has defended the demographic performance criterion, arguing that it is intended to reward States that have made efforts to control population growth. It has also pointed out that the weight assigned to this criterion is relatively small (12.5%) and that it is only one of several factors considered in the devolution formula.

Impact on States' Finances

Some States have also expressed concerns about the overall impact of the 15th Finance Commission's recommendations on their finances. They argue that the commission's formula for horizontal devolution is unfavorable to them and that it could lead to a reduction in their share of Union taxes.

The commission has acknowledged that its recommendations could have differential impacts on different States. However, it has emphasized that it has tried to balance equity and efficiency in its recommendations. It has also pointed out that the States will continue to receive grants-in-aid from the Union government to address their specific needs.

Significance for UPSC Mains

The 15th Finance Commission is a hot topic for the UPSC Mains examination. You should be prepared to answer questions on its recommendations, their impact on the States, and the controversies surrounding them.

• Understand the key recommendations: Make sure you have a clear understanding of the commission's recommendations on vertical and horizontal devolution, grants-in-aid, and other issues.
• Analyze the impact on States: Be able to analyze how the commission's recommendations will affect the finances of different States. Consider the implications for both the Union and the States.
• Evaluate the controversies: Be aware of the controversies surrounding the commission's recommendations, particularly the demographic performance criterion. Understand the arguments for and against this criterion.
• Relate to current affairs: Connect the commission's recommendations to current affairs. For example, how will the recommendations affect the States' ability to deal with the COVID-19 pandemic? How will they impact infrastructure development and social welfare programs?

Conclusion

The 15th Finance Commission plays a crucial role in shaping India's fiscal landscape. Its recommendations have far-reaching implications for the Union and the States. As a UPSC aspirant, it is essential to have a thorough understanding of the commission's work and its impact on the Indian economy and polity. Guys, make sure you study this topic thoroughly and stay updated on the latest developments related to fiscal federalism in India. Good luck with your preparation!