• The Finance Commission (FC) is a constitutional body formed every five years under Article 280 by the President to recommend the distribution of tax revenue between the Union and States and among the States themselves.
  • The 15th Finance Commission, headed by N.K. Singh, has been tasked with fulfilling its constitutional mandate, which includes recommending the distribution of revenue, grants-in-aid, measures for local bodies’ resources, and suggestions for sound finance.

The constitutional mandate of the Finance Commission includes:

  • Distributing the net proceeds of taxes between the Union and States.
  • Establishing principles for grants-in-aid from the Consolidated Fund of India to the States.
  • Recommending measures to supplement the resources of Panchayats and Municipalities.
  • Providing recommendations on any other matter related to sound finance.

The 15th Finance Commission’s recommendations and their implications:

  • Performance-based incentives for states: These incentives are linked to the states’ performance on various parameters set by the Centre, such as the Aspirational District Programme. However, this may discourage independent decision-making by the states.
  • Example: States may prioritize meeting the criteria for incentives over their unique developmental needs.
  • Reformation in centrally sponsored schemes (CSS): The Commission recommended the phasing out of CSS with low utility, leaving it as an executive decision.
  • Example: Some CSS may be discontinued despite their relevance to certain states, affecting their developmental priorities.
  • Evaluation of GST systems and compensation fund: The Commission examined the impact of GST and suggested a compensation fund for anticipated revenue losses for five years.
  • Example: States may feel dependent on the Centre for GST-related compensation, affecting their fiscal autonomy.
  • Fiscal management and consolidation guide: The Commission advised reducing the fiscal deficit to 4% of GDP by 2025-2026 and proposed a framework for public financial management and an independent fiscal council.
  • Example: States may face pressure to align their fiscal policies with the Centre’s target, limiting their autonomy.
  • Sector-specific grants: Specific grants for sectors like health and nutrition may reduce the states’ ability to make autonomous decisions.
  • Example: States may have to prioritize projects supported by these grants, affecting their discretion over budget allocations.
  • Environment and ecology protection, population control, and debt reduction: These are desirable outcomes of the Centre’s reform agenda, but the Finance Commission should not be used as a means to push such reforms.
  • Example: States may feel obligated to implement these reforms, even if they are not aligned with their immediate priorities.


Despite addressing several economic reforms, the 15th Finance Commission has fulfilled its core function by recommending vertical devolution, horizontal distribution, and various grants to states.

To ensure fiscal federalism, the Finance Commission should not be utilized as an instrument to promote the Centre’s reforms. Instead, it should focus on its constitutional mandate of equitable distribution of resources among the Union and the States.

Legacy Editor Changed status to publish March 2, 2024