How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss.

Introduction

The Finance Commission is the constitutional balance-wheel of Indian fiscal federalism, mediating the transfer of resources from the Union to the states.

Constitution of the Commission

• Under Article 280, the President constitutes a Finance Commission every fifth year or earlier, comprising a chairman and four members.
• The Finance Commission (Miscellaneous Provisions) Act, 1951 prescribes qualifications: a chairman experienced in public affairs, and members who are qualified to be High Court judges or possess special knowledge of finance and accounts, financial administration, or economics.
• Core mandate: recommend vertical distribution of the divisible tax pool, its horizontal sharing among states, grants-in-aid under Article 275, measures to augment state funds for panchayats and municipalities, and any matter referred to it in the interest of sound finance.

Terms of Reference of the 15th Finance Commission

Constituted in November 2017 under N.K. Singh, its ToR broke new ground:

• Mandatory use of Census 2011 population data — controversial because southern states feared being penalised for successful population control; the Commission balanced this with a 12.5% weight for demographic performance.
• Performance-based incentives: efforts in population control, GST implementation, power-sector reforms, ease of doing business, DBT adoption and restraint on populist expenditure.
• Review of the impact of the 14th Finance Commission's 42% devolution on Union finances, of the FRBM roadmap, and a re-examination of revenue deficit grants.
• A later addendum sought examination of a non-lapsable fund for defence and internal security.

The Commission ultimately recommended 41% devolution for 2021-26, adjusting one percentage point for the union territories of J&K and Ladakh.

Conclusion

The ToR debate showed the Commission's tightrope between equity and efficiency — one the 16th Finance Commission (constituted December 2023 under Arvind Panagariya, for 2026-31) now walks.