NOTE:- THIS INVOICE COPY IS NOT VALID FOR

REGISTRATION.

Finance Commission of India

From Wikipedia, the free encyclopedia
Finance Commission of India
Agency overview
Formed
22 November 1951
Jurisdiction
Government of India
Headquarters
New Delhi
Dr Y.V Reddy, Chairman
Dr M.Govindha Rao, Member
Sushma Nath, Member
Agency executives
Prof Abhijit Sen, Member
Dr Sudipto Mundle, Member
Ajay Narayan Jha, Secretary
Website
http://fincomindia.nic.in/
The Finance Commission of India came into existence in 1951. It was established under Article 280
of the Indian Constitution by the President of India. It was formed to define the financial relations
between the centre and the state. The Finance Commission Act of 1951 states the terms of
qualification, appointment and disqualification, the term, eligibility and powers of the Finance
Commission.[1] As per the Constitution, the commission is appointed every five years and consists of a
chairman and four other members. Since the institution of the first finance commission, stark changes
have occurred in the Indian economy causing changes in the macroeconomic scenario. This has led to
major changes in the Finance Commission's recommendations over the years. Till date, Fourteen
Finance Commissions have submitted their reports.

Contents

1 History: Genesis of the Finance Commission

2 Functions

3 The Finance Commission (Miscellaneous Provisions) Act, 1951

4 Finance Commissions appointed so far

5 Proposals to 14th finance commission

6 Finance Commissions, their Terms of Reference and Recommendations

7 Finance commission Versus planning commission

8 See also

9 References

10 External links

NOTE:- THIS INVOICE COPY IS NOT VALID FOR

REGISTRATION.

History: Genesis of the Finance Commission

The Indian State, like all other federations, is also ridden by the problems of Vertical and Horizontal
Imbalances. Explaining vertical Imbalances result because states are assigned responsibilities and in
the process of fulfilling those that they incur expenditures disproportionate to their sources of revenue,
Dr. B.R. Ambedkar,the Father of Constitution of India, established Finance Commission of India. This
is because the states are able to gauge the needs and concerns of their people more effectively, and
hence, are more efficient in addressing them. Factors like historical backgrounds, differences in
resource endowments etc. lead to widening Horizontal Imbalances. Thus, as he has enshrined in the
Constitution of India, in recognition of these two problems, Dr. Ambedkar has made several provisions
to bridge the gap of finances between the Centre and the States. These include various articles in the
constitution like Article 268, which facilitates levy of duties by the Centre but equips the states to
collect and retain the same. Similarly, there are Articles 269, 270, 275, 282 and 293 all of which
specify ways and means of sharing resources between Union and States. Apart from the abovementioned provisions, The Indian Constitution provides an institutional framework to facilitate CentreState Transfers. This body is the Finance Commission, which came into existence in 1951, under
Article 280 of the Indian Constitution, which states:
1. The President will constitute a Finance Commission within two years from the commencement
of the Constitution and thereafter at the end of every fifth year or earlier, as the deemed
necessary by him/her, which shall include a chairman and four other members.
2. Parliament may by law determine the requisite qualifications for appointment as members of
the Commission and the procedure of selection.
3. The Commission is constituted to make recommendations to the president about the
distribution of the net proceeds of taxes between the Union and States and also the allocation of
the same amongst the States themselves. It is also under the ambit of the Finance Commission
to define the financial relations between the Union and the States. They also deal with
devolution of non-plan revenue resources.
Recently fourteenth finance commission is constituted under the chairmanship of Y.V. Reddy,former
RBI Governor.

Functions
Functions of the Finance Commission can be explicitly stated as:
1. Distribution of net proceeds of taxes between Centre and the States, to be divided as per their
respective contributions to the taxes.
2. Determine factors governing Grants-in Aid to the states and the magnitude of the same.
3. To make recommendations to president as to the measures needed to augment the Consolidated
Fund of a State to supplement the resources of the panchayats and municipalities in the state on
the basis of the recommendations made by the Finance Commission of the state.

The Finance Commission (Miscellaneous Provisions) Act, 1951

With the objective of giving a structured format to the Finance Commission of India and to bring it at
par with world standards, The Finance Commission (Miscellaneous Provisions) Act, 1951 was passed.
It lays down rules regarding qualification and disqualification of members of the Commission, their
appointment, term, eligibility and powers.

NOTE:- THIS INVOICE COPY IS NOT VALID FOR

REGISTRATION.

Qualifications of the members

The Chairman of the Finance Commission is selected among people who have had the experience of
public affairs. The other four other members are selected from people who:
1. Are, or have been, or are qualified, as judges of High Court, or
2. Have knowledge of Government finances or accounts, or
3. Have had experience in administration and financial expertise; or
4. Have special knowledge of economics

Procedure and Powers of the Commission

The Commission has the power determine their own procedure and:
1. Has all powers of the civil court as per the Court of Civil Procedure, 1908.
2. Can summon and enforce the attendance of any witness or ask any person to deliver
information or produce a document, which it deems relevant.
3. Can ask for the production of any public record or document from any court or office.
4. Shall be deemed to be a civil court for purposes of Sections 480 and 482 of the Code of
Criminal Procedure, 1898

Disqualification from being a member of the Commission

A member may be disqualified if:

1. He is mentally unsound;
2. He is an undischarged insolvent;
3. He has been convicted of an immoral offence;
4. His financial and other interests are such that it hinders smooth functioning of the Commission.

Terms of Office of Members and eligibility for Reappointment

Every member will be in office for the time period as specified in the order of the president, but is
eligible for reappointment provided he has, by means of a letter addressed to the president, resigned his
office.

Salaries and Allowances of the members

The members of the Commission shall provide full- time or part- time service to the Commission, as
the president specifies in his order. The members shall be paid Salaries and Allowances as per the
provisions made by the Central Government. So far, 13 Finance commissions(v. kelkar) have
submitted their recommendations. More or less, all of them have been accepted by the Union
Government.

NOTE:- THIS INVOICE COPY IS NOT VALID FOR

REGISTRATION.

Finance Commissions appointed so far

So far 14 Finance Commissions have been appointed which are as follows:[2]
Finance Commission
First
Second
Third
Fourth
Fifth
Sixth
Seventh
Eighth
Ninth
Tenth
Eleventh
Twelfth
Thirteenth
Fourteenth[3]

Year of Establishment
1951
1956
1960
1964
1968
1972
1977
1983
1987
1992
1998
2003
2007
2012

Chairman
K. C. Neogy
K. Santhanam
A. K. Chanda
P. V. Rajamannar
Mahaveer Tyagi
K. Brahmananda Reddy
J. M. Shelat
Y. B. Chavan
N. K. P. Salve
K. C. Pant
A.M.Khusro
C. Rangarajan
Dr. Vijay L. Kelkar
Dr. Y. V Reddy

Operational Duration
195257
195762
196266
196669
196974
197479
197984
198489
198995
19952000
20002005
20052010
20102015
20152020

Proposals to 14th finance commission

As the states are subjected to more and more interstate migrant workers and illegal migrants
from the neighbouring countries, the finance commission shall give appropriate weight-age in
distribution of the total taxes to the states based on these criteria. The states which are giving
more employment to interstate workers are ahead in demographic transition. Demographic
transition of a state is a real index & status of all round human and economical development.

The states with coast line shall be given appropriate share from the royalty / taxes collected by
the central government from the minerals produced (including oil & natural gas) from the area
of territorial waters and exclusive economic zone similar to land based minerals production.
Articles 1 & 3 of the constitution define India as union of two entities only which are either
states or union territories. There is no third entity such as territorial waters or exclusive
economic zone. These are parts of states / union territories under Indian union.

Article 282 accords financial autonomy in spending the resources available with the states for
public purpose. Finance commission should desist from specific expenditure related grant in
aids to the states out of the Consolidated Fund of India.[4][5]

Under article 360 of the constitution, President can proclaim financial emergency when the
financial stability or credit of the nation or of any part of its territory is threatened. Finance
commission should bring out the guidelines which may warrant the imposition of financial
emergency in the entire country or a state or a union territory or a panchayat or a municipality
or a corporation to take up precautions for improving their financial soundness.

Finance commission should deliberate and recommend whether government advertisements

other than educational advertisements are serving public purpose for deserving government
expenditure under article 282 of the constitution.[6]

NOTE:- THIS INVOICE COPY IS NOT VALID FOR

REGISTRATION.

The finance commissions shall deliberate and recommend on all issues related to government
spendings which are taken up by various law commissions earlier and of public topics with
wide public attention.

Finance Commissions, their Terms of Reference and

Recommendations

Major Recommendations of 14th Finance Commission headed by Prof. Y V Reddy

1.The share of states in the net proceeds of the shareable Central taxes should be 42%.This is 10%
higher than the recommendation of 13th Finance Commission.
2.Revenue deficit to be progressively reduced and eliminated.
3.Fiscal deficit to be reduced to 3% of the GDP by 201718.
4.A target of 62% of GDP for the combined debt of centre and states.
5.The Medium Term Fiscal Plan(MTFP)should be reformed and made the statement of commitment
rather than a statement of intent.
6.FRBM Act need to be amended to mention the nature of shocks which shall require targets
relaxation.
7.Both centre and states should conclude 'Grand Bargain' to implement the model Goods and Services
Act(GST).
8.Initiatives to reduce the number of Central Sponsored Schemes(CSS)and to restore the predominance
of formula based plan grants.
9.States need to address the problem of losses in the power sector in time bound manner.

Major Recommendations of 13th Finance Commission headed by shri Vijay Kelkar.

1. The share of states in the net proceeds of the shareable Central taxes should be 32%.This is
1.5% higher than the recommendation of 12th Finance Commission.
2. Revenue deficit to be progressively reduced and eliminated, followed by revenue surplus by
201314.
3. Fiscal deficit to be reduced to 3% of the GDP by 201415.
4. A target of 68% of GDP for the combined debt of centre and states.
5. The Medium Term Fiscal Plan(MTFP)should be reformed and made the statement of
commitment rather than a statement of intent.
6. FRBM Act need to be amended to mention the nature of shocks which shall require targets
relaxation.

NOTE:- THIS INVOICE COPY IS NOT VALID FOR

REGISTRATION.

7. Both centre and states should conclude 'Grand Bargain' to implement the model Goods and
Services Act(GST).To incentivise the states, the commission recommended a sanction of the
grant of Rs500 billion.
8. Initiatives to reduce the number of Central Sponsored Schemes(CSS)and to restore the
predominance of formula based plan grants.
9. States need to address the problem of losses in the power sector in time bound manner.
Recommendations of the 14th Finance Commission

1)The 14th Finance Commission is of the view that tax devolution should be the primary route for
transfer of resources to the States.
2)In understanding the States needs, it has ignored the Plan and non-Plan distinctions
3) According to the Commission, the increased devolution of the divisible pool of taxes is a
``compositional shift in transfers from grants to tax devolution
4)In recommending an horizontal distribution, it has used broad parameters population (1971),
changes in population since then, income distance, forest cover and area, among others.
5)It has recommended distribution of grants to States for local bodies using 2011 population data with
weight of 90 per cent and area with weight of 10 per cent
6)Grants to States are divided into two
7)One, grant to duly constituted gram panchayats
8)Two, grant to duly constituted municipal bodies
9)And, it has divided grants into two parts
10) A basic grant, and a performance one for gram panchayats and municipal bodies
11)The ration of basic to performance grant is 90:10 for panchayats; and 80:20 for municipalities
12)The total grant recommended is Rs. 2,87,436 crore for a five-year period. Out of which, the grant to
panchayats is Rs.2,00,292 crore. And, the reminder goes to municipalities
13)The Commission has significantly departed from previous commission vis--vis recommendation
of the principles governing grants-in-aid to the States by the Centre
14)It has chosen to take the entire revenue expenditure for this purpose. Hence, it has decided to take
into account a states entire revenue expenditure needs without making a distinction between plan and
non-plan expenditure
15)The Commission is of the view that sharing pattern in respect to various Centrally-sponsored
schemes need to change. It wants the States to share a greater fiscal responsibility for the
implementation of such schemes.

NOTE:- THIS INVOICE COPY IS NOT VALID FOR

REGISTRATION.

What is the difference between fiscal and

monetary policy?
he government uses both fiscal and monetary policy to stimulate the economy (get it
growing) and also to slow the rate of growth down when it gets overheated. With fiscal
policy the government influences the economy by changing how the government
collects and spends money. The most common tools that the government enacts to effect
fiscal policy include:
Increased Spending on new government programs and initiatives (such as job
creation programs). This has the effect of increasing demand for labor and can result in
lower unemployment levels
Automatic Fiscal Programs are programs that take effect immediately to help
correct the slide in the economy. Probably the single best example of this is
unemployment insurance which a person can file for as soon as they lose their job.
Tax Cuts are another tool that government uses to stimulate demand for goods and
services when the economy takes a turn for the worse. The effect of a tax break is to put
more money back in the pockets of businesses and consumers which they can spend and
put back to work in the economy.
Monetary Policy, on the other hand, involves the manipulation of the available money
supply within the economy. In the United States, the role of manipulating the money
supply falls to the Fed or the central bank in the US. Not only does the Fed have overall
responsibility for the country's monetary policy, but it also has responsibility for issuing
currency and overseeing bank operations. An increasing money supply puts more money
in the hands of consumers which they turn around and spend - a decreasing money
supply does just the opposite.
In order to increase or decrease the money supply, the Fed has four principal levers
which it pulls to try and effect change. The first thing that the Fed can do is to alter the
reserve ratio which is the percentage of assets that commercial banks have to keep on
deposit at one of the Federal Reserve Banks - the higher the reserve ratio, the less
money that banks can lend out to the general public.
Another way the Fed can control the money supply is by adjusting the federal funds rate
(fed funds rate). The federal funds rate is a short-term borrowing rate that banks have
established amongst themselves for short-term borrowing. Another way the Fed can
adjust the money supply is by raising or lowering the discount rate which is the rate at
which commercial banks can borrow money from the Fed. The higher the rate (or interest
charged on the loan), the less inclined commercial banks are to borrow and a smaller
amount of money will be available in the market. And lastly, the Fed can buy and sell
government bonds. The buying of bonds translates into income for the US government,
which can in turn put more money into the economy.

Interdependence between monetary and fiscal

policy?

NOTE:- THIS INVOICE COPY IS NOT VALID FOR

REGISTRATION.
In some countries, the scope for fiscal policy action has recently come up against its
limits. This has raised expectations on monetary policy to do something to stabilise the
economy and the financial markets. And indeed, central banks across the world have
introduced unconventional measures, in order to fulfil their mandates even under these
unusual circumstances. In some countries, this has given rise to tension between fiscal
and economic policy.
To achieve as tension-free an economic policy as possible, fiscal and monetary policy
implementation has to focus on stability. But how can this be guaranteed? In order to
ensure that fiscal and monetary policy authorities do not exploit their discretionary
freedom, but instead use their instruments in a targeted way with the aim of achieving
sustainable economic policy, there need to be clear and binding rules.
In Switzerland, despite the difficult economic environment, there is currently no tension
between monetary and fiscal policy. There are two reasons for this. First, public finances
are very healthy. Second, monetary policy has always been focused on stability. Swiss
economic policy stands out for having good rules and a stability culture that work
through the political structures in a mutually reinforcing way. Thanks to this culture of
stability, Switzerland was able to combat the financial and economic crisis with sound
finances and a credible and effective monetary policy.