Finance commission report

Anuj Jindal
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Introduction

 The finance commission is a constitutional body set up every five years under
article 280 of the constitution of India.
 Responsibilities of finance commission:
o To recommend the distribution of proceeds of taxes between the union
and the states.
o To recommend the principles which should govern the grants – in – aid
to be given to the states.
o Any other matter referred to the commission by the president in the
interest of sound finance.

 The 15th finance commission was set up by President of India in 2017 under
the chairmanship of NK Singh and its recommendation is for the period of
2021 – 22 to 2025 – 26.
 The 15th finance commission’s report is divided into four volumes:
o Volume 1 and 2 – Main report and annexes
o Volume 3 – Devoted to the union government
o Volume 4 – Devoted to the states
 There are 117 core recommendations in the report.

Key points from the report

 Fiscal deficit

o Central government should bring down the fiscal deficit to 4% of GDP by

2025 – 26
o For states, the FC recommended the fiscal deficit limit as percentage of
GSDP:
I. 4% in 2021 – 22
II. 3.5% in 2022 – 23
III. 3% during 2023 – 26
 Extra annual borrowing worth 0.5% of GSDP will be allowed to states during
first four years (2021 – 25) upon undertaking power sector reforms.

 Vertical devolution (Devolution of taxes from centre to states)

o The FC has recommended the vertical devolution at 41%.

 o Expected gross tax revenue is Rs.135.2 Lakh Crore and out of this
divisible pool (after deducting surcharges and cesses and cost of
collection) is estimated to be Rs.103 lakh crore.
o States’ share at 41 per cent of divisible pool comes to 42.2 lakh crore for
2021-26 period.

 Horizontal devolution (Allocation between the states)

o Based on principles of equity, need and performance, overall devolution
formula is:

Criteria Weight (%)

Population 15
Area 15
Forest and ecology 10
Income distance 45
Tax and fiscal efforts 2.5
Demographic performance 12.5

 Income distance – It is the distance of GSDP of a particular state from the

state with the highest GDP. To maintain inter state equity, the states with
lower per capita income would be given a higher share.

 Revenue deficit grants

o Revenue deficit grant is required to meet the fiscal needs of the states
on their revenue account that remain to be met.
o The FC has recommended total revenue deficit grants of Rs.2,94,514
crore for 17 states.

 Local governments

o The total grants to local government should be Rs.4,36,361 crore for the
period 2021 – 26.

 Health

o The commission recommended that the health spending by the states

should be increased to more than 8% of their budget by 2022.
 o It has also recommended that public health expenditure of Union and
state governments together should rise progressively to reach 2.5% of
GDP by 2025
o Primary health care expenditure should be two – thirds of the total health
expenditure by 2022.
o Total grant in aid – Rs.1,06,606 Crore.

 Education

o The FC has recommended grants of Rs.4800 Crore (Rs.1200 Crore

each year) from 2022 – 23 to 2025 – 26 for incentivising the states to
enhance educational outcomes.
o The commission has recommended Rs.6143 Crores for online learning
and development of professional courses in regional languages for
higher education in India.

 Agricultural reforms

o Rs.45000 Crore for performance – based incentive for all the states for
carrying out agricultural reforms.

 Aspirational districts and blocks

o The FC has recommended Rs.3150 Crore for the development of

aspirational districts and blocks.

 Defence and internal security

o A dedicated non – lapsable fund, Modernisation fund for defence and

internal security with total indicative size of Rs.2,38,354 will be set
up.

 Disaster risk management

o For state disaster response management fund, the FC has

recommended the total corpus of Rs.1,60,153 Crore for states for
disaster management for 2021 – 26
o Out of the above amount, union’s share is Rs.1,22,601 Crore and states’
share is Rs.37,552 Crore
Test yourself

Q.1) As per the 15th finance commission recommendation, central government

should bring down the fiscal deficit to what percent by 2025 – 26?

[a] 4.5%
[b] 5%
[c] 3.5%
[d] 4%
[e] 5.5%

Solution – [d]

Q.2) How much share has been recommended by 15th Finance Commission for
states from the central taxes for 2021-26 period?

[a] 41%
[b] 53%
[c] 37%
[d] 42%
[e] 39%

Solution – [a]

Q.3) What is the amount that has been recommended by 15th finance commission
for agricultural reforms and aspirational districts and blocks respectively?

[a] Rs.35000 Crore and Rs.3150 Crore

[b] Rs.45000 Crore and Rs.3150 Crore
[c] Rs.55000 Crore and Rs.3150 Crore
[d] Rs.45000 Crore and Rs.2150 Crore
[e] Rs.25000 Crore and Rs.2150 Crore

Solution – [b]
Q.4) Consider the following statements regarding the recommendations of 15th
finance commission regarding education and health and identify the correct
statement/s

(1) The commission recommended that the health spending by the states should be
increased to more than 8% of their budget by 2022.
(2) The public expenditure on health should be increased to 2.5% of the GDP by
2025
(3) Rs.6800 Crore has been sanctioned for incentivising the states for enhancing
their educational outcomes

[a] Only 2 and 3

[b] Only 1 and 3
[c] Only 1 and 2
[d] None is correct
[e] All are correct

Solution – [c]

Q.5) How much corpus has been suggested by 15th Finance Commission for
Modernisation Fund for Defence and Internal Security for 5 years till 2026?

[a] Rs 1 lakh crore

[b] Rs 2.4 lakh crore
[c] Rs 5 lakh crore
[d] Rs 1.2 lakh crore
[e] Rs 3 lakh crore

Solution – [b]
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