Finance Commission

Context: The government will soon kick off the process to set up the Sixteenth Finance Commission, with the Finance Ministry likely to notify the terms of references for the constitutional body, tasked with recommending the revenue sharing formula between the Centre and States and their distribution among States, towards the latter half of this year.

About Finance Commission:

• The Finance Commission is a Constitutionally mandated body that is at the centre of fiscal federalism.
• It is constituted by the President Article 280 of the Constitution,
• Its core responsibility is to evaluate the state of finances of the Union and State Governments, recommend the sharing of taxes between them, lay down the principles determining the distribution of these taxes among States.
• Its working is characterised by extensive and intensive consultations with all levels of governments, thus strengthening the principle of cooperative federalism.
• Its recommendations are also geared towards improving the quality of public spending and promoting fiscal stability.
• The First Finance Commission was constituted vide Presidential Order under the chairmanship of Shri K.C. Neogy on 6th April 1952.
• The Fifteenth Finance Commission was constituted on 27 November 2017 against the backdrop of the abolition of Planning Commission (as also of the distinction between Plan and non-Plan expenditure) and the introduction of the goods and services tax (GST), which has fundamentally redefined federal fiscal relations.

Core Responsibilities: It is the duty of the Commission to make recommendations to the President as to—

• the distribution between the Union and the States of the net proceeds of taxes which are to be, or maybe, divided between them and the allocation between the States of the respective shares of such proceeds;
• the principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India;
• the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats in the State on the basis of the recommendations made by the Finance Commission of the State;
• the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State;
• any other matter referred to the Commission by the President in the interests of sound finance.
• The Commission determines its procedure and has such powers in the performance of its functions as Parliament may by law confer on them.

Source:                          The Hindu

Previous Year Questions

Q.1) In India, the Central Bank’s function as the “lender of last resort” usually refers to which of the following? (2021)

1. Lending to trade and industry bodies when they fail to borrow from other sources
2. Providing liquidity to the banks having a temporary crisis
3. Lending to governments to finance budgetary deficits

Select the correct answer using the code given below

1. 1 and 2
2. 2 only
3. 2 and 3
4. 3 only

Q.2) Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? (2017)

1. It decides the RBI’s benchmark interest rates.
2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister.

Select the correct answer using the code given below :

1. 1 only
2. 1 and 2 only
3. 3 only
4. 2 and 3 only