Finance Commission of India

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. 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, Thirteen Finance Commissions have submitted their report

History: Genesis of the Finance Commission

The Indian State, like all other federations, is also ridden by the problems of Vertical and Horizontal Imbalances. Vertical Imbalances result because states are assigned responsibilities and in the process of fulfilling those, they incur expenditures disproportionate to their sources of revenue. 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. The Constitution of India, in recognition of these two problems, 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 areArticles 269, 270, 275, 282 and 293 all of which specify ways and means of sharing resources between Union and States. Apart from the above- mentioned provisions, The Indian Constitution provides an institutional framework to facilitate Centre- State 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 and 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 fouteenth finance is constituted under the chairmanship of y v reddy,former RBI governor.

FunctionsFunctions 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. Work with the State Finance Commissions and suggest measures to augment the Consolidated Fund of the States so as to provide additional resources to Panchayats and Municipalities in 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.

• 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

• 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.

• Major Recommendations of 13th Finance Commission

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 2013-14.
3. Fiscal deficit to be reduced to 3% of the GDP by 2014-15.
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.
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 Rs 50000 crore.
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.

The Central Government has recently constituted the 14 th finance commisson headed by Shri Y.V.REDDY, who was the former governor of RBI(Reserve Bank of India)