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Prelims Capsule


Finance Commission recommends Urban Local Bodies empowerment to fight Covid 19

Finance Commission recommends Urban Local Bodies empowerment to fight Covid 19


  • GS 2 || Polity || Constitutional Bodies || Finance Commission

Why in news?

The government has approved the suggestion of the 15th Finance Commission to keep the States’ share of the divisible pool of taxes at 41 percent for the five-year term beginning in 2021-22.

All about Finance Commission:

What is the Finance Commission?

  • The Finance Commission is a constitutional body that sets the method and methodology for allocating tax revenues between the federal government and states, as well as between states.
  • The Finance Commission also determines the proportion of taxes and grants to be distributed to state local governments. This portion of tax revenue is known as Finance Commission Grants, and it is included in the Union budget.
  • The President of India appoints a chairman and four members to the Finance Commission.

15th Finance Commission:

  • The Finance Commission (FC) is a constitutional authority that establishes the method and formula for allocating tax revenues between the Centre and states, as well as among states, in accordance with the Constitution and current needs.
  • The President of India is required by Article 280 of the Constitution to appoint a Finance Commission every five years or sooner.
  • In November 2017, the President of India appointed the 15th Finance Commission, which is chaired by NK Singh. It will make suggestions for a five-year period, from 2021-22 to 2025-26.

Recommendations of the 15th Finance Commission:

  • Maintaining vertical devolution at 41%:
    • It has suggested that the vertical devolution be kept at 41 percent for 2020-21, as it was in the study, to aid with predictability and resource stabilization, especially during COVID periods.
    • It’s at the same level as 14th FC’s recommendation of 42 percent of the divisible pool. However, due to the reclassification of the former state of Jammu and Kashmir as the new Union Territories of Ladakh and Jammu and Kashmir, it has made the necessary adjustment of roughly 1%.
  • On GST: The GST accounts for 35% of the Union’s total tax income. The GST accounts for around 44% of the states’ own tax income.
  • On Horizontal Devolution:
    • Population: Only 2011 Census data is utilized, according to the ToR. The population criterion is only given a 15% weighted since it will scale some of the other criteria.
    • Area: According to a moderate weight of 15% for the area requirement, a larger area incurs some more administrative costs, but it may not lead to a proportional growth in the cost of supplying services.
    • Forest & Ecology: This criterion is used to evaluate the ecological advantages provided to the country as a whole by dividing each State’s thick forest by the total dense forest of all States. The criteria for forest and ecological has been granted a 10% weighting.
    • Income Distance: This factor is intended to make the devolution formula more equalizing and progressive, allowing states with lower per capita income and tax capacity to receive more devolution. The 15th finance commission maintained the income distance requirement with a 45 percent weighting.
    • Efforts in Taxation and Finance: (2.5 percent) States with higher tax collection efficiency will be rewarded, and other states will be pushed to be more tax efficient, by adding tax effort as a performance-based criterion. It’s derived by dividing a state’s average per capita own tax income over three years by its per capita GSDP, then scaling that ratio by the population of the state.
    • Performance in terms of demographics: (12.5 percent) a transition from 1971 to 2011 Census data should not unfairly penalize states that have done successfully in population control. As a result, the committee recommended implementing a new performance-based criterion to reward states that have performed well in terms of demographics. This demograph criterion is calculated using the reciprocal.
  • On Revenue Deficit Grants (RDG):
    • The obligation to satisfy the budgetary requirements of the States on their revenue accounts that remain unmet, even after considering their own tax and non-tax resources and tax devolution to them, leads to revenue shortfall grants.
    • The gap between revenue or current spending and revenue collections, which includes both tax and non-tax revenue, is known as the revenue deficit.
    • It has proposed post-devolution income deficit grants at Rs. 2.94 lakh crores for the five-year period ending in FY26.
    • The number of states eligible for revenue deficit grants falls from 17 in FY22, the first year of the award period, to 6 in FY26, the final year of the award period.
  • Sector-specific grants: States would get Rs 1.3 lakh crore in sector-specific funds for eight sectors: health, school education, higher education, agricultural reforms, PMGSY road maintenance, judiciary, statistics, and aspirational districts and blocks. A part of these funds will be conditional on performance.
  • State-specific grants: The Commission proposed Rs 49,599 crore in state-specific grants. Social requirements, administrative administration and infrastructure, water and sanitation, cultural and historical monument protection, high-cost physical infrastructure, and tourism will all be addressed.
  • Fiscal Space for Centre:Total 15th Finance Commission transfers (devolution + grants) account for roughly 34% of the Union’s projected Gross Revenue Receipts, allowing the Union to satisfy its resource requirements and spending responsibilities on national development objectives while maintaining budgetary flexibility.
  • On Local Governments: The entire funding provided to local governments for the period 2021-2026 is Rs.4,36,361crore. The shared municipal services would receive Rs.450 crore of the entire amount. All three tiers of Panchayat, village, block, and district, will be eligible for funding to local authorities. Other than health funds, grants to local bodies will be divided across states depending on population and area, with 90% and 10% weightage, respectively.
  • On Health:
    • The group recommends that by 2022, the state’s health spending be increased by 8%.
    • The report recommended that the development of All India Health Services/All India Medical Services, modeled after the UPSC Civil Services, be prioritized.
    • It is proposed that the National Medical Council establish brief courses on wellness clinics, basic surgical techniques, anaesthesia, obstetrics and gynecology, eye, and ophthalmology.
    • AYUSH should be promoted as an elective topic for medical students.
    • The Bill on Allied and Healthcare Professions should be passed as soon as possible.
  • On Higher Education:
    • The 15th finance commission has recommended two subtypes of higher education grants:
    • Promotion of online education:
  1. A total grant of Rs. 5,078 crore will be given to promote online education.
  2. Professional courses in regional languages will be developed.
  3. The commission’s recommendation will be in line with the New Education Policy 2020. From 2021 to 2026, a total of Rs. 1,065 crore has been set aside to build these courses.
  • On Defence:
  • The 15th FC has re-calibrated the proportional proportions of Union and States in gross income collections in light of the current strategic requirements for national defense in the global environment.
  • This will allow the Union to set aside funds for the specific finance structure recommended by the 15th FC.
  • The Union Government may establish a special non-lapsable fund, the Modernisation Fund for Defence and Internal Security, in the Public Account of India (MFDIS).
  • The planned MFDIS has a total indicative size of Rs. 2,38,354crore for the period 2021-2026..
  • On Disaster Risk Management:
  • Except for the NE States, the fifteenth finance commission proposed that state contributions to the State Disaster Risk Fund (SDRF) remain at 25%. (10 percent )
  • Since the 13th Finance Commission proposed the same system, nothing has changed.
  • Mitigation funds should be established at both the federal and state levels. The Mitigation Fund should be utilized for actions at the local level and in communities that decrease risks and promote environmentally sustainable settlements and livelihood patterns.

Comparison between the 14th and 15th Finance Commission:

When compared to previous Finance Commissions, the 15th Finance Commission made several important modifications:

  • To suggest funding to all tiers of the Panchayati Raj to facilitate resource pooling and improved functional viability of community assets.
  • To provide funds to the localities included in the Fifth and Sixth Schedules, as well as Cantonment Boards.
  • To offer tied grants in the key areas of sanitation and drinking water, in order to provide additional money to local governments over and above the monies granted for these objectives through the centrally sponsored schemes (CSS), Swachh Bharat, and JalJeevan Missions.
  • Over the medium term, the percentage of urban local bodies in Finance Commission funds to local bodies should be gradually increased to 40% to account for rising urbanization.
  • Because larger cities tend to develop faster due to the agglomeration effect, the country’s fifty million-plus cities require special attention, with a focus on addressing the issues of poor ambient air quality, groundwater depletion, and sanitation.


Since the 15th Finance Commission’s recommendations, other obstacles have developed, including the global economic downturn, decreased tax revenue realization, and, most importantly, the massive economic disruption caused by the Coronavirus epidemic.These will need a number of new allocation requests in the future years. In addition, a number of policy problems, such as simplifying the GST, the Direct Tax Code, and improving expenditure results, would require specific attention from the government in order for the government to meet the lofty goals put forth by the Finance Commission.

Mains oriented question:

Analyze the proposals of India’s Fifteenth Finance Commission and provide recommendations for the future. (200 words)