16th Finance Commission of India, Article, Chairman, Constitutional Provisions

Context: The 16th Finance Commission (FC) of India has commenced its operations.

Recommendations for the 16th Finance Commission

• The previous guiding principles of the 15th FC, including enhancements in property tax collection and other fiscal strategies, need revisiting and updating.
• The 16th FC is encouraged to double the IGTs to urban areas to better align with the dynamic urbanisation of India.
• According to a McKinsey Global Institute report, without substantial investments, urban infrastructure deficits will exacerbate, leading to severe urban issues like water scarcity and untreated sewage problems.

Read this article below to know all about the Finance Commission of India in detail.

Finance Commission of India

The Finance Commission of India has been mentioned under Part XII, Chapter I (Finance) in Articles 280 and 281 of the Indian Constitution. The Finance Commission is a quasi-judicial body which recommends the Indian President in matters related to financial distribution between union and state government by demarcating the set of formulas and mechanisms as needed to the situation in the country and Constitution.

Facts about Finance Commission

Composition of Finance Commission of India

In India, the Finance Commission is composed of a total of five members of which one is the Chairman of the Finance Commission and the other four members of the Finance Commission who the President of India appoints. It is to be noted that they are also eligible to be reappointed to the Finance Commission by the President.

Qualification of Finance Commission Members

The Parliament has been empowered by the Indian Constitution in order to determine the qualification and manner required through which the member of the Finance Commission is selected. The Chairman should be a person with good experience in the field of public affairs and the other four members need to be from the following:

• High Court Judge or qualified to be the HC Judge
• Need to have specialized Knowledge of Accounts and Finance of the Indian Government.
• Vastly experienced in the field of administration and finance
• Specialised knowledge in the field of economics

Functions of Finance Commission

The prominent function of the Finance Commission is to recommend the Indian President in the matters such as:

• Shares of tax distribution between center and state government
• Determine the principle based on which the centre will give states the grants-in-aid of the Consolidated Fund of India.
• Other matters as prescribed by the Indian President.
• Based on the Finance Commission’s recommendations, steps must be taken to increase the state’s consolidated funds in order to support the resources of the panchayat and the municipality.

Note: The last function regarding financial assistance to the Panchayat and Municipality was added after the 73rd and 74th CAA 1992 which granted constitutional status to Panchayat and Municipality.

List of Finance Commission Chairman

In India since 1951 till date, a total of fifteen Finance Commissions have been constituted. The List of Finance Commissions Chairman has been mentioned in the table below:  

What are the Challenges Associated?

• Financial Allocation To Urban Areas: Despite their crucial economic role, financial allocation to urban areas remains insufficient.
  • Cities are pivotal to India’s economic landscape, contributing approximately 66% of the nation’s Gross Domestic Product (GDP) and about 90% of total government revenues.

• Challenges in Fiscal Devolution to Urban Local Bodies (ULBs): Despite the constitutional mandates and the efforts of previous finance commissions since the 11th FC, the fiscal devolution to cities has been inadequate.
  • Urban Local Bodies (ULBs) face a financial shortfall, which impacts city productivity and the quality of life.
  • Currently, Intergovernmental Transfers (IGTs) to ULBs are merely about 5% of GDP, significantly lower than in other developing countries like South Africa (2.6%), Mexico (1.6%), the Philippines (2.5%), and Brazil (5.1%).
• Taxation Challenges Post-GST Implementation: The introduction of the Goods and Services Tax (GST) has notably reduced the tax revenues of ULBs, excluding property tax, from about 23% in 2012-13 to roughly 9% in 2017-18.
  • The financial support from states to ULBs, recommended by State Finance Commissions, is also notably low, constituting only about 7% of states’ own revenue in 2018-19.
• Impact of Parallel Agencies on Local Governance: The 13th Finance Commission highlighted the detrimental effect of parallel agencies which financially and operationally weaken local governments.
  • Notable programs like the Member of Parliament Local Area Development Scheme (MPLADS) and the Member of Legislative Assembly Local Area Development Scheme (MLALADS) further complicate this distortion in the federal structure.
• Outdated 2011 Census Data: The reliance on outdated 2011 Census data for fiscal devolution is increasingly problematic, especially in the absence of the 2021 Census.
  • Accurate and current demographic data is crucial for the 16th FC to consider the significant urban migration and the emerging urban centres in Tier-2 and Tier-3 cities.

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