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Day 29 – Q 4.How far do the terms of reference of the 15th Finance Commission encapsulate the spirit of fiscal federalism? Critically examine.

4. How far do the terms of reference of the 15th Finance Commission encapsulate the spirit of fiscal federalism? Critically examine. 

15 वें वित्त आयोग के टर्म्स ऑफ़ रिफरेन्स राजकोषीय संघवाद की भावना को कितना आत्मसात करती हैं? समालोचनात्मक जांच करें।


Finance Commission of India is an independent and non-partisan institution, which is a constitutional body, whose recommendations can have a drastic impact on the nature of fiscal federalism in the country. The main tasks of the commission are to strengthen cooperative federalism, improve the quality of public spending and help protect fiscal stability. 


The Fifteenth Finance Commission was constituted in the backdrop of the abolition of Planning Commission, the abolition of distinction between plan and non-plan expenditure and the far reaching structural tax changes embedded in the Goods and Services tax. 

The Terms of Reference of this Commission are somewhat unique including monitarable performance criteria for important national flagship programmes, and examining the possibility of setting up permanent non lapsable funding for India’s Security needs.

Conventionally, the Terms of References of FC can be seen as below:

  • Principles governing the vertical devolution of taxes between union and states.
  • Principles governing the Horizontal distribution between the states.
  • Grant in aid to states, supplement the resources of PRI, ULBs from states’ Consolidated funds.
  • Performance Based incentives for States

In this regard, the performance based incentives for the states will be based on multiple criteria which will be helpful in promoting fiscal federalism in the following manner-

  • Efforts made by the States in expansion and deepening of tax net under GST will help in realisation of a competitive tax environment where fiscal position of states will improve in turn improving the fiscal federalism.
  • ‘Progress made in increasing capital expenditure, eliminating losses of power sector, and improving the quality of such expenditure in generating future income streams’ criteria can help tackle the stress of NPAs in power sector and improve the fiscal situation of states.
  • ‘Control or lack of it in incurring expenditure on populist measures’ criteria can help arrest the burden of populist measures under political compulsions.
  • ‘Progress made in sanitation, solid waste management and bringing in behavioural change to end open defecation’ criteria can help overcome the burden due to sanitation related health expenditure especially in poorer states.

At the same time, there has been considerable contestation over the new provisions of Terms of reference and these are seen as antithetical to the vision of Fiscal federalism due to the following factors-

  • The ToR’s are seen as too expansive, and that this expansiveness is in the direction of tilting the fiscal balance further in favour of the Centre.
  • The call to revisit the previous FC’s decision to increase the share of the states is worrying.
  • The ToR states that the commission may also examine if revenue deficit grants are to be provided at all. To suggest that revenue deficit grants may not be provided is equivalent to demanding the Commission to disregard Articles 275. This is a violation of constitutional guarantees as well as fiscal federalism principles.
  • The 15th Finance Commission has been mandated to use data from the 2011 Census, instead of 1971 Census, as the base for determining revenue share across states.This, southern states have argued, may penalize them for their successful efforts in controlling population growth, by decreasing their share in the overall resource pool.
  • The TOR proposes that all states be judged, among other criteria, on how well they implemented flagship schemes of the Centre. However, it seems irrational considering there are many schemes of the Central government that the states have neglected because they have corresponding state schemes running successfully.
  • The recent, last-minute addition of asking FC XV to suggest ways of allocating non-lapsable funds for defence and internal security can be surely considered as against the ideals of fiscal federalism as defence is a union subject.

These issues call for reform of the overall architecture of fiscal federalism. Three possible options can be considered- 

  • One option is to only allow transfers through untied tax devolution.
  • A second option is to make the FC a permanent body and expand its mandate to undertake the resource allocation role of the erstwhile Planning Commission.
  • A third option is to revive the Inter-State Council as an effective federal decision-making body. 


Sustainable Development Goal SDG10 aims for reducing inequality within and among countries. Goal16 requires nations to build effective, accountable and inclusive institutions at all levels. An equitable distribution of revenue tied with performance incentives will help greatly in this regard as well as achieving the ideals of fiscal federalism.

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