15th Finance Commission

The report of the Fifteenth FC, along with an Action Taken Report, was tabled in Parliament.

About the 15th Finance Commission

• N K Singh is the chairman of 15th Finance Commission.
• The Fifteenth Finance Commission (FC) has considered the 2011 population along with forest cover, tax effort, area of the state, and “demographic performance” to arrive at the states’ share in the divisible pool of taxes.

Finance Commission

• The Finance Commission of India was established in 1951.
• The purpose of its establishment was to preserve the financial relations between the Central Government and the State Governments of India. The Finance Commission is appointed after every five years.
• 15 Finance Commissions have been appointed so far.
• In 2017 the latest Finance Commission was set up under the chairmanship of NK Singh (former member of Planning Commission of India). The tenure of the Finance Commission is 5 years.
• The Finance Commission is constituted under Article 280 as a constitutional body.
• It is a quasi-judicial institution. It is constituted by the President of India. The Finance Commission in India is constituted under the Finance Commission Act 1951.
• In 1993, the State Finance Commission was also set up in all the states of India. The Finance Commission consists of a Chairman and 4 members, 2 members are full-time members and 2 members are part-time members.

Highlights of the Report

• The Commission has reduced the vertical devolution — the share of tax revenues that the Centre shares with the states — from 42% to 41%.
• The 1 per cent decrease in the vertical devolution is roughly equal to the share of the erstwhile state of Jammu and Kashmir, which would have been 0.85% as per the formula described by the Commission.
• The Commission has said that it intends to set up an expert group to initiate a non-lapsable fund for defence expenditure.
• The Fifteenth FC has use of 2011 population figures has resulted in states with larger populations like Uttar Pradesh and Bihar getting larger shares, while smaller countries with lower fertility rates (the number of children born to a woman in her life) have lost out.

The demographic effort

• To reward population control efforts by states, the Commission developed a criterion for the demographic attempt — which is essentially the ratio of the state’s population in 1971 to its fertility rate in 2011 — with a weight of 12.5%.
• States such as Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, and Telangana have fertility rates below the replacement rate or the number of children that have to be born to a woman of reproductive age for the population to maintain itself at the current level without migration.

Income distance criterion

• The total area of states, the area under forest cover, and “income distance” were also used by the FC to arrive at the tax-sharing formula.
• Income distance is calculated as the difference between the per capita gross state domestic products (GSDP) of the state from that of the state with the highest per capita GSDP.
• The states with less income getting a higher share to allow them to provide services comparable to those provided by the richer ones.
• The Commission used the per capita GSDP of Haryana as the reference for calculating the income distance, and gave it a weight of 45%, down from the 50% assigned by the 14th FC.
• The weight assigned to state area was unchanged at 15%, and that of forest cover was increased from 7.5% to 10%.

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