Functions of the Finance Commission of India

The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution. Its primary function is to define the financial relations between the Union Government and the State Governments. This ensures a fair and balanced distribution of resources, promoting fiscal federalism in India.

Key Functions:

1. Distribution of Tax Revenue: The core function is to recommend the principles governing the distribution of the net proceeds of taxes between the Union and the States. It also determines the allocation of these proceeds among the States themselves. This involves complex calculations considering factors like population, income, area, and fiscal capacity of each state.
2. Grants-in-Aid: The Commission suggests principles that should govern grants-in-aid to the States out of the Consolidated Fund of India. These grants are crucial for states facing fiscal deficits or needing support for specific development projects. The Commission meticulously assesses the needs of each state before recommending the amount of grants.
3. Measures to Augment State Resources: The Finance Commission advises the President on measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State, based on the recommendations made by the State Finance Commission. This helps ensure that local bodies have sufficient funds for their functions.
4. Other Matters Referred by the President: The President can refer any other matter relating to sound finance to the Commission for its opinion. This provides flexibility to address emerging fiscal challenges and issues.
5. Review of the state of the finances of the Union and States The commission makes its recommendations on the basis of many things and one of which is the review of finances of union and the states. This is done to maintain fiscal prudence and proper financial health of both the governments.

Impact and Significance:

The recommendations of the Finance Commission are crucial for the financial stability and development of the country. Although its suggestions are advisory, they carry significant weight, and the government generally accepts them. The Commission’s work ensures that resources are distributed fairly, promoting inclusive growth across all states. By recommending measures to strengthen local bodies, it promotes decentralization and grassroots development.

Each Finance Commission operates for a period of five years, and its recommendations are applicable for that period. The periodic establishment of the Finance Commission ensures that the fiscal arrangements between the Union and the States are regularly reviewed and updated to reflect changing economic realities.