The Constitution of India envisages the Finance Commission under Article 280 as the ‘balancing wheel of fiscal federalism’ in India.
Key Recommendations & Impact
Tax Devolution Raised to 42% – Increased untied resources, enhanced fiscal autonomy.
Reduced Dependence on Central Grants – Gave States more predictable, formula-based transfers.
Greater Spending Autonomy – Fewer tied schemes allowed States to set local priorities.
Plan vs Non-Plan Expenditure removed – Simplified budgeting, better fiscal management.
Incentives for Fiscal Discipline – FRBM compliance encouraged prudent debt management.
Support to Local Bodies – Higher allocations improved grassroots fiscal health.
Special Grants for Environment & Judiciary – Helped States strengthen governance and green initiatives.
GST Compensation Mechanism (recommended later) – Protected States from revenue loss during tax transition.
Positive Impact
Strengthened fiscal federalism
Improved fiscal indicators of states
Encouraged competitive federalism
Concerns
Rise in Cesses & Surcharges – Cesses & surcharges rising from 12.8% (2015-20) to 18.5% (2020-24).
States’ effective share shrank – Fell from 35% (2015-20) to ~31% (2020-24) of Centre’s gross tax revenue.
GST Compensation Delays – Especially during COVID, strained States’ finances.
Reduced Central Grants – Decline in discretionary and plan-based transfers cut flexibility.
Borrowing Restrictions (Art. 293, FRBM) – Limited States’ ability to raise resources.
High Centrally Sponsored Schemes (CSS) – Continued tied funds reduced States’ expenditure autonomy.
Way Forward
Increase Devolution to 50% under 16th FC.
Include Cess/Surcharge in divisible pool
Restructure CSS – Consolidate into fewer umbrella schemes
As the Punchhi Commission noted, “true federalism requires fiscal autonomy alongside political autonomy.”