Finance Commission – Issues related to devolution of resources

[oped of the day] Beyond the mandate


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : 15th Finance Commission - ToRs - challenges


Recent amendments to the Terms of Reference (ToR) of the 15th Finance Commission (FFC) are examined here. 


    • First – requires the FFC to examine “whether a separate mechanism for funding of defence and internal security ought to be set up and how such a mechanism should be operationalised”. 
    • Second – from Section 83 of the Jammu and Kashmir Reorganisation Act 2019. It requires the President to “make a reference to the 15th Finance Commission to include the UT of J&K in its ToR and make an award for the successor UT of Jammu and Kashmir.

A new funding mechanism

    • Separate mechanism – The use of the words “separate mechanism” points to creating a mechanism distinct from the existing one. 
    • Constitutional position 
      • The Constitution requires that estimates relating to voted expenditure in the Annual Financial Statement be submitted in the form of demands for grants to the Lok Sabha.
      • The Government of India submits demands for grants to the Lok Sabha under the defence and home ministries for defence and deployment of armed forces in states.
    • New mechanism – The separate mechanism could be the creation of defence and internal security fund in the public account to which their annual budgetary allocations could be credited and spent over a multi-year time-frame without the threat of lapse. 
    • Already existing model – Such an arrangement already exists for a number of funds in the public account, like the National Disaster Relief Fund.

Challenges with this model

    • The extent of sum – The budget provision for 2019-20 for defence and the police grant of the home ministry is about Rs 5,30,000 crore. 
    • Huge amounts – It will be inappropriate to take away one-fifth of the GoI’s budget allocations into the public account. 
    • Budgetary management – escrowing such a large amount from its resources will constrain the GoI’s budgetary management.
    • Other ministries – similar demands could arise from other critical ministries like infrastructure and health, which will further emasculate budgetary flexibility. 
    • Lax budgeting – it will lead to lazy budgeting by the beneficiary ministries. 
    • Violation of rules – it violates the Government Accounting Rules 1990 (GAR), which allow for creating a fund in the public account only for the implementation of specified schemes of ministries and not for entire budgetary allocations of departments. 
    • Canons of budgeting – it violates the fundamental canons of annual budgeting mandated in the Constitution — providing for lapse of money budgeted but unspent during a year and obtaining Parliament’s approval every year for the Annual Financial Statement.
    • Ambiguity – The use of the words “internal security” creates ambiguity. 
      • Internal security means maintaining public order and peace by tackling internal threats and upholding the law. 
      • Public order and police are part of the state’s responsibility. 
      • Internal security is as much a concern of states as it is of the centre. 
    • Sharing with states – there would be a further challenge if such a fund is created in the GoI’s public account. It will have to decide how it will be shared with states.

J&K amendment

    • The phrase “include UT of JnK in its Terms of Reference” is indeterminate. 
    • No place for states – ToR of the FFC has 15 clauses. In which clause and where should it be included remains a question. The names of no state or UT find a place in any of these 15 clauses.
    • Treat as a state – this amendment requires the FFC to treat the UT of JnK as a state for the purposes of its award. 
    • No awards for UTs – No Finance Commission has ever made an award for any UT. It is not clear how the FFC can now make an award treating the UT of J&K as a state.
    • Competition with other UTs – the claims of the two other UTs with a legislature — Delhi and Puducherry demanding that FCs award a share of the divisible pool to them can’t be ignored.
    • The challenge from states – States argue that the impact of such a provision would increase the number of claimants to the divisible pool and reduce their individual share. 


    • Some state governments have complained about its perceived inequities to the President.
    • These two amendments unnecessarily raise more challenges for the FFC.
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