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Subject: Finance Commission

  • [10th August 2026] The Hindu OpED: The fiscal cost of unconditional cash transfers to women

    PYQ Relevance
    [UPSC 2022]     Reforming the government delivery system through the Direct Benefit Transfer Scheme is a progressive step, but it has its limitations too. Comment.
    Linkage: The PYQ Examines DBT-based welfare delivery, fiscal sustainability, and the trade-off between welfare transfers and human-capital expenditure. The article highlights the trade-off between cash transfers and spending on education, health and development.

    Mentor’s Comment

    Delhi rolled out the Lakshmi Yojana on August 1, an unconditional cash transfer (UCT) of ₹2,500 a month for eligible women, joining a rapidly growing list of States running similar schemes since 2023. Fresh State-wise expenditure data show that in several States this spending already exceeds the entire education or health budget, reopening the question of what these transfers displace. The concern is set against the 16th Finance Commission’s award period.

    What is an unconditional cash transfer?

    • Definition: A UCT is a direct income payment to a beneficiary with no work, attendance, or behaviour condition attached, unlike a conditional transfer or an in-kind subsidy.
    • This wave: The current schemes target women with a fixed monthly sum, framed as income support rather than a service.

    Why are states rushing to launch women’s UCT schemes?

    • Electoral promise: Most schemes were pledged at assembly elections and rolled out immediately, drawing the label of a pre-poll dole.
    • Near-universal spread: From 2023 onward almost every major state added a scheme, making it politically hard for any state to abstain.
    • Compensation framing: Some argue the transfers compensate women for the state’s failure to create broad opportunity and services.

    Are these transfers a benefit to women or a burden on states?

    • Used productively: Evaluations show women mostly spend the money on food, health and education, so the transfer reaches real welfare needs.
    • Fiscal pressure: The same spending expands a recurring liability that presses on existing health and education budgets.
    • Genuine trade-off: The tension is real, the cash is used well by recipients yet competes with the public services those recipients depend on.

    How much fiscal space do states actually have?

    • Committed spending: The 16th Finance Commission notes almost 44% of state expenditure is locked in interest payments, pensions and salaries.
    • Shrinking social share: Social sector revenue expenditure has stayed stable as a share of total spending since 2011-12 but has declined as a share of GDP since 2020-21.
    • Little room: With most of the budget pre-committed, new UCT outlays crowd against fresh investment in services and infrastructure.

    How large are these schemes across states?

    • Share of total spending: UCT outlays range from 10.03% of total expenditure in Jharkhand and 7.84% in West Bengal down to 0.97% in Goa and 0.26% in Himachal Pradesh.
    • Share of education spending: In the largest-scheme states the UCT bill exceeds half the entire education budget, near 74% in Jharkhand and Karnataka and 54% in West Bengal.
    • Named schemes and amounts: Karnataka Gruha Lakshmi (Rs 2,000), Madhya Pradesh Ladli Behna (Rs 1,500), Tamil Nadu Kalaignar Magalir Urimai Thogai (Rs 1,000), Maharashtra Majhi Ladki Bahin (Rs 1,500), Jharkhand Maiya Samman (Rs 2,500), Odisha Subhadra (Rs 10,000 a year), Assam Orunodoi (Rs 1,250), and Delhi Lakshmi Yojana (Rs 2,500).

    Do the transfers reach the poorest, or do barriers exclude them?

    • Rationalisation cuts: Maharashtra and Madhya Pradesh have reduced beneficiary numbers in the name of rationalisation.
    • Gatekeeping criteria: Delhi’s scheme requires a recommendation from the local MLA or MP, plausibly to cap numbers before rollout.
    • Access barriers: Lack of documents, weak bank access and errors in digital records still exclude eligible women.

    Conclusion:

    The transfers are used well by the women who receive them, but states have little fiscal room, since most spending is pre-committed and the social sector share of GDP is already falling. Without new resource mobilisation, the schemes are financed by squeezing the very education and health services their beneficiaries rely on. The unresolved question is whether states raise revenue to fund them or let public services erode.

    Back2Basics: 16th Finance Commission

    • Award period: The 16th Finance Commission’s recommendations cover the five years beginning 2026-27.
    • What it is: A constitutional body under Article 280, constituted every five years.
    • Mandate: Recommends the sharing of central taxes between the Centre and states (vertical devolution) and among states (horizontal devolution), plus grants-in-aid.

    [2022, GS2, 10 marks] Reforming the government delivery system through the Direct Benefit Transfer Scheme is a progressive step, but it has its limitations too. Comment.

  • Equity concerns in the 16th Finance Commission award

    Why in the News

    The 16th Finance Commission has retained the size of the tax pool for States but reshaped the grants that equalise between them. The tension is between fiscal efficiency and the constitutional intent of equity across unequal States.

    What is the Finance Commission?

    1. Constitutional body: The Finance Commission is set up under Article 280 every five years to recommend the sharing of taxes between the Union and the States.
    2. Vertical devolution: It fixes the share of central taxes that goes to States as a whole.
    3. Horizontal devolution: It sets the formula distributing that share among individual States.

    What are the Key Recommendations of the 16th Finance Commission?

    • Vertical devolution retained at 41%: The States’ share of the divisible pool stays at 41%, the same level as the 15th Finance Commission, giving continuity and predictability.
    • Income distance weight trimmed: The income distance weight in the horizontal formula is cut from 45% to 42.5%.
    • New GDP contribution weight: A 10% GDP contribution weight is introduced in the horizontal formula.
    • Revenue Deficit Grants eliminated: The Revenue Deficit Grants that plugged the gap for States unable to meet committed expenditure are discontinued.
    • Sector and State specific grants cut: Most sector specific and State specific grants are removed.
    • Grants in aid share halved: Grants in aid fall from 19.4% to 8.3% of total transfers.

    Why do the changes raise equity concerns?

    • Rewarding the prosperous: A GDP contribution weight favours already prosperous States that contribute more to national output.
    • Removing the equaliser: Revenue Deficit Grants had cushioned States that cannot meet committed expenditure from their own revenue.
    • Constitutional intent: Grants in aid under Article 275 are meant to lift weaker States, and a shrinking grant share works against that purpose.

    Conclusion

    The award tilts the transfer system toward fiscal performance and away from equalisation. The unresolved question is whether poorer States can meet their obligations once the grant cushion is withdrawn.

    What is Fiscal Federalism?

    • About: Fiscal federalism is the division of taxation powers, expenditure responsibilities, borrowing powers, and intergovernmental transfers among the different levels of government in a federal system.
    • Rationale: It is not merely a mechanism for dividing taxes, it ensures that a citizen’s access to essential public services does not depend excessively on the fiscal capacity of the State in which they live. Indian fiscal federalism reconciles three imbalances.
    • Vertical fiscal imbalance: The Union has access to buoyant, broad based taxes, while the States carry expenditure intensive responsibilities such as health, education, agriculture, police, and local infrastructure.
    • Horizontal fiscal imbalance: States differ widely in income, resources, geography, demographics, and revenue raising ability, so a lower income State cannot fund the same services as a richer one at similar tax rates.
    • Third tier fiscal imbalance: Panchayats and Municipalities carry substantial service delivery duties but have limited own source revenue and depend on transfers from the Union and the States.

    Constitutional Framework Governing Fiscal Federalism

    • Article 246 and the Seventh Schedule: Divides legislative and taxation powers through the Union, State, and Concurrent Lists, placing public order, health, agriculture, and local government largely in the State domain.
    • Article 246A: Inserted by the 101st Constitutional Amendment Act, 2016, gives Parliament and State Legislatures concurrent power over Goods and Services Tax, with Parliament exclusive over inter State GST.
    • Article 270: Defines the taxes forming the divisible pool shared with the States on the Finance Commission’s recommendation.
    • Article 271: Allows Union surcharges, which along with cesses are excluded from the divisible pool.
    • Article 275: Empowers Parliament to give grants in aid from the Consolidated Fund of India to States in need, including for Scheduled Tribes and Scheduled Areas.
    • Article 280: Requires the President to constitute a Finance Commission every five years to recommend vertical and horizontal devolution, the principles of grants in aid, and measures to augment State funds for local bodies.
    • Article 282: Permits the Union or a State to make grants for any public purpose, the constitutional basis for many discretionary and centrally sponsored transfers.
    • Articles 243-I and 243-Y: Require States to constitute State Finance Commissions every five years for Panchayats and Municipalities respectively.
    • Article 293: Lets States borrow within India, but a State indebted to the Union needs Union consent for further borrowing.
    • Article 279A: Establishes the GST Council, institutionalising cooperative Union State decision making on indirect taxes.

    [2023] Consider the following :
    1. Demographic performance
    2. Forest and ecology
    3. Governance reforms
    4. Stable government
    5. Tax and fiscal efforts
    For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?
    (a) Only two
    (b) Only three
    (c) only four
    (d) All five

  • Discuss the recommendations of the 13th Finance Commission which have been a departure from the previous commissions for strengthening the local government finances.

  • How is the Finance Commission of India constituted? What do you about the terms of reference of the recently constituted Finance Commission? Discuss.

    The Finance Commission of India (FC), established under Article 280 of the Constitution, is a quasi-judicial body. It plays a vital role in maintaining the fiscal federal balance envisioned by the Constitution.

    Constitution of the Finance Commission

    Constitutional Provision- As per Article 280(1), the President of India constitutes the Finance Commission every five years or earlier if necessary.

    Composition-

    Consists of a Chairperson and four other members, appointed by the President.

    Their qualifications and terms of service are determined by the Finance Commission (Miscellaneous Provisions) Act, 1951.

    Tenure- The Commission usually has a tenure of five years, extendable by Presidential order.

    Terms of Reference (ToR) of the Recently Constituted Finance Commission

    The 16th Finance Commission was constituted in December 2023, chaired by Dr. Arvind Panagariya.
    Its recommendations will apply for the period 2026-2031.

    Division of Tax Proceeds

    Recommend the distribution of net tax proceeds between the Union and the States under Chapter I, Part XII of the Constitution.

    Determine the allocation of shares among individual States from the total divisible pool of central taxes.

    Principles for Grants-in-Aid

    Lay down the principles governing grants-in-aid to States from the Consolidated Fund of India.

    Recommend the amounts to be provided to States as grants under Article 275, for purposes other than those specified in the provisos to clause (1).

    Enhancing State Funds for Local Bodies

    Suggest measures to increase the Consolidated Fund of States to supplement resources of Panchayats and Municipalities.

    Base these recommendations on the inputs of respective State Finance Commissions, ensuring fiscal strengthening of local governance.

    Evaluation of Disaster Management Financing

    Review existing funding mechanisms for Disaster Management, particularly those created under the Disaster Management Act, 2005.

    Recommend improvements in the structure, sharing pattern, and utilization of National and State Disaster Response Funds.

    Any Other Matters Referred by the President

    Examine and recommend on additional fiscal issues to ensure “sound finance,” including fiscal consolidation, resource augmentation, and expenditure efficiency.

    Challenges Ahead

    Data Gaps and Quality Issues- Relies on outdated and inconsistent official data, affecting fiscal assessments.

    Political Factors- Faces pressure to balance conflicting interests of Centre, States, and political stakeholders.

    Overlap with GST Council- GST decisions affect revenue flows and reduce FC’s fiscal autonomy.

    Limited Role in Local Governance- Depends on weak or irregular State Finance Commissions for data and recommendations.

    FCs have no enforcement power, as their recommendations are advisory in nature.

    Way Forward

    Ensuring state representation in decision making

    Permanence- Make FC a permanent body for continuous review and coordination. (Rajamannar Committee)

    Addressing Emerging Issues and Challenges – Factor in digital transformation and green financing for sustainable growth.

    Build data-driven analytical capacity with reliable and updated fiscal databases.

    The Finance Commission remains the keystone of India’s fiscal federalism, ensuring both equity and efficiency in resource distribution.

  • How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position?

    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.”

  • Consider the following

    Consider the following :
    1. Demographic performance
    2. Forest and ecology
    3. Governance reforms
    4. Stable government
    5. Tax and fiscal efforts
    For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?

  • Report on Datasets for State Finance Commissions (SFCs)

    Why in the news?

    The Ministry of Panchayati Raj released the Report of the Committee on Datasets for State Finance Commissions to strengthen evidence-based fiscal decentralisation and improve financial governance of local bodies.

    Key Highlights

    • Released by V. Anantha Nageswaran.
    • The report aims to strengthen: Fiscal decentralisation, Local public finance, and Data-driven governance
    • Focuses on improving data availability for Panchayats and State Finance Commissions (SFCs)

    Why is the Report Important?

    According to the Chief Economic Adviser:

    • Better data leads to better governance.
    • Sound fiscal decisions require: Reliable data, Timely data, and Granular (local-level) data
    • Effective delivery of services such as: Drinking water, Roads, Street lighting, Anganwadi services depend on empowered local governments.

    Major Recommendations

    • Panchayat-Level Fiscal Database: Creation of comprehensive databases on: Revenue, Expenditure, Assets, Liabilities.
    • Use of Panchayat Advancement Index (PAI): Classification of PAI indicators for SFC analysis and recommendations.
    • State Finance Commission Cells: Dedicated SFC Cells in State Governments, to support: Data collection, Research, Technical analysis
    • Standardised Accounting Framework: Uniform accounting and reporting systems across States.
    • Common Reporting Framework: Standard format for SFC reports. Enables comparison and consistency.
    • Data Handbooks: Publication of comprehensive Panchayat data handbooks.
    • State Finance Commission Manual: Preparation of a standard operational guide for future SFCs.

    State Finance Commission (SFC)

    • Constitutional Basis: Article 243-I: Provides for constitution of a State Finance Commission by the Governor every five years.
    • Functions
      • Review financial position of Panchayats.
      • Recommend distribution of State taxes, Duties, Tolls, Fees between State Government and local bodies.
      • Suggest measures to improve local finances.

    [2025] Consider the following statements :
    I. Panchayats at the intermediate level exist in all States.
    II. To be eligible to be a Member of a Panchayat at the intermediate level, a person should attain the age of thirty years.
    III. The Chief Minister of a State constitutes a commission to review the financial position of Panchayats at the intermediate levels and to make recommendations regarding the distribution of net proceeds of taxes and duties, leviable by the State, between the State and Panchayats at the intermediate level.
    Which of the statements given above are not correct?

    [A] I and II only

    [B] II and III only

    [C] I and III only

    [D] I, II and III

  • With reference to the Finance Commission of India, which of the following statements is correct

    With reference to the Finance Commission of India, which of the following statements is correct?

  • Which of the following is /are among the noticeable features of the recommendations of the Thirteenth Finance Commission

    Which of the following is /are among the noticeable features of the recommendations of the Thirteenth Finance Commission?
    1. A design for the Goods and Services Tax, and a compensation package linked to adherence to the proposed design.
    2. A design for the creation of lakhs of jobs in the next ten years in consonance with India’s demographic dividend.
    3. Devolution of a specified share of central taxes to local bodies as grants.
    Select the correct answer using the code given below:

  • With reference to the Fourteenth Finance Commission, which of the following statements is/are correct

    With reference to the Fourteenth Finance Commission, which of the following statements is/are correct?
    (1) It has increased the share of States in the central divisible pool from 32 percent to 42 percent
    (2) It has made recommondations concerning sector-specific grants
    Select the correct answer using the code given below.