How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss.
Approach · directive: “how / what do you know / discuss”
What it asks · Explain how Article 280 constitutes the Finance Commission and what it does, then describe the main terms of reference of the recent (Fifteenth) Commission.
The question has 2 parts — answer each
- How the Finance Commission is constituted under Article 280: appointment, composition, qualifications, functions and the status of its recommendations
- What you know of the terms of reference of the recently constituted (Fifteenth) Finance Commission; discuss their significance
Open with · The Finance Commission is a constitutional body under Article 280, appointed by the President every fifth year to recommend how tax revenues are shared between the Union and the States.
Cover
- Constitution: the President appoints a Chairman and four members every fifth year or earlier; Parliament fixes qualifications, such as a High Court judge (or one qualified to be) and experts in finance, accounts and economics.
- Duties (Article 280(3)): recommend sharing of net tax proceeds between the Union and States and among States; principles for grants-in-aid; measures to supplement the resources of Panchayats and Municipalities; and matters the President refers.
- Status: its recommendations are advisory; the Union lays them before Parliament with a memorandum on action taken (Article 281).
- Fifteenth Finance Commission: constituted on 27 November 2017 under Chairman N.K. Singh to make recommendations for five years from 1 April 2020.
- New features in its terms of reference: 2011 population data (para 8), which worried States that had curbed population growth; a roadmap for sound fiscal management (para 5); performance-based incentives in nine areas (para 7).
- Other tasks: vertical and horizontal devolution, grants-in-aid, and grants for local bodies and disaster management.
- Context: the Fourteenth Commission had raised the States' share of the divisible pool to 42 per cent, so the Fifteenth had to balance State needs with the Union's commitments.
Close with · The Commission is a constitutional arbiter of fiscal federalism; the recent terms of reference bring in updated population data, fiscal discipline and performance incentives that will shape Centre–State finances.
Add value (verified)
- The Fifteenth Finance Commission's own report records that its terms of reference required it to use 2011 population data, a departure that raised concern among States that had reduced population growth. Report of the Fifteenth Finance Commission for 2020-21 (November 2019), Chapter 3 — Finance Commission, India (fincomindia.nic.in) ↗“the Commission shall use the population data of 2011 while making recommendations”
Question: UPSC's CS (Main) 2018, GS Paper II — paper ↗. Approach: Minimalist IAS, checked 30 Sept 2026 (how we verify) — UPSC publishes no model answers. ·
Model answer · 302 words (UPSC limit 250) · Minimalist IAS
The Finance Commission is a constitutional body under Article 280, appointed by the President every fifth year or earlier, to recommend how taxes and grants are shared between the Union and the States; it is the arbiter of India's fiscal federalism.
Constitution and functions
- Composition: a Chairman and four other members appointed by the President; Parliament prescribes qualifications by law, and under the 1951 Act these cover a High Court judge or one qualified to be, and persons with expertise in finance, government accounts, administration and economics.
- Duties (Article 280(3)): recommend the distribution of net tax proceeds between the Union and the States and among the States; the principles governing grants-in-aid; measures to augment State funds to supplement Panchayats and Municipalities; and any matter referred in the interest of sound finance.
- Status: recommendations are advisory; the Union lays them before Parliament with an explanatory memorandum on the action taken (Article 281).
Terms of reference of the Fifteenth Finance Commission
- Constituted on 27 November 2017 under Chairman N.K. Singh, to recommend for five years from 1 April 2020.
- Core tasks: vertical and horizontal devolution, principles of grants-in-aid, and grants for local bodies and disaster management, after the Fourteenth Commission had raised the States' share of the divisible pool to 42 per cent.
- Population data (para 8): the Commission was required to use 2011 Census data, worrying States that had curbed population growth and feared losing share.
- Fiscal roadmap (para 5): a path for sound fiscal management for the Union and the States.
- Performance incentives (para 7): measurable, performance-based incentives in nine areas, which States read as conditionality on transfers.
The Commission is the constitutional arbiter of fiscal federalism; the recent terms of reference, with updated population data, fiscal discipline and performance incentives, will shape Centre–State finances and must be balanced against State needs.
Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.