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.
It asks 2 things — 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 · Article 280 requires the President to constitute a Finance Commission every fifth year or earlier; it is the constitutional arbiter of India's fiscal federalism.
Cover
- Constitution: a Chairman and four members appointed by the President; the 1951 Act sets qualifications (High Court judge, finance, accounts, administration, economics).
- Duties under Article 280(3): vertical and horizontal sharing, grants-in-aid principles, augmenting State funds for local bodies, referred matters; advisory, with an Article 281 memorandum.
- Fifteenth Commission: constituted 27 November 2017 under N.K. Singh for five years from 1 April 2020.
- Terms of reference: 2011 population data (para 8), a fiscal roadmap (para 5) and performance incentives in nine areas (para 7).
- Discussion: the 2011 data alarmed States that slowed population growth; since then, the Commission added a total fertility rate criterion and set the States' share at 41 per cent.
Close with · Since then, the Commission named its devolution chapter 'Towards Cooperative Federalism'; its lasting test is to reward reform without penalising States for past success.
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”
- Article 280(1): the President constitutes a Finance Commission within two years of the Constitution's commencement and thereafter every fifth year or earlier.The Constitution of India (as on 1 May 2024) - Legislative Department ↗“The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Com”
- The 2011 population mandate raised fears among States that had reduced population growth since 1971.Fifteenth Finance Commission, Report for 2020-21 - Finance Commission of India ↗“The ToR enjoining us to use the population data of 2011 created apprehensions that in the process those States that have achieved greater progress in reducing population growth since 1971 would be adversely affected.”
- The Fifteenth Commission introduced total fertility rate as a measure of demographic performance.Fifteenth Finance Commission, Report for 2020-21 - Finance Commission of India ↗“introducing a new criterion of total fertility rate (TFR) as a measure of demographic performance”
- The Fifteenth Commission set the States' share at 41 per cent of the divisible pool, one point below 42, to meet the needs of the new Union Territories.Fifteenth Finance Commission, Report for 2020-21 - Finance Commission of India ↗“we recommend that the aggregate share of States may be reduced by 1 percentage point to 41 per cent of the divisible pool.”
- The report's devolution chapter is titled 'Towards Cooperative Federalism'.Fifteenth Finance Commission, Report for 2020-21 - Finance Commission of India ↗“Chapter 3: Towards Cooperative Federalism: Vertical and Horizontal Devolution”
Question: UPSC's CS (Main) 2018, GS Paper II — paper ↗. Approach: Minimalist IAS, checked 3 Oct 2026 (how we verify) — UPSC publishes no model answers. ·
Model answer· 367words · Minimalist IAS
Article 280 requires the President to constitute a Finance Commission within two years of the Constitution's commencement and thereafter every fifth year or earlier. It is the constitutional arbiter of fiscal federalism, deciding how the Union's taxes are shared with the States.
How the Finance Commission is constituted
- Composition: a Chairman and four other members, appointed by the President.
- Qualifications: Parliament prescribes them; the 1951 Act wants a Chairman experienced in public affairs and members who are, or could be, High Court judges or experts in finance, accounts, administration or economics.
- Duties (Article 280(3)): share net tax proceeds between the Union and the States and among States; set principles for grants-in-aid; suggest measures to augment State funds for Panchayats and Municipalities; and advise on matters the President refers.
- Status: advisory; the Union lays the report before Parliament with a memorandum on action taken (Article 281).
- President constitutes (Art. 280)
- Commission consults Union and States
- Report to President
- Laid in Parliament with action memo (Art. 281)
Terms of reference of the recent (Fifteenth) Commission
- Set-up: constituted on 27 November 2017 under Chairman N.K. Singh, for five years from 1 April 2020.
- Core mandate: vertical and horizontal devolution, grants-in-aid, and grants for local bodies and disaster management.
- 2011 population (para 8): a clear break from earlier practice.
- Fiscal roadmap (para 5): a path of sound fiscal management for the Union and the States.
- Performance incentives (para 7): measurable incentives in nine reform areas.
Discussion: why the terms of reference were contested
- Demographic fear: States that slowed population growth since 1971 feared losing share; since then, the Commission answered with a new total fertility rate criterion for demographic performance.
- Vertical share: the Fourteenth Commission had raised the States' share to 42 per cent; since then, the Fifteenth set it at 41 per cent, the 1 point covering the new Union Territories of Jammu and Kashmir and Ladakh.
- Conditionality: incentives reward reform, but States saw them as a squeeze on fiscal autonomy.
The Fifteenth Commission's report, since then, titles its devolution chapter 'Towards Cooperative Federalism'. Its lasting test, and that of every successor, is to reward reform and efficiency without penalising States for past success, keeping the Union–State fiscal compact fair.
Prepared by Minimalist IAS to the answer standard of Shivam Singh (mentor, 7 years) · facts checked against official sources (how we verify) · updated 3 Oct 2026. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.
