Finance Commission

Finance Commission

Subject: Polity

Section: Constitutional Bodies

Why is it in the news?

• The Sixteenth Finance Commission is due to be set up shortly.
• It will re-examine the recommendations of 15th Finance commission since many changes have taken place since 2017 that includes Covid-19 and the subsequent geopolitical changes.

Finance Commission

• The President shall constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President.
• Qualifications for members of the Finance commission as per Finance commission act,1951:

1. Chairperson – Individual with experience of public affairs
2. Member 1 – High court judge or qualified to be one.
3. Member 2 – special knowledge of finance and accounts of government.
4. Member 3 – special knowledge of economics.
5. Member 4 – wide experience in financial matters and administration.

• It shall be the duty of the Commission to make recommendations to the President as to

1. the distribution between the Union and the States of the net proceeds of taxes and the allocation between the States of the respective shares of such proceeds;
2. the principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India;
3. any other matter referred to the Commission by the President in the interests of sound finance

Fiscal Responsibility and Budget Management (FRBM) Act

• The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, intends to bring transparency and accountability in the conduct of the fiscal and monetary actions of the government.
• The central government agreed to the following fiscal indicators and targets, subsequent to the enactment of the FRBMA
• Revenue deficit to be eliminated by the 31st of March 2009. A minimum annual reduction of 0.5% of GDP.
• Fiscal Deficit to be brought down to at least 3% of GDP by 31st of March 2008. A minimum annual reduction – 0.3% of GDP.
• The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:
  • Medium Term Fiscal Policy Statement
  • Macroeconomic Framework Statement
  • Fiscal Policy Strategy Statement
• The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy statement.
• Several years have passed since the FRBM Act was enacted, but the Government of India has not been able to achieve targets set under it. The Act has been amended several times.
• In 2013, the government introduced a change and introduced the concept of effective revenue deficit.
• This implies that effective revenue deficit would be equal to revenue deficit minus grants to states for the creation of capital assets.
• In 2016, a committee under N K Singh was set up to suggest changes to the Act.