Role of Finance Commission in India

Role of Finance Commission in India – The Finance Commission of India plays a crucial role in shaping the financial landscape of the country.

Role of Finance Commission in India


The Finance Commission of India plays a crucial role in shaping the financial landscape of the country. Established under Article 280 of the Indian Constitution, the Commission’s primary responsibility is to recommend the distribution of financial resources between the central government and the state governments. Since its inception, the Finance Commission has evolved into a significant institution that aims to ensure fiscal stability, equity, and cooperative federalism within the Indian economy.

Background and Composition:

The Finance Commission is typically constituted every five years, and its composition includes a Chairman and four other members with diverse expertise in economics, finance, and public administration. The current Finance Commission is the 15th Finance Commission, which was constituted in 2017.

Key Responsibilities:

The main responsibilities of the Finance Commission are as follows:

Resource Distribution: One of the primary roles of the Commission is to recommend the distribution of net proceeds of taxes between the central and state governments. This helps maintain a balance between the resources available to both levels of government, ensuring that they can fulfill their respective responsibilities effectively.

Vertical and Horizontal Devolution: The Commission recommends the percentage of central tax revenue that should be shared with the states. This is known as vertical devolution. Additionally, it suggests the criteria for the distribution of funds among the states, which is referred to as horizontal devolution. These criteria consider factors like population, area, income distance, and fiscal discipline.

Grant-in-Aid: The Finance Commission may suggests grants to states to cover deficits in their revenue accounts. These grants are intended to assist states in bridging their financial gaps and fulfilling their obligations.

Local Government Finance: The Commission also makes recommendations regarding the allocation of resources to rural and urban local bodies. This aims to strengthen local governance and empower grassroots institutions.

Fiscal Consolidation: The Commission assesses the fiscal positions of both the central and state governments and recommends measures for achieving fiscal consolidation, which is essential for maintaining fiscal discipline and sustainability.

Significance and Impact:
The Finance Commission’s recommendations hold significant implications for the fiscal health of both the central and state governments. By ensuring a fair distribution of resources, it contributes to reducing regional imbalances and promoting cooperative federalism. The Commission’s role in recommending grants and assistance to local bodies strengthens decentralized governance and facilitates development at the grassroots level.


The Finance Commission plays an integral role in maintaining fiscal equilibrium, promoting cooperation between the central and state governments, and ensuring effective governance. Its recommendations significantly impact the financial landscape of India, striving to achieve a balanced distribution of resources and fostering inclusive development across the nation. As India’s economy continues to evolve, the Finance Commission’s role will remain pivotal in guiding its financial framework towards prosperity and stability.

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