Indian Government Forms 16th Finance Commission to Review Fiscal Distribution – Dr. Arvind Panagariya to Chair

In a strategic move, the Indian government has established the 16th Finance Commission, chaired by former NITI Aayog Vice Chairman Dr. Arvind Panagariya. The commission, formed under Article 280(1) of the Constitution, is set to review fiscal distribution between the Union and States for the five-year period starting from 2026. This topic is an important part of the latest current affairs, making it crucial for discussion.

Key Points

• Article 280(1) mandates the creation of the Finance Commission every five years.
• Core responsibilities include determining States’ share in central tax revenue, defining principles for central grants to States, and suggesting measures to boost local government resources.
• Formation and Leadership:
• Dr. Arvind Panagariya, former NITI Aayog Vice Chairman and Columbia University professor, will lead the panel.

Focus Areas

The commission’s terms of reference cover critical aspects such as the tax devolution framework between the Center and States, norms for grants-in-aid disbursal, augmentation of funds for rural and urban local bodies, and a review of financing under the 2005 Disaster Management Act.

Timeline and Recommendations

Recommendations for the fiscal distribution and grants architecture for the period 2026-2031 are expected by October 2025.

News

The 16th Finance Commission, chaired by Dr. Arvind Panagariya, is poised to play a pivotal role in shaping the financial landscape of India over the next five years. With a focus on tax devolution, grants-in-aid disbursal, and resource augmentation for local bodies, the commission will address crucial aspects of fiscal governance. 

The comprehensive review, including the examination of the 2005 Disaster Management Act’s financing, reflects the commitment to adapting financial policies to contemporary needs. The recommendations, due by October 2025, are anticipated to influence economic growth and reinforce cooperative fiscal federalism.

Why is the Commission Constituted?

The Finance Commission is constituted to fulfill constitutional obligations outlined in Article 280(1), ensuring a regular review of fiscal matters between the Union and States.

 The formation of the 16th Commission underscores the government’s commitment to responsible and equitable resource allocation, with an experienced economist like Dr. Arvind Panagariya at the helm, emphasizing the importance of cooperative fiscal federalism in driving India’s economic growth.

Important Points About The Finance Commission

• The Finance Commission is constitutionally mandated under Article 280(1) of the Indian Constitution.
• It is constituted every five years to review and recommend fiscal matters between the Union and States.

Key Responsibilities:

• Determines the share of States in central tax revenue.
• Lays down principles governing the distribution of central grants to States.
• Recommends measures to enhance the financial resources of local governments.

Term Duration

• The Finance Commission is appointed for a specific term, typically for five years.
• The recommendations made by the commission are applicable for the period specified in its terms of reference.

Composition

• The commission is typically headed by a Chairperson, often an eminent economist or financial expert.
• It consists of other members who bring expertise in finance, economics, and related fields.

Importance of Tax Devolution

One of the crucial aspects addressed by the Finance Commission is the tax devolution framework between the Center and States.

This ensures a fair and equitable distribution of central tax revenue among the States.

Grants-in-Aid Disbursal

The Finance Commission determines norms for grants-in-aid disbursal to States, influencing their fiscal health and development projects.

Local Government Funding

The commission examines ways to enhance funds allocated to rural and urban local bodies, promoting grassroots development.

Periodic Review

• The Finance Commission plays a vital role in adapting fiscal policies to changing economic conditions by conducting periodic reviews.

Influence on Economic Growth

The recommendations of the Finance Commission significantly influence economic growth by shaping the fiscal landscape at both the central and state levels.

Important Questions For Exams 

What is the constitutional mandate of the Finance Commission?

1. Why is the Finance Commission constituted every five years?
2. Outline the key responsibilities of the Finance Commission as per Article 280(1).
3. Explain the significance of determining the share of States in central tax revenue.
4. Who typically leads the Finance Commission, and what qualifications do they possess?
5. Describe the composition of the Finance Commission and the expertise of its members.
6. Why is the tax devolution framework between the Center and States a crucial aspect addressed by the Finance Commission?
7. How does the Finance Commission influence the fiscal health of States through grants-in-aid disbursal norms?
8. What measures does the Finance Commission recommend to enhance funds for rural and urban local bodies?
9. Discuss the importance of allocating sufficient resources to local governments.
10. Elaborate on the concept of cooperative fiscal federalism.
11. How does the Finance Commission contribute to cooperative fiscal federalism in India?
12. Who is the current Chairperson of the Finance Commission (as of the last available information)?
13. What are the key focus areas of the 16th Finance Commission?