The Finance Commissions in India, known in the local language as Vitta Āyoga, get established periodically by the President under the Indian Constitution's Article 280. The purpose behind setting them up is to create a financial balance between the central government and each individual state government.

First Finance Commission and Subsequent Commissions

The First Finance Commission came into existence in 1951 based on The Finance Commission (Miscellaneous Provisions) Act, 1951. Since the Indian Constitution was enacted in 1950, a total of fifteen Finance Commissions have been appointed and worked towards establishing financial harmony in the country.

Each of these commissions has its own terms of reference which specify the parameters for selection, appointment, and disqualification for the members. These terms also outline the eligibility criteria, the appointment tenure, and the powers vested in the Finance Commission.

Constitution and Frequency of Commissions

The Indian Constitution mandates that a new Finance Commission must be set up every five years. The commission comprises a chairman and four other members who bring relevant expertise to the table.

Most Recent Finance Commission

The latest Finance Commission was formed on 31st December 2023 under the leadership of Arvind Panagariya, who previously held the position of Vice Chairman at the National Institution for Transforming India (NITI) Aayog.

Role and Responsibilities of Finance Commissions

Finance Commissions have a crucial role in maintaining the economy's stability by fostering cooperative financial relations between the central and state governments. They are tasked with:

• Allocating central taxes that are to be distributed between the central and state governments.
• Determining principles governing grants-in-aid to the states out of the Consolidated Fund of India.
• Considering new measures to augment the Consolidated Fund of a state to supplement the resources of local bodies in the state.
• Reviewing government financial liabilities and suggesting corrective actions.

The Finance Commissions work independently and impartially to ensure equitable distribution of national resources, thereby promoting balanced economic development across all regions of the country. They contribute fundamentally to the economic governance of India, making them a foundational pillar for maintaining the country's financial health and stability.

Understanding Finance Commission in Indian Economy

Role of the Finance Commission

The Finance Commission is a significant entity in the context of the Indian economy. It is established under Article 280 of the Indian Constitution which authorizes the President of India to constitute a finance commission. This commission is expected to be set up every five years, or earlier, if considered necessary by the President. The commission comprises a chairman and four other members.

The Parliament of India has the authority to establish the requirements for the selection and appointment of the commission members through lawful procedures. It is therefore essential for people who are appointed as members of the commission to meet the eligibility criteria decided by the Parliament.

Responsibilities of the Finance Commission

The Finance Commission serves the crucial role of advising the President on financial matters concerning the Union and the states. This primarily involves recommendations on the distribution of net earnings from taxes between the Union and the States. In addition to that, the commission also determines the allocation of these funds among the States themselves.

Moreover, the commission is responsible for defining the monetary relationship between the Union and the States. This means that the Finance Commission plays a crucial role in the governance of India's fiscal architecture.

The scope of the Finance Commission's responsibilities extends to handling the devolution of unplanned revenue resources. In simpler terms, the commission decides how unexpected or unallocated revenue should be distributed.

Impact of the Finance Commission on Indian Economy

Through its functions, the Finance Commission has a significant influence on India's economic health and stability. It ensures a balanced and fair distribution of financial resources, which in turn supports the economic welfare of both the Union and the states.

By establishing the financial relationship between the Union and states, the Finance Commission enables smoother fiscal operations, ensuring that financial burdens and benefits are appropriately shared. This way, it plays an essential role in maintaining financial harmony among all levels of governance.

The efficient handling of unplanned revenue resources by the Finance Commission contributes to India's financial resilience. By identifying the best ways to allocate these resources, the commission fosters economic stability, driving the nation's overall economic growth and development.

In conclusion, the Finance Commission, established under Article 280 of the Indian Constitution, serves as a crucial pillar in strengthening India's economic framework. It provides the necessary financial alignment between the Union and states, ensuring equitable distribution of resources, thereby promoting financial stability and economic growth in the nation.

Simplified Explanation

When we talk about important positions within high-ranking organizations, it's crucial for candidates to meet specific criteria. For instance, they may have previously worked as judges in a high court or have the necessary qualifications for such a role.

Additionally, having a good understanding of government finances or accounts is another requirement. This kind of knowledge can come from practical experience or education in specialized areas.

Experience in administration and finance is also highly valued. This suggests the candidate has managed teams of people, mastered budget planning, and is experienced in financial decision-making processes.

Another important qualification is having a special understanding of economics. This shows the candidate's awareness of how the economy functions and their ability to make decisions that reflect economic trends and predictions.

Extended Explanation

Legal Understanding and Experience

At times, candidates who are or have been qualified as judges of a high court are considered for specific roles. This requirement is valued because a person with legal knowledge can provide a valuable perspective on the complex legal aspects of financial and economic matters in the country. Similarly, their experience in handling intricate legal cases would be beneficial.

Government Finances and Accounting Knowledge

A profound understanding of government finances and accounting is vital, especially when dealing with financial matters that are related to or impacting the economy of the country. Knowledge in this area involves understanding the procedures and guidelines associated with fiscal operations, understanding financial records and reports, and making decisions based on these elements.

Administrative and Financial Expertise

Having experience in administrative roles, along with financial expertise, provides a comprehensive understanding of management and financial aspects. This entails an ability to make strategic financial decisions, understanding the risks and potential returns, managing budgets effectively, and leading teams to work towards organizational goals.

Special Knowledge in Economics

In the context of the Indian economy, having a special knowledge in economics suggests a strong understanding of micro and macroeconomic concepts, predicting economic trends, and understanding the impact of various economic policies. Such knowledge is critical as it aids in shaping financial strategies and policies to stimulate economic growth and stability within the country.

Regulatory Bodies and Relevant Laws

Knowledge and understanding of regulatory bodies such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and important financial institutions of the country are a plus. Additionally, awareness of relevant laws and acts such as the Income Tax Act, Companies Act, Insolvency and Bankruptcy Code, and GST Laws, among others, are essential for the job role.

Conclusion

A candidate for high-ranking financial roles should be well-equipped with a combination of legal, financial, managerial, and economics expertise. Their understanding of government operations and their efficiency in administration and financial management are important. Also, they need to have an understanding of relevant entities, institutions, and laws, which is crucial to make informed and effective decisions.

Mental Fitness

One important aspect that is considered in the framework of serving the commission relates to the mental stability of the person. It is absolutely crucial that a member be mentally sound in order to serve efficiently and make informed decisions. Indian laws and organizations place substantial emphasis on this factor.

Insolvency Status

A similar integral aspect considered in the assessment of a member's suitability for the commission is their insolvency status. A person is deemed unfit to serve the commission if they are an undischarged insolvent. This means that an individual who is still settling financial obligations and has not yet been legally discharged from insolvency cannot be a member of the commission. This is to ensure financial accountability and responsibility in the commission.

Criminal Convictions

Additionally, any criminal history, especially one concerning an immoral offence, renders a person unfit for serve in the commission. This is specifically designed to ensure that the members encompass not just a clean financial record, but also a clean criminal history in order to uphold the commission’s prestige and integrity.

Conflict of Interest

In terms of personal, financial and other interests, it is crucial that none should hinder the smooth functioning of the commission. A common risk in major institutions is the possibility of conflicts of interest, where an individual's personal or financial associations could affect their professional judgment and responsibilities. This could negatively impact the commission, especially if they are making decisions potentially influenced by these conflicted interests. Thus, the absence of such conflicts is of great importance to ensure the effective functioning of the commission.

In conclusion, there are various eligibility criteria that are considered for a person to serve in the commission. Not only should the person be mentally sound and have a clean personal and financial record, but they should also be free from any potential conflicts of interest to ensure the commission's smooth functioning. These criteria are set to uphold certain standards within the commission and to ensure that every decision made within the institution is driven by the right motives and judgments.

Overview of 14th Finance Commission

The 14th Finance Commission was headed by Professor Y V Reddy. This commission is significant as it guides the financial relationships between the central government and the states in India. Here are the key recommendations proposed by this commission:

Increased Share of Tax Revenues to States

One of the primary recommendations by the 14th Finance Commission was to hike the share of states in the Central divisible pool of taxes from 32% to 42%. This was the highest ever increase in vertical tax devolution. The Commission aimed to promote fiscal federalism by empowering states towards self-governance and improved public service delivery.

Revenue Deficit Grants

The commission introduced the Post-Devolution Revenue Deficit Grant, designed to maintain fiscal discipline while providing sufficient resources to the states. This grant was meant for those states which couldn't meet their revenue deficit after the tax devolution.

Fiscal Responsibility and Budget Management (FRBM) Act

The Finance Commission recommended amendments to the FRBM Act, citing constraints due to its rigid parameters. It proposed a fiscal deficit limit of 3% of GDP, which could be relaxed to 3.5% under circumstances such as war, calamities, and steep economic downturns.xa0

Changes in Grants Distribution

The 14th Finance Commission suggested restructuring the grants into two components - formula-based grants and performance-based grants. The formula-based grants would be allocated based on quantifiable performance indicators. On the other hand, performance-based grants encouraged states to improve their administrative and economic efficiency.

Establishment of Fiscal Council

The commission proposed the establishment of an independent Fiscal Council to act as a watchdog for the government's fiscal policy. This council would ensure transparency, coordination, and consistency in fiscal operations.

Disaster Management Funds

Another significant recommendation was the provision for State Disaster Response Fund (SDRF) and National Disaster Response Fund (NDRF). These funds were designed to help manage natural disasters' financial implications.

GST Compensation

The commission also addressed the implementation of the Goods and Services Tax (GST). It recommended a Goods and Services Tax compensation for initial years to eliminate the potential loss the states might face after the implementation of GST.

Local Government Grants

In addition to state and central governments, the Commission also emphasized strengthening local bodies like municipalities and panchayats. It recommended increasing the combined grants to local bodies to over Rs. 2,87,000 crore for a five-year period.

In conclusion, the 14th Finance Commission's recommendations attempted to create a balanced and efficient fiscal framework that promotes cooperative federalism and integrates the national economy. While certain flexibility allows the states to cater to their specific socioeconomic challenges, these guidelines ensure the fiscal discipline and transparency that a growing economy like India necessitates.

Enhancing State Share and Diminishing Revenue Deficit

The proposed allocation is that states should receive 42% of the total revenue from central taxes that can be apportioned between states and the central government. This marks a significant increase from the previous proposition of the 13th Finance Commission, suggesting a 10% increment in the state share.

Alongside, a progressive reduction in revenue deficit – the gap between a government's income and expenditure – is advised so it's eventually eradicated. This aligns with prudent financial practice by promoting a strategy that emphasizes fiscal responsibility and stability.

Fiscal Deficit Reduction and Debt Management

The fiscal deficit, which refers to the difference between the government's total income and its total expenditure, is recommended to be lowered to 3% of the Gross Domestic Product (GDP) by the 2017-18 financial year. This is a crucial parameter of the financial health of a country as it indicates the amount of borrowing the government needs to meet its expenses.

Similarly, keeping in mind the risks and macroeconomic stability, a 62% of GDP limit for the cumulative debt of the central and state governments must be pursued. Debt management is vital as excessive liabilities can weaken a nation's finances and trigger an economic crisis.

Reforming the Medium Term Fiscal Plan

The Medium Term Fiscal Plan (MTFP) is a policy document that outlines the government's fiscal policies over the medium term. As part of the financial roadmap, it's recommended that this plan needs to be restructured and treated as a pledge rather than a vague aspiration.

Amendment of the FRBM Act

The Fiscal Responsibility and Budget Management (FRBM) Act, which advocates prudent and composed fiscal management, needs to be modified. The recommended alterations specify the nature of stocks that should be considered if and when relaxations in target goals are required, maintaining fiscal discipline during unexpected situations.

Implementing GST through 'Grand Bargain'

To enhance the efficiency of taxation and integrate India's economy seamlessly, both the central and state governments are advised to broker a 'Grand Bargain' to implement the model Goods and Services Tax (GST) Act. The GST, a singular comprehensive tax system, would reduce the cascading effect of tax on tax.

Central Sponsored Schemes and State Power Sector Amendments

Reconfiguring the number of Central Sponsored Schemes (CSS) and returning dominance to formula-based plan grants are other insightful steps. Central Sponsored Schemes, funded largely by India's Central Government, should not eclipse the flexibility of states in catering to their unique developmental needs.

Lastly, it's crucial that the states address the issue of losses in the power sector in a structured and time-bound manner. The power sector's financial health deeply impacts state finances; thus, it is an essential aspect of achieving overall economic stability and growth.

Introduction

The Fifteenth Finance Commission, or simply the 15th FC, was established by the Indian Government with the approval of the President. This action was formally documented in the Gazette of India in November 2017.

Members of the Commission

The appointees to the Commission included Nand Kishore Singh as the chairman. Shaktikanta Das and Anoop Singh were appointed as full-time members, while Ramesh Chand and Ashok Lahiri occupied part-time roles. However, later Shaktikanta Das left his position, and Ajay Narayan Jha stepped into his place. The change was prompted by Das's appointment as the governor of the Reserve Bank of India (RBI).

The Commission's Mandate

The Fifteenth Finance Commission was entrusted with the vital task of making financial recommendations for a five-year period starting from 1st April 2020. The Commission's key responsibilities included fortifying cooperative federalism, ensuring that public spending is used well and maintaining fiscal stability.

Challenges Faced by the Commission

Noteworthy challenges emerged for the Commission due to the implementation of the Goods and Services Tax (GST). Major newspapers like The Hindu and The Economic Times highlighted those challenges. The GST, by establishing the GST Council, had effectively taken away certain taxation powers from both the states and the Union Government. This significant shift in the taxation landscape added complexity to the Commission's work.

Impact of Goods and Services Tax (GST) on Indian Economy

GST implementation was a major overhaul of India's taxation system. The fundamental principle behind GST is the concept of 'one nation, one tax,' aiming at uniform indirect taxes across the country. This shift has, however, influenced the financial structure and revenues at both state and central levels, thereby affecting the assignment of resources by the Finance Commission.

The GST Council, the governing body that regulates GST law, is a joint forum of the Centre and the states. This made the task of the Finance Commission challenging as the Commission no longer had the full autonomy to decide on fiscal matters relating to indirect tax.

Conclusion

Despite significant challenges, the Fifteenth Finance Commission has played a crucial role in India's economic policy formulation and financial planning. By providing recommendations on government spending and maintaining fiscal stability, this Commission has had a significant impact on the Indian economy. It serves as a vital institution ensuring fair distribution of financial resources among different regions in India.

Simplified Explanation for First Finance Commission's Proposition for State's Income-Tax Share

The First Finance Commission of India suggested how the percentage share of the net income-tax earnings should be divided among the states.

Historical Perspective and Legislative Background

The Finance Commission is a constitutional body established under Article 280 of the Indian Constitution. Its principal task is to allocate revenue between the central and state governments and to recommend methods on how revenues should be divided among the states. The First Finance Commission was set up in 1951 under the chairmanship of K.C. Neogy.

Main Proposition and Framework for Distribution

The central idea of the commission's proposition was to distribute the income-tax collected nationally amongst the states of India. The percentage shares would be based on specific criteria, ensuring an equitable distribution. The exact percentages and the detailed mechanics of the distribution process weren't included in the original statement but would be guided by various financial parameters and social-economic considerations in the interest of fiscal federalism.

Basis for Distribution

The distribution of the income-tax proceeds was expected to consider factors like population, per capita income, the level of infrastructure, average fiscal effort, and fiscal capacity, etc. of each state. The proposal aimed at ensuring fiscal equity, whereby every state would have adequate resources to meet its expenditure requirements while maintaining fiscal stability and sustainability.

Role of Income-Tax in State Economies

Income tax, a part of direct taxes, is a crucial revenue source for the government. It plays an important role in state finances, able to back major development projects. A state's share in the income-tax proceeds as recommended by the Finance Commission helps support various state-led initiatives, covering areas like healthcare, education, and infrastructure development, among others.

Future Implications and Considerations

The proposition by the First Finance Commission set the base for subsequent commissions. They continue to use the guidelines and principles proposed by the initial commission to distribute tax revenue between the central and state governments. The percentage share varies with every new commission and its assessment of the fiscal scenario and states' requirements.

The methodology proposed by the First Finance Commission seeks to ensure fiscal autonomy and financial self-sufficiency at the state level, contributing significantly to India's economic federalism.

Understanding the Role of the Finance Commissions in India

The Finance Commission, is a constitutionally mandated body in India, established by the President under article 280 to give recommendations on financial matters. It aims to maintain a balanced and fair division of resources between states and the central government.

2nd Finance Commission (1957-1962)

The 2nd Finance Commission in India was set up in 1957 and did its work until 1962. The Chairman of this Commission was K Santhanam. This Commission was responsible for outlining fiscal relations between the Union Government of India and the individual state governments. The Commission put forward several recommendations, including placing a higher value on income tax and working on improving administration to increase revenue collection.

3rd Finance Commission (1962-1966)

Established in 1961, the 3rd Finance Commission was chaired by AD Gorawala. The functions of the Finance Commission were broadened at this time, and the distribution of revenue and grants-in-aid took a front seat. The Commission realized the need for a more planned economy and started prioritizing issues like poverty alleviation and economic growth.

4th Finance Commission (1966-1970)

The 4th Finance Commission was chaired by PV Rajamannar in 1964 but started its operation in 1965. The work of this Commission was framed keeping in mind the financial needs, prospects, and resources of each state. It also focused on bringing about more balanced fiscal federalism and worked hard to ensure the funds were distributed equitably.

5th Finance Commission (1969-1974)

Launched in 1969, the 5th Finance Commission was presided over by MV Rangachari. This Commission made several recommendations to ensure balanced and comprehensive economic growth, promote welfare, and achieve fiscal stability. It called for changes in the revenue allocation formula, enhanced the revenue capacity of states, and expanded tax devolution.

In summary, every Finance Commission has the primary objective to address financial relations between the central government and individual states. It analyses and decides how the net proceeds of taxes should be divided between the central and the state governments, how much money should be given as grants-in-aid to the states, and how to consolidate the country's financial position. It plays an essential role in creating financial harmony within the Indian federation by addressing regional imbalances and fostering economic well-being for state governments.

Overview of the Indian Finance Commissions

In India, the allocation of tax revenues shared between the central and state governments is decided by the Finance Commission. It is a constitutional body, formed in accordance with Article 280 of the Indian constitution, and the excising President chooses its members. Let's delve into the details of the 6th, 7th, 8th, and 9th Finance Commissions of India.

6th Finance Commission (1973)

The 6th Finance Commission of India was constituted in 1972 and submitted its final report in 1973. It evaluated fiscal matters of the nation during the period 1974-1979. This commission was chaired by K. Brahmananda Reddy. The recommendations made by this commission includes granting power to the Central Government to provide financial assistance to the States during periods of natural calamities or unforeseen hardships.

7th Finance Commission (1978)

Established in 1977, the 7th Finance Commission's findings were presented in 1978 to be in effect from 1979 to 1984. This commission shared a unique feature of determining financial relief for states affected by natural disasters based on the magnitude of the calamity and the affected regions. It emphasized the need for a more significant share of central taxes for the states to ensure their financial stability.

8th Finance Commission (1984)

Constituted in 1983, the 8th Finance Commission submitted its recommendations in 1984 for 1984-1989. The commission, under the leadership of N.K.P. Salve, recommended a bigger role for the states in the country's fiscal decisions. This commission gave an innovative proposal to set up a National Development Fund for financing sustainable projects with long-term benefits.

9th Finance Commission (1990)

The 9th Finance Commission was constituted in 1984 and submitted its recommendations in 1989 for five years from 1990 to 1995. Under the chairmanship of N. Ramasamy, the commission worked on improving the process of revenue sharing between the center and the states, thereby sustaining the Indian federal structure. It also recommended a list of performance-linked incentives for the states.

Summary

Each finance commission plays a pivotal role in determining the financial relations between the center and the states in India. They have contributed to the balanced development of our country by ensuring the fair distribution of resources and financial discipline. Over the years, they have adapted to the changing economic and fiscal landscape and evolving needs of states and the central government. They have strived for uniform economic development across the nation and endorsed the principles of good governance, efficiency, and equity in fiscal matters.

Overview of Finance Commissions in India

In India, the Finance Commission is a governing body established under Article 280 of the Indian Constitution. It functions to devise and recommend how the funds should be distributed between the Union and the States.

The Commission upholds principles of financial propriety and keeps regional imbalances to a minimum. Each Commission is formed every five years and comprises a chairman and four other members. The President of India assigns them their responsibilities.

Here, we will discuss the 10th to the 15th Finance Commissions of India.

10th Finance Commission (1995)

The 10th Finance Commission of India served from 1992 to 1995. K. C. Pant was designated as the chairman of the Commission. The Commission was instituted to review the financial position of the states and recommend the distribution of taxes between the Union and the States. It also affirms if revenue allocation principles induce efficiency, economy, and fairness.

11th Finance Commission

The 11th Finance Commission served from 2000 to 2005, under the appointment of Chairman A.M. Khusro. One of the major tasks of the 11th Finance Commission was to suggest ways to augment the Consolidated Fund of a State to supplement the resources of municipalities and Panchayats based on the recommendations made by the State Finance Commissions.

12th Finance Commission

From 2005 to 2010, the 12th Finance Commission served under the chairmanship of C. Rangarajan. The Commission reviewed the state of finances, deficit, and debt levels of the Union and States, thus recommending corrective actions. It played a significant role in determining taxes and duties proceeds for the states and union territories.

13th Finance Commission

The 13th Finance Commission served India from 2010 to 2015, with the chairmanship of Dr. Vijay L Kelkar. This commission proposed a roadmap for fiscal consolidation and recommended design and implementation of Goods and Service Tax (GST).

14th Finance Commission

The 14th Finance Commission, chaired by Dr. Y V Reddy, served from 2015 to 2020. One notable feature about this Commission is that it increased the share of states in the Union's Tax Revenue from 32% to 42%, which was the highest increment ever recommended.

15th Finance Commission

The most recent is the 15th Finance Commission, established in 2020 under the chairmanship of N.K. Singh. It is tasked with evaluating the current economic situation of the states, their performance in revenue collection, and determining the distribution of taxes between Centre and States for the years 2020-2025.

Each Finance Commission plays a crucial role in preserving fiscal federalism in India and ensuring a fair distribution of financial resources across the states. Thus, these Commissions greatly aid in maintaining the economic stability of the country.

Brief on the Finance Commission of India

Established under Article 280 of the Indian Constitution, the Finance Commission is an institutional mechanism that aids in the distribution of financial resources between the central and the states in India, keeping fairness and equity at the forefront. This important body has been led by numerous key figures in the Indian financial scene and over the course of almost seven decades, it has seen fifteen different iterations, each with its distinct Chairman, year of establishment, and span of operation.

Here is a breakdown of the operational duration, year of establishment, and respective chairpersons of each appointed Finance Commission:

1. First Commission (1951 - 1957): K. C. Neogy chaired the commission, whose function began in 1952.
2. Second Commission (1956 - 1962): The commission, led by K. Santhanam, was operational from 1957.
3. Third Commission (1960 - 1966): A. K. Chanda took over the reins in this tenure and the commission was active from 1962.
4. Fourth Commission (1964 - 1969): Led by P. V. Rajamannar, the commission functioned from 1966.
5. Fifth Commission (1968 - 1974): Presided over by Mahavir Tyagi, this commission started its activity from 1969.
6. Sixth Commission (1972 - 1979): With K. Brahmananda Reddy at its helm, the commission operated from 1974.
7. Seventh Commission (1977 - 1984): Under the leadership of J. M. Shelat, this commission worked from 1979.
8. Eighth Commission (1983 - 1989): Chaired by Y. B. Chavan, the commission started its duties from 1984.
9. Ninth Commission (1987 - 1995): Guided by N. K. P. Salve, this commission's work commenced in 1989.
10. Tenth Commission (1992 - 2000): Led by K. C. Pant, the commission began its operations in 1995.
11. Eleventh Commission (1998 - 2005): In the chair was A. M. Khusro and the commission was active from 2000.
12. Twelfth Commission (2002 - 2010): Led by C. Rangarajan, this commission started its function from 2005.
13. Thirteenth Commission (2007 - 2015): This commission, steered by Dr. Vijay L. Kelkar, started its operation in 2010.
14. Fourteenth Commission (2013 - 2020): Driven by Dr. Y. V Reddy, the commission started its functioning in 2015.
15. Fifteenth Commission (2017 - 2026): N. K. Singh has been chairing the commission, which began its tenure from 2020.
16. Sixteenth Commission (2023 - 2031): The upcoming commission will be headed by Arvind Panagariya, who'll begin his tenure in 2026.

Noteworthy Facts

Each chairman has had a unique task in addressing the nation's financial requirements, and these financial figures have tackled various challenging times in Indian history, including periods of robust economic growth as well as financial crisis. For instance, Dr. C. Rangarajan, the Chairman of the Twelfth Commission, is well acclaimed for his profound insights and critical decision-making abilities during his time as the Governor of the Reserve Bank of India.

The task of the Finance Commission is to foster cooperative federalism through financial prudence and stability. It is also responsible for recommending the Chief Ministers and the President of India in the matters of financial importance, which significantly influences the relationship between the central government and the states.

Distribution of Economic Contribution Across States in India

The different states in India contribute variably to the overall Indian economy. Each state has its own distinct economic landscape, and the income is largely derived from the local industries, agriculture, services, and other demographic-specific factors. This document highlights the percentages of economic contributions made by different states in India.

Key Contributors

Among all Indian states, Bombay, Uttar Pradesh (U.P) and Madras hold the top positions contributing significantly to the nation's economy.

Bombay

Bombay, now known as Mumbai but retaining the historical name here for period accuracy, holds the highest percentage of contribution, accounting for 17.50% of India's total economy. Mumbai, the financial capital of India, houses the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), and numerous multinational corporations, which significantly contributes to its high economic share.

Uttar Pradesh

U.P. is the second major contributor to the Indian economy with a share of 15.75%. It is one of the largest states in India, having a diverse economic base ranging from agriculture to manufacturing and services.

Madras

Madras, currently known as Chennai, contributes 15.25% to India's economy. The city is a major IT and industrial hub and also has one of the largest seaports in India.

Other Significant States

West Bengal and Bihar also contribute a significant portion to India's economy, with shares of 11.20% and 9.75%, respectively. Both states have a mixed economy based on agriculture, services, and industries.

Moderate Contributors

Madhya Pradesh and Hyderabad add 5.25% and 4.50% respectively. Hyderabad, known as 'Cyberabad', has a booming IT industry apart from historical robustness in services and manufacturing sectors.

Lower Contribution States

Odisha, Rajasthan, and Punjab, while not insignificant, add less to the overall economy with contributions of 3.50%, 3.50%, and 3.25% respectively.

Lowest Contributors

Finally, Travancore, Assam, Madhya Bharat, Saurashtra, and PEPSU are at the lower end of the scale, contributing 2.50%, 2.25%, 1.75%, 1.00%, and 0.75% respectively.

Each state, irrespective of the scale of contribution, plays a vital role in the face of the Indian economy. Their unique geographical, demographical, and social aspects lead to a diverse range of industries and economic activities, which not only boost local economies but collectively drive the overall economic growth and development of India.

Understanding the Division of Federal Revenue in India

India's fiscal architecture is characterized by the division of the federal revenue between the central government, known as the Union, and the State governments. Here, we focus on the percentage shares of major states from the 2nd to the 5th Financial Commissions (FCs).

The Financial Commissions

The FCs are constitutional bodies formed by the President of India every five years under Article 280 of the Indian Constitution. They recommend the distribution of net proceeds from taxes between the Union and the States, among many other responsibilities.

State-wise Distribution: Comparison Over the Years

1. Uttar Pradesh: The most populous state in India has consistently had a significant share, ranging from 14.42% in the 3rd FC to 16.36% in the 2nd FC.

2. Bombay: Also known as Maharashtra, Bombay's share dropped from 15.97% in the 2nd FC to 11.40% in the 5th FC.

3. West Bengal: The share for West Bengal has stayed relatively stable, with a slight dip from 10.09% in the 2nd FC to 9.11% in the 5th FC.

4. Bihar: Bihar's share dropped to 9.03% in the 4th FC before rising to 9.99% in the 5th FC.

5. Madras (Tamil Nadu): This state has seen relatively stable revenue shares, oscillating within the range of 8.13% to 8.40%.

6. Andhra Pradesh: The revenue shares for Andhra Pradesh have fluctuated, reaching a low of 7.34% during the 4th FC, then rebounding to 8.01% in the 5th FC.

7. Madhya Pradesh: The state has seen a steady increase in its share, rising from 6.42% in the 2nd FC to 7.09% in the 5th FC.

8. Mysore (Karnataka): Mysore's revenue share has been stable around 5.14% from the 2nd to the 4th FC, with a minor rise to 5.40% in the 5th FC.

9. Gujarat: In the absence of data for the 2nd FC, Gujarat's share grew moderately from 4.78% in the 3rd FC to 5.29% in the 4th FC, and then slightly decreased to 5.13% in the 5th FC.

10. Punjab: Despite a slight uptick around the 3rd FC, Punjab's revenue allocation experienced a decline by the 5th FC to 2.55%.

11. Rajasthan: Rajasthan's share hovered slightly below 4%, with a minor increase to 4.34% in the 5th FC.

12. Odisha: The share for Odisha remained quite stable, staying within the narrow 3.40% - 3.75% range across the FCs.

13. Kerala: Kerala’s allocation increased from 3.35% in the 3rd FC to 3.59% in the 4th FC, and then to 3.83% in the 5th FC.

14. Assam: This North-Eastern state's share fluctuated moderately from 2.44% through the 2nd to the 4th FCs, before a minor increase to 2.67% in the 5th FC.

15. Jammu & Kashmir: The northern-most state's share increased from 0.70% in the 3rd FC to 0.79% in the 5th FC.

16. Haryana and Nagaland: These two states initially had missing pieces of data, but by the 5th FC, Haryana had a share of 1.73% and Nagaland had 0.08%.

17. Union Territory: As collective units, their share has fluctuated from 1% in the 2nd FC, 3% in the 3rd FC, 2.5% in the 4th FC and again rose to 2.6% in the 5th FC.

Concluding Remarks

The allocations are an important aspect of the cooperative federalism model that marks the fiscal relationships in India. They are designed to ensure a degree of financial autonomy to states while also accounting for their individual development requirements and fiscal capacities. The trends in the allocations could reflect economic growth trajectories, policy changes, the fiscal needs of the individual states, among other considerations.

Please note that the names of certain states have changed over time - Bombay is now Maharashtra and Mysore is Karnataka. Furthermore, the formation of new states and their revenue shares would be worked out based on numerous factors for the forthcoming FCs. Understanding these trends is a significant part of studying India's economic history and policy-making mechanisms.

Understanding Financial Commissions and Distribution of Shares Among Indian States

The Financial Commissions of India play a vital role in the distribution of financial resources among Indian states. A Financial Commission is a body set up under Article 280 of the Indian Constitution. Its main task is to recommend the division of tax revenues between the central and state governments. This article simplifies the percentage distribution of shares among various states during the 6th, 7th, 8th, and 9th Financial Commissions.

Distribution Across The 6th To The 9th Financial Commissions

Following figures indicate the percentage distribution of share among states during the 6th, 7th, 8th, and 9th Finance Commissions:

1. Uttar Pradesh: The percentage shares for this state were 15.23, 15.42, 17.907, and 16.786 respectively.
2. Maharashtra: This state recorded shares of 11.05, 10.95, 8.392, and 8.191 respectively.
3. Bihar: Bihar noted its shares as 9.61, 9.53, 12.08, and 12.418 respectively.
4. West Bengal: The shares for this state were 8.89, 8.015, 7.8, and 7.976 respectively.
5. Tamil Nadu: The state saw shares of 7.94, 8.05, 7.565, and 7.931 respectively.
6. Andhra Pradesh: This state had shares of 7.76, 8.021, 8.187, and 8.208 respectively.
7. Madhya Pradesh: The shares for this state were 7.3, 7.35, 8.378, and 8.185 respectively.
8. Gujarat: Gujarat documented shares of 5.55, 5.96, 4.049, and 4.550 respectively.
9. Karnataka: The state noted shares of 5.33, 5.44, 4.979, and 4.928 respectively.
10. Rajasthan: This state had shares of 4.5, 4.362, 4.545, and 4.836 respectively.

Some states like Kerala, Odisha, Punjab, and Assam also received substantial shares. Meanwhile, others like Jammu and Kashmir, Himachal Pradesh, Tripura, and Manipur along with Meghalaya received modest shares. Some states such as Goa, Nagaland, Mizoram, and Sikkim had the least shares, with Goa, Mizoram, and Sikkim not having any distribution during the 6th, 7th, and 8th commissions.

Role of Financial Commissions

India's financial commissions play an essential role in balancing socio-economic elements within the country. They ensure that every state gets its fair share of resources for development and growth. The distribution policy takes social and economic disparities across states into account. This makes sure that states with lesser resources or development do not lag behind those that are better off.

The commissions also ensure that effective financial relations between the center and states occur, maintaining India's federal structure. In essence, the financial commissions play an important role in preserving democratic values, promoting inclusive growth and fostering national unity.

Overview of Financial Commissions in India

The data represents the percentages of financial allocations to the Indian states recommended by the Finance Commissions of India during their 10th to 15th reports.

The Finance Commission (FC) is a constitutionally mandated body that is set up in India and has a pivotal role in the country’s financial governance. Its function is to define the fiscal relationship and financial distribution between the central government and individual state governments.

Every five years, the FC sets out a framework for financial understanding between these bodies. It ensures fair allocation of funds and maintains economic equity amongst all the Indian states.

Analysis of State-wise Financial Distribution

The finance commission maintains an ongoing analysis of every Indian state's monetary requirements and accordingly pronounces its fund allocation.

For example, the 10th finance commission allocated the largest share to Uttar Pradesh (17.811%), followed by Bihar (12.861%) and Andhra Pradesh (8.465%).

The 15th finance commission had their highest allocation assigned to Uttar Pradesh (17.939%) followed closely by Bihar (10.058%) and West Bengal (7.523%).

Considerations for Financial Allocations

The percentage of financial allocation crucially relies on the particular state's economic conditions, population, level of poverty, income inequality, revenue generation, and potential for development amongst other aspects.

Inclusion and Omissions in the Allocations

Certain states were not included in the financial distribution until later FC terms due to a variety of regulatory, political and administrative reasons. For example, Telangana started receiving its financial share from the 14th FC.

There are also instances where the allocations cease for some states in certain FC terms. For example, Jammu and Kashmir stopped receiving funds from the 15th FC due to its reformation into two Union Territories in 2019.

Impact on Indian Economy

The financial distribution has a substantial impact on the Indian economy as it determines the flow of central assistance for state plans. This results in balanced economic growth, fiscal discipline, revenue deficit grants, and other rewards and incentives for states based on their fiscal performance.

Conclusion

The Finance Commission’s contribution to the fiscal federalism in India is indispensable as it equalizes fiscal capacity amongst the Indian states, ensuring resources are distributed according to needs and opportunities. Understanding these percentages can provide insights into how financial resources are shared amongst Indian states.