Applications for LAMP Fellowship 2025-26 are now open. Apply here. The last date for submitting applications is December 21, 2024
In November 2017, the 15th Finance Commission (Chair: Mr N. K. Singh) was constituted to give recommendations on the transfer of resources from the centre to states for the five year period between 2020-25. In recent times, there has been some discussion around the role and mandate of the Commission. In this context, we explain the role of the Finance Commission.
What is the Finance Commission?
The Finance Commission is a constitutional body formed every five years to give suggestions on centre-state financial relations. Each Finance Commission is required to make recommendations on: (i) sharing of central taxes with states, (ii) distribution of central grants to states, (iii) measures to improve the finances of states to supplement the resources of panchayats and municipalities, and (iv) any other matter referred to it.
Composition of transfers: The central taxes devolved to states are untied funds, and states can spend them according to their discretion. Over the years, tax devolved to states has constituted over 80% of the total central transfers to states (Figure 1). The centre also provides grants to states and local bodies which must be used for specified purposes. These grants have ranged between 12% to 19% of the total transfers.
Over the years the core mandate of the Commission has remained unchanged, though it has been given the additional responsibility of examining various issues. For instance, the 12th Finance Commission evaluated the fiscal position of states and offered relief to those that enacted their Fiscal Responsibility and Budget Management laws. The 13th and the 14th Finance Commissionassessed the impact of GST on the economy. The 13th Finance Commission also incentivised states to increase forest cover by providing additional grants.
15th Finance Commission: The 15th Finance Commission constituted in November 2017 will recommend central transfers to states. It has also been mandated to: (i) review the impact of the 14th Finance Commission recommendations on the fiscal position of the centre; (ii) review the debt level of the centre and states, and recommend a roadmap; (iii) study the impact of GST on the economy; and (iv) recommend performance-based incentives for states based on their efforts to control population, promote ease of doing business, and control expenditure on populist measures, among others.
Why is there a need for a Finance Commission?
The Indian federal system allows for the division of power and responsibilities between the centre and states. Correspondingly, the taxation powers are also broadly divided between the centre and states (Table 1). State legislatures may devolve some of their taxation powers to local bodies.
The centre collects majority of the tax revenue as it enjoys scale economies in the collection of certain taxes. States have the responsibility of delivering public goods in their areas due to their proximity to local issues and needs.
Sometimes, this leads to states incurring expenditures higher than the revenue generated by them. Further, due to vast regional disparities some states are unable to raise adequate resources as compared to others. To address these imbalances, the Finance Commission recommends the extent of central funds to be shared with states. Prior to 2000, only revenue income tax and union excise duty on certain goods was shared by the centre with states. A Constitution amendment in 2000 allowed for all central taxes to be shared with states.
Several other federal countries, such as Pakistan, Malaysia, and Australia have similar bodies which recommend the manner in which central funds will be shared with states.
Tax devolution to states
The 14th Finance Commission considerably increased the devolution of taxes from the centre to states from 32% to 42%. The Commission had recommended that tax devolution should be the primary source of transfer of funds to states. This would increase the flow of unconditional transfers and give states more flexibility in their spending.
The share in central taxes is distributed among states based on a formula. Previous Finance Commissions have considered various factors to determine the criteria such as the population and income needs of states, their area and infrastructure, etc. Further, the weightage assigned to each criterion has varied with each Finance Commission.
The criteria used by the 11th to 14thFinance Commissions are given in Table 2, along with the weight assigned to them. State level details of the criteria used by the 14th Finance Commission are given in Table 3.
Grants-in-Aid
Besides the taxes devolved to states, another source of transfers from the centre to states is grants-in-aid. As per the recommendations of the 14th Finance Commission, grants-in-aid constitute 12% of the central transfers to states. The 14th Finance Commission had recommended grants to states for three purposes: (i) disaster relief, (ii) local bodies, and (iii) revenue deficit.
On June 13, 2022, the West Bengal government passed a Bill to replace the Governor with the Chief Minister, as the Chancellor of 31 state public universities (such as Calcutta University, Jadavpur University). As per the All India Survey on Higher Education (2019-20), state public universities provide higher education to almost 85% of all students enrolled in higher education in India. In this blog, we discuss the role of the Governor in state public universities.
What is the role of the Chancellor in public universities?
State public universities are established through laws passed by state legislatures. In most laws the Governor has been designated as the Chancellor of these universities. The Chancellor functions as the head of public universities, and appoints the Vice-Chancellor of the university. Further, the Chancellor can declare invalid, any university proceeding which is not as per existing laws. In some states (such as Bihar, Gujarat, and Jharkhand), the Chancellor has the power to conduct inspections in the university. The Chancellor also presides over the convocation of the university, and confirms proposals for conferring honorary degrees. This is different in Telangana, where the Chancellor is appointed by the state government.
The Chancellor presides over the meetings of various university bodies (such as the Court/Senate of the university). The Court/Senate decides on matters of general policy related to the development of the university, such as: (i) establishing new university departments, (ii) conferring and withdrawing degrees and titles, and (iii) instituting fellowships.
The West Bengal University Laws (Amendment) Bill, 2022 designates the Chief Minister of West Bengal as the Chancellor of the 31 public universities in the state. Further, the Chief Minister (instead of the Governor) will be the head of these universities, and preside over the meetings of university bodies (such as Court/Senate).
Does the Governor have discretion in his capacity as Chancellor?
In 1997, the Supreme Court held that the Governor was not bound by the aid and advice of the Council of Ministers, while discharging duties of a separate statutory office (such as the Chancellor).
The Sarkaria and Puunchi Commission also dealt with the role of the Governor in educational institutions. Both Commissions concurred that while discharging statutory functions, the Governor is not legally bound by the aid and advice of the Council of Ministers. However, it may be advantageous for the Governor to consult the concerned Minister. The Sarkaria Commission recommended that state legislatures should avoid conferring statutory powers on the Governor, which were not envisaged by the Constitution. The Puunchi Commission observed that the role of Governor as the Chancellor may expose the office to controversies or public criticism. Hence, the role of the Governor should be restricted to constitutional provisions only. The Statement of Objects and Reasons of the West Bengal University Laws (Amendment) Bill, 2022 also mentions this recommendation given by the Puunchi Commission.
Recent developments
Recently, some states have taken steps to reduce the oversight of the Governor in state public universities. In April 2022, the Tamil Nadu Legislative Assembly passed two Bills, to transfer the power of appointing the Vice-Chancellor (in public universities) from the Governor, to the state government. As of June 8, 2022, these Bills have not received the Governor’s assent.
In 2021, Maharashtra amended the process to appoint the Vice Chancellor of state public universities. Prior to the amendment, a Search Committee forwarded a panel of at least five names to the Chancellor (who is the Governor). The Chancellor could then appoint one of the persons from the suggested panel as Vice-Chancellor, or ask for a fresh panel of names to be recommended. The 2021 amendment mandated the Search Committee to first forward the panel of names to the state government, which would recommend a panel of two names (from the original panel) to the Chancellor. The Chancellor must appoint one of the two names from the panel as Vice-Chancellor within thirty days. As per the amendment, the Chancellor has no option of asking for a fresh panel of names to be recommended.
