The Finance Commission: How it works

The Finance Commission is up as per the provisions of Article 280 of the Indian Constitution, and the Finance Commission (Miscellaneous Provisions) Act, 1951.

Its primary purpose is to recommend the distribution between the Centre and the states of the net proceeds of the taxes and also the allocation between the different states.

Besides distributing the revenue, the Finance Commission also decides the principles that will govern the grants-in-aid to the states out of the Consolidated Fund of India.

The Finance Commission also recommends methods to augment the Consolidated Fund of India, as the Eleventh Commission was asked to do, with the view to augment the resources of the panchayats and local bodies across the country.

The measures of each Finance Commission is applicable for five years, and this began from the First Finance Commission (1951-1960), down to the present Eleventh Finance Commission (2001-2005).

The President is likely to announce the Twelfth Finance Commission by 2002, and whose recommendations will be applicable for 2006-2010.

In making its recommendations, each Finance Commission makes its decision based on various factors - the states backwardness and level of poverty, its development needs, the population, and its revenue earning capacity.

Each Finance Commission gives more weightage to some factors and less to some others. Previously, population and the backwardness of a state were given a higher weightage than a state's revenue earning capacity. Such a system invariably favoured the cow-belt states, but given the Congress party's domination over the Centre and the states in the past decades, few protested as publicly as did Andhra Pradesh Chief Minister N Chandrababu Naidu.

Each Finance Commission may also be given extra tasks to accomplish. For instance, the Eleventh Finance Commission was asked to consider ways and means by which the central and states' governments can restructure their finances to reduce the deficits and the financial powers of the local bodies.

The Eleventh Finance Commission has five members, including a chairman and a member-secretary. They are chairman A M Khusro, an eminent economist and former journalist; Dr Amrish Bagchi, director of the National Institute of Public Finance and Policy; J C Jetli, former secretary, government of India; N C Jain, former advocate general, Madhya Pradesh; and, T N Srivastava, member-secretary, Indian Administrative Service.

Khusro, incidentally, hails from Hyderabad.

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