Introduction

The 15th Finance Commission, chaired by N. K. Singh, was set up in November 2017 to define how financial resources should be shared between the Union and the states for 2021 to 2026. It submitted its final report in November 2020. The Commission worked during the economic shock of COVID-19 and focused on fiscal stability, equitable distribution, and performance-based incentives for states. It recommended that states receive 41 percent of the Union’s divisible tax pool. This slight reduction from 42 percent under the 14th Commission reflects the reorganization of Jammu and Kashmir and Ladakh into Union Territories.

How Does the Commission Handle Vertical Devolution?

Vertical devolution answers how the total pool of central taxes should be divided between the Centre and the states. The Commission maintained the states’ share at 41 percent. It balanced the principle of fairness with the need for the Union to retain fiscal space to manage national-level programs and post-pandemic recovery. This stable share ensures predictable transfers for states and encourages them to manage their own finances more efficiently.

How Does Horizontal Devolution Work Among States?

Horizontal devolution distributes the 41 percent share among individual states. The Commission used a formula that aims to reduce inequality, support larger and ecologically rich states, and reward better governance. Income distance carries the highest weight at 45 percent. Population from the 2011 Census accounts for 15 percent. Area also carries 15 percent. Forest and ecological cover get 10 percent, reflecting the environmental value states provide. Tax and demographic performance together hold 10 percent. This combination shifts attention from population-based distribution and promotes efficiency and sustainability.

What Types of Grants Does the Commission Recommend?

The Commission recommended grants to help states meet spending needs beyond what tax shares can cover. It assigned revenue deficit grants of Rs 2.94 trillion to 17 states that face gaps between revenues and expenditures. It also proposed major sector-specific grants. Local bodies, including Panchayats and municipalities, receive about Rs 1.2 trillion. The health sector receives Rs 45,000 crore to strengthen primary and critical healthcare systems. Incentives for reforms in the power sector are set at Rs 2.93 lakh crore. Agriculture receives Rs 45,000 crore to support modernization and resilience.

Disaster management receives increased attention with grants of Rs 1.6 lakh crore. States receive Rs 28,983 crore for State Disaster Response Funds. These grants aim to improve preparedness for natural calamities and public health emergencies.

What Is the Commission’s Fiscal Reform Roadmap?

The Commission lays out a medium-term plan for reducing public debt. It recommends that the Centre reduce its debt from 62.9 percent of GDP to 56.6 percent by 2025-26. States should lower their debt from 33.1 percent to 32.5 percent. These targets aim to restore fiscal sustainability after the pandemic. The Commission stresses the need for rationalizing GST rates to increase efficiency and revenue. It suggests strengthening income tax systems and administrative capacity.

The Commission also recommends an independent Fiscal Council. This body would monitor fiscal rules, improve transparency, and ensure better coordination between the Centre and states. States should update their fiscal responsibility laws to align with national goals. The Commission encourages states to enhance their own revenues through property taxes, user charges, and improved tax compliance.

How Much Money Will States Receive Overall?

The Commission projects total transfers to states at 50.9 percent of the Union’s divisible tax pool. Tax devolution accounts for Rs 42.2 trillion. Grants account for Rs 10.33 trillion. These transfers support development, social welfare, and administrative functioning. The Commission emphasizes predictable funding so that states can plan long-term projects and maintain essential services.

Why Are Local Bodies a Major Focus?

Local bodies form the foundation of India’s decentralized governance. The Commission highlights their role in delivering public services. It recommends assured and timely funding to Panchayats and municipalities. It also calls for stronger financial reporting and auditing at the local level. Property tax reforms and digital governance tools should help urban bodies raise more revenue and improve efficiency.

How Does the Commission Encourage Sectoral Reforms?

The Commission links part of the grants to performance. Power sector incentives encourage states to reduce distribution losses, improve billing efficiency, and strengthen regulatory oversight. Agricultural grants target modernization of markets, diversification, and climate-resilient practices. Health grants aim to expand primary healthcare, increase testing capacity, and upgrade hospitals. This approach supports long-term structural reforms.

What Are the Broader Implications of the Recommendations?

The recommendations aim to strengthen cooperative federalism. States receive stable shares and targeted support while being encouraged to reform and manage resources better. The Centre retains space for national commitments and macroeconomic stability. Environmental considerations and demographic management gain importance in the devolution formula. Overall, the Commission seeks to balance equity, efficiency, and sustainability.

Conclusion

The Commission’s report shapes financial relations until 2026. It guides how tax revenues flow, how grants support development, and how fiscal rules evolve. Its focus on debt management, GST reforms, and an independent Fiscal Council continues to shape debates on India’s fiscal future. Its emphasis on demographic and ecological factors signals a new direction for resource sharing. The Commission’s work remains crucial for economic recovery, inclusive growth, and stronger federal governance.