Revision summary
Article 280 makes the Finance Commission the constitutional tax-sharing equaliser. Vertical devolution sizes the States’ pool; horizontal devolution, led by income distance, favours poorer States. Article 275 grants cover post-devolution deficits, local bodies, disaster, and some sectors. The Fourteenth Commission set 42 per cent; the Fifteenth set 41 per cent for 2021–26 with a detailed equalising formula. Forest, demography, and tax-effort weights add green and performance incentives. Cess and surcharge outside the pool, and private capital, limit how far awards can close real regional gaps.
Model answer
Introduction
- Regional disparity in India is fiscal as well as industrial: poorer States have a weaker tax base and a heavier social load. The Finance Commission under Article 280 is the constitutional equaliser of the divisible pool. Its role is to transfer, equalise, and grant — not to run factories in backward districts.
Body
Constitutional role
- Article 280 requires a Finance Commission every five years to recommend the distribution of net tax proceeds between the Union and the States, and among the States.
- Vertical devolution sets how large the States’ share of the Union divisible pool will be; horizontal devolution sets which State gets how much of that share.
- Income distance in the horizontal formula is the main equalising lever: a State far below the highest-income State receives a larger weight, which is disparity correction by arithmetic.
- Grants-in-aid under Article 275 can plug revenue deficits of poorer States and fund local bodies, disaster, and sector gaps that tax share alone does not reach.
- The Commission can also reward forest cover, demographic performance, and tax effort, which pulls policy toward greener and more responsible fisc without abandoning need.
Measures taken so far
- The Fourteenth Finance Commission raised the States’ share of the divisible pool to 42 per cent, a structural shift toward State fiscal space after decades of smaller shares.
- The Fifteenth Finance Commission set 41 per cent for 2021–26, one point lower because Jammu and Kashmir became Union Territories, and kept a strongly equalising horizontal mix: income distance 45 per cent, area 15, 2011 population 15, demographic performance 12.5, forest and ecology 10, tax and fiscal effort 2.5.
- Successive Commissions have given revenue-deficit grants to States whose post-devolution accounts still do not close, which is a direct transfer to lagging fiscs.
- Local-body grants, increasingly tied to water, sanitation, and audited accounts, push resources below the State capital into districts that disparity maps actually show.
- Sector and performance grants — including for health, education, and power in various awards — have tried to buy outcomes in lagging regions, with mixed compliance.
- Special-category politics sat beside the Commission for decades; after NITI Aayog, the Commission’s forest and income-distance weights remain the lawful all-India equaliser, including for the North-East and hill States.
Limits
- The Commission cannot equalise private investment or historical industrial location; it equalises public money.
- Cess and surcharge outside the divisible pool shrink the very pie it distributes, which is why States still argue disparity even after 41 per cent.
Flow diagram
flowchart TD A280[Article 280] --> V[Vertical share 41-42 percent] A280 --> H[Horizontal income distance] A280 --> G[Art 275 grants] V --> E[Less regional fiscal gap] H --> E G --> E
Conclusion
The Finance Commission addresses regional disparity by enlarging the States’ share, weighting poor and forested States in the horizontal formula, and adding Article 275 grants for residual gaps and local bodies. The Fourteenth and Fifteenth awards are the living measures; they equalise the fisc, not the entire regional economy.
Quick related
Students also ask
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What challenges is the Government facing in implementing welfare schemes for the most vulnerable sections?
Next question in the 2024 paper (Q15). View answer →
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Why did the Fifteenth Commission recommend 41 per cent, not 42?
Because Jammu and Kashmir was reorganised into Union Territories, which are funded from the Union budget, not from the States’ share of the pool.
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Can the Finance Commission order factories into a backward district?
No. It recommends transfers and grants. Location of private investment remains market, State policy, and Union schemes.
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