Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct? I. It has recommended grants of ₹4,800 crores from the year 2022-23 to the year 2025-26 for incentivizing States to enhance educational outcomes. II. 45% of the net proceeds of Union taxes are to be shared with States. III. ₹45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms. IV. It reintroduced tax effort criteria to reward fiscal performance. Select the correct answer using the code given below.
Contents18
- AI, II and III
- BI, II and IV
- CI, III and IV
- DII, III and IV
Show answer
Answer: (C) I, III and IV
Let's verify each statement about the 15th Finance Commission (chaired by NK Singh, for the period 2021-26):
(I) 'Recommended ₹4,800 crore grants for educational outcomes' — CORRECT.
The Commission recommended performance-based grants linked to improvement in educational outcomes, including school enrollment, retention, and learning outcomes. ✓
(II) '45% of Union taxes shared with States' — INCORRECT.
The 15th FC recommended 41% as the States' share of the divisible pool of central taxes (vertical devolution), NOT 45%.
This was a slight reduction from the 42% recommended by the 14th FC, partly because the erstwhile state of J&K became two Union Territories. ✗
(III) '₹45,000 crore for agricultural reforms' — CORRECT.
The Commission recommended keeping ₹45,000 crore as performance-based incentives for states carrying out agricultural reforms, including those related to land leasing, marketing reforms, and adoption of sustainable practices. ✓
(IV) 'Reintroduced tax effort criteria' — CORRECT.
The 15th FC reintroduced 'tax effort' as one of the criteria for horizontal devolution (distribution among states).
This rewards states that make greater efforts to collect their own taxes, encouraging fiscal discipline and self-reliance. ✓
Statements I, III, and IV are correct. Answer is (c).
The 15th Finance Commission's recommendations became operational from 2021-22, making its specific allocations and tax devolution formula directly relevant for current affairs.
The Commission reduced states' share from 42% to 41% of divisible pool taxes, a politically sensitive decision that required constitutional justification due to J&K's changed status.
Performance-based incentives for education and agriculture reflect the shift toward conditional transfers rather than unconditional devolution in federal fiscal relations.
15th Finance Commission Key Recommendations
Indian Economy 15th Finance Commission ₹4,800 crores 45% ₹45,000 crores tax effort criteria
15th Finance Commission: Major Recommendations & UPSC Facts
Chaired by NK Singh for period 2021-26
Recommended 41% vertical devolution (not 45%)
₹4,800 crore grants for educational outcomes
₹45,000 crore performance incentive for agricultural reforms
Reintroduced tax effort criteria for horizontal devolution
Context
The 15th Finance Commission was constituted to recommend the distribution of tax revenues between Centre and States for 2021-26. Its recommendations directly impact fiscal federalism and state finances.
Key Recommendations Analysis
Recommendation | Amount/Rate | Purpose | Status in Question |
|---|---|---|---|
Educational outcome grants | ₹4,800 crore | Performance-based incentives for school enrollment, retention, learning outcomes | Correct ✓ |
Vertical devolution (States' share) | 41% | States' share of divisible pool of central taxes | Incorrect (Question says 45%) ✗ |
Agricultural reform incentive | ₹45,000 crore | Performance incentive for land leasing, marketing reforms, sustainable practices | Correct ✓ |
Tax effort criteria | Reintroduced | Reward states for own tax collection efforts in horizontal devolution | Correct ✓ |
Why 41% Not 45%
14th FC had recommended 42% vertical devolution
15th FC reduced it to 41% mainly due to J&K reorganization (state became two UTs)
Other factors: increased defence expenditure, centrally sponsored schemes expansion
This 1% reduction was a major concern for states during consultations
Question Connection
This PYQ tests specific numerical recommendations of 15th FC. Statement II was the trap - confusing the actual 41% with a false 45%. Students who memorized the correct figure would immediately eliminate options containing Statement II.
Trap: 45% vs 41% - UPSC frequently tests the exact vertical devolution percentage
Common confusion: 14th FC (42%) vs 15th FC (41%) - know the reduction reason
Numbers trap: ₹4,800 crore (education) vs ₹45,000 crore (agriculture) - don't swap these amounts
Concept mix-up: Tax effort criteria was reintroduced by 15th FC (was dropped by 14th FC)
Vertical vs Horizontal Devolution
Indian Economy 45% tax effort criteria
Finance Commission: Vertical & Horizontal Devolution Mechanism
Vertical devolution = Centre's share vs States' collective share
Horizontal devolution = distribution among individual states
Current vertical split: 59% Centre, 41% States
Horizontal uses criteria like population, area, tax effort, fiscal capacity
Two-Stage Devolution Process
Stage | What It Decides | Key Question | 15th FC Recommendation |
|---|---|---|---|
Vertical Devolution | Centre vs States collective share | How much goes to states overall? | 41% to states, 59% to Centre |
Horizontal Devolution | Distribution among individual states | Which state gets how much? | Based on population (15%), area (15%), tax effort (12.5%), others |
Devolution Process Flow
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**Divisible Pool Created**
All central taxes except surcharge & cess`"]
s2["`**Vertical Split Applied**
41% allocated to all states collectively`"]
s3["`**Horizontal Criteria Applied**
Population, area, tax effort, fiscal capacity, etc.`"]
s4["`**Individual State Shares**
Each state gets specific percentage based on weighted criteria`"]
s1 --> s2
s2 --> s3
s3 --> s4Tax Effort Criteria Significance
Tax effort = State's own tax revenue as % of its GSDP compared to potential
14th FC had dropped this criteria completely
15th FC reintroduced it with 12.5% weight to encourage fiscal discipline
Rewards states like Maharashtra, Gujarat with high tax collection efficiency
Encourages states to improve tax administration rather than depend on central transfers
Don't confuse: Vertical (Centre vs States) with Horizontal (among states)
41% is states' collective share, not any individual state's share
Tax effort measures efficiency in collecting own taxes, not central tax collection
Divisible pool excludes surcharge and cess - only basic tax rates are shared
Performance-Based Grants System
Indian Economy ₹4,800 crores ₹45,000 crores educational outcomes agricultural reforms
Finance Commission Performance-Based Grants: Education & Agriculture
₹4,800 crore allocated for education performance grants
₹45,000 crore set aside for agricultural reform incentives
Grants are conditional on achieving specific outcomes/reforms
Part of cooperative federalism approach
Major Performance Grant Categories
Sector | Amount | Performance Criteria | Objective |
|---|---|---|---|
Education | ₹4,800 crore | School enrollment, retention rates, learning outcomes | Improve educational quality and access |
Agriculture | ₹45,000 crore | Land leasing reforms, marketing reforms, sustainable practices | Modernize agricultural sector |
Health | ₹70,051 crore | Primary healthcare strengthening | Universal health coverage |
Rural Economy | ₹60,750 crore | Rural infrastructure, connectivity | Rural development acceleration |
Agricultural Reform Focus Areas
Land leasing reforms - facilitate tenant farming legalization
Marketing reforms - remove APMC restrictions, promote farmer producer organizations
Sustainable agriculture - organic farming, water conservation, soil health
Technology adoption - digital agriculture, precision farming techniques
States must demonstrate measurable progress to access the ₹45,000 crore fund
Education Performance Metrics
Enrollment rates - especially for marginalized communities and girls
Retention rates - reducing dropout rates at primary and secondary levels
Learning outcomes - standardized assessment scores, competency achievements
Infrastructure improvements - teacher-student ratios, school facilities
Grants released in tranches based on achievement of milestones
Policy Rationale
Performance-based grants represent a shift from unconditional transfers to incentive-driven federalism. States compete for additional funding by demonstrating reform implementation and outcome improvements, encouraging policy innovation and administrative efficiency.
Don't swap amounts: ₹4,800 crore is for education, ₹45,000 crore is for agriculture
These are additional grants, not part of the regular 41% vertical devolution
Performance grants are conditional - states must meet criteria to access funds
Focus is on outcomes (enrollment, yields) not just expenditure (budget allocation)
14th vs 15th Finance Commission Changes
Indian Economy tax effort criteria 45%
Key Changes from 14th to 15th Finance Commission
Vertical devolution reduced from 42% to 41%
Tax effort criteria reintroduced after being dropped
Increased focus on performance-based grants
J&K reorganization impact factored in recommendations
Major Policy Shifts
Aspect | 14th FC (2015-20) | 15th FC (2021-26) | Reason for Change |
|---|---|---|---|
Chairperson | YV Reddy | NK Singh | Constitutional requirement |
Vertical Devolution | 42% | 41% | J&K became UTs, defence needs |
Tax Effort Criteria | Dropped completely | Reintroduced (12.5%) | Encourage fiscal discipline |
Performance Grants | Limited sectoral grants | Expanded conditional transfers | Outcome-based federalism |
Digital Focus | Minimal | Strong emphasis | Digital India alignment |
Why Tax Effort Was Reintroduced
14th FC dropped tax effort to avoid penalizing poorer states with limited tax base
Result: Some states became overly dependent on central transfers, reduced own revenue efforts
15th FC brought it back with 12.5% weightage to balance equity with efficiency
Compromise approach: Lower weight than historical levels but enough to incentivize tax collection
Addresses criticism that states lacked motivation for tax administration improvements
Impact of J&K Reorganization
J&K state reorganized into two Union Territories in August 2019
UTs receive grants from Centre, not share in tax devolution like states
Reduced the number of devolution-eligible states during 15th FC period
Contributed to 1% reduction in overall states' share (42% → 41%)
Created precedent for future territorial reorganizations affecting federal finance
YV Reddy chaired 14th FC, NK Singh chaired 15th FC - don't confuse
Tax effort was dropped by 14th FC and reintroduced by 15th FC
42% → 41% reduction seems small but represents thousands of crores for states
J&K reorganization was a unique factor specific to 15th FC period