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.
The Ministry of Human Resource Development released the draft National Education Policy, 2016 in July this year.[1] The Ministry was receiving comments on the draft policy until the end of September 2016. In this context, we provide an overview of the proposed framework in the draft Policy to address challenges in the education sector. The country’s education policy was last revised in 1992. It outlined equitable access to quality education, with a common educational structure of 10+2+3 years. The draft Policy 2016 aims to create an education system which ensures quality education and learning opportunities for all. The focus areas of intervention of the draft Policy are: (i) access and participation, (ii) quality of education, (iii) curriculum and examination reforms, (iv) teacher development and management and (v) skill development and employability. Through these key interventions, the draft Policy provides a framework for the development of education in the country over the next few years. We discuss the key areas of intervention below.
Access and participation 
Presently in the country, enrolment at pre-school levels for children between the ages of 3- 5 years is low. 38% of children in this age bracket are enrolled in pre-school education in government anganwadi centres, while 27% of the children are not attending any (either government or private) pre-school.[2] In contrast, the enrolment rate in primary education, which is class 1-5, is almost 100%. However, this reduces to 91% in classes 6-8 and 78% in classes 9-12.[3] The trend of lower enrolment rates is seen in higher education (college and university level), where it is at 24%.[4] Due to low enrolment rates after class 5, transition of students from one level to the next is a major challenge. Figure 1 shows the enrolment rates across different education levels. With regard to improving participation of children in pre-school education, the draft Policy aims to start a program for children in the pre-school age group which will be implemented in coordination with the Ministry of Women and Child Development. It also aims to strengthen pre-school education in anganwadis by developing learning materials and training anganwadi workers. Presently, the Right to Education (RTE) Act, 2009 applies to elementary education only. To improve access to education, the draft Policy suggests bringing secondary education under the ambit of the RTE Act. However, a strategy to increase enrolment across different levels of education has not been specified. Quality of education 
A large number of children leave school before passing class eight. In 2013-14, the proportion of students who dropped out from classes 1-8 was 36% and from classes 1-10 was 47%.3 Figure 2 shows the proportion of students who exited the school system in classes 1-8 in 2008-09 and 2013-14. Among the population of children who stay in school, the quality or level of learning is low. The Economic Survey 2015-16 noted that the proportion of class 3 children able to solve simple two-digit subtraction problems fell from 26% in 2013 to 25% in 2014. Similarly, the percentage of class two children who cannot recognize numbers up to 9 increased from 11.3% in 2009 to 19.5% in 2014.[5] To address the issue of learning levels in school going children, the draft Policy proposes that norms for learning outcomes should be developed and applied uniformly to both private and government schools. In addition, it also recommends that the existing no-detention policy (promoting all students of a class to the next class, regardless of academic performance) till class 8 be amended and limited to class 5. At the upper primary stage (class six onward), the system of detention should be restored. Curriculum and examination reforms It has been noted that the current curriculum followed in schools does not help students acquire relevant skills which are essential to become employable. The draft Policy highlights that the assessment practices in the education system focus on rote learning and testing the students’ ability to reproduce content knowledge, rather than on understanding. The draft Policy aims to restructure the present assessment system to ensure a more comprehensive evaluation of students, and plans to include learning outcomes that relate to both scholastic and co-scholastic domains. In order to reduce failure rates in class 10, the Policy proposes to conduct examination for the subjects of mathematics, science and English in class 10 at two levels. The two levels will be part A (at a higher level) and part B (at a lower level). Students who wish to opt for a vocational stream or courses for which mathematics, science and English are not compulsory may opt for part B level examination. Teacher development and management It has been observed that the current teacher education and training programs are inadequate in imparting the requisite skills to teachers. The mismatch between institutional capacity to train teachers and required supply in schools results in a shortage of qualified teachers. At the level of classes 9-12, the Rashtriya Madhyamik Shiksha Abhiyan prescribes a teacher-pupil ratio of 1:30.[6] However, some states have a higher teacher-pupil ratio: Chhattisgarh (1:45), Bihar (1:57) and Jharkhand (1:68).3 In various central universities, the total number of sanctioned teaching posts is 16,339, of which 37% are lying vacant.[7] The draft Policy recommends that state governments should set up independent teacher recruitment commissions to facilitate transparent, merit based recruitment of principals, teachers, and other academic staff. For teacher development, a Teacher Education University should be set up at the national level to focus on teacher education and faculty development. In addition, the draft Policy also states that all teacher education institutes must have mandatory accreditation. To ensure effective teacher management, periodic assessment of teachers in government and private schools should be carried out and linked to their future promotions and increments. Skill development and employability It has been noted that the current institutional arrangements to support technical and vocational education programs for population below 25 years of age is inadequate. The social acceptability of vocational education is also low. Presently, over 62% of the population in the country is in the working age-group (15-59 years).[8] Only 10% of this workforce (7.4 crore) is trained, which includes about 3% who are formally trained and 7% who are informally trained.[9] In developed countries, skilled workforce is between 60-90% of the total workforce.[10] The draft Policy proposes to integrate skill development programs in 25% of schools and higher education institutions in the country. This is in line with the National Skill Development and Entrepreneurship Policy that was released by the government in 2015. The draft Policy 2016 focuses on important aspects that have not been addressed in previous policies such as: (i) curriculum and examination reforms, and (ii) teacher development . Although the Policy sets a framework for improving education in the country, the various implementation strategies that will be put in place to achieve the education outcomes envisaged by it remains to be seen. For an analysis on some education indicators such as enrolment of students, drop-out rates, availability of teachers and share of government and private schools, please see our Vital Stats on the ‘overview of the education sector’ here. [1] Some Inputs for Draft National Education Policy 2016, Ministry of Human Resource Development, http://mhrd.gov.in/sites/upload_files/mhrd/files/Inputs_Draft_NEP_2016.pdf. [2] Rapid Survey on Children, 2013-14, Ministry of Women & Child Development, Government of India, http://wcd.nic.in/sites/default/files/RSOC%20FACT%20SHEETS%20Final.pdf. [3] Secondary education in India, U-DISE 2014-15, National University of Educational Planning and Administration, http://www.dise.in/Downloads/Publications/Documents/SecondaryFlash%20Statistics-2014-15.pdf. [4] All India Survey on Higher Education 2014-15, http://aishe.nic.in/aishe/viewDocument.action?documentId=197. [5] Economic Survey 2015-16, Volume-2, http://indiabudget.nic.in/es2015-16/echapvol2-09.pdf. [6] Overview, Rashtriya Madhyamik Shiksha Abhiyan, Ministry of Human Resource Development, http://mhrd.gov.in/rmsa. [7] “265th Report: Demands for Grants (Demand No. 60) of the Department of Higher Education”, Standing Committee on Human Resource Development, April 2013, 2015, http://164.100.47.5/newcommittee/reports/EnglishCommittees/Committee%20on%20HRD/265.pdf. [8] “Ministry of Skill Development and Entrepreneurship: Key Achievements and Success Stories in 2015”, Ministry of Skill Development and Entrepreneurship, Press Information Bureau, December 15, 2015. [9] Draft Report of the Sub-Group of Chief Ministers on Skill Development, NITI Aayog, September 2015, http://niti.gov.in/mgov_file/Final%20report%20%20of%20Sub-Group%20Report%20on%20Skill%20Development.pdf. [10] Economic Survey 2014-15, Volume 2, http://indiabudget.nic.in/es2014-15/echapter-vol2.pdf.
