Context: The central government appointed Arvind Panagariya as the chairman of the 16th Finance Commission (SFC), a constitutional body.

About Finance Commission

• The Constitution of India (CoI) envisages the FC as the balancing wheel of fiscal federalism in India. The first Finance Commission was set up in 1951.
• Set up under Article 280 of the Constitution, FC is a constitutional body formed by the President of India to give suggestions on center-state financial relations. 
• Core Responsibility: 
  • To evaluate the state of finances of the Union and State Governments.
  • Recommend the sharing of taxes between them.
  • Lay down the principles determining the distribution of these taxes among States. 
• Working: It is characterized by consultations with all levels of government, thus strengthening the principle of cooperative federalism. 
• Composition: It consists of a chairman and 4 other members to be appointed by the President.
• Nature of Recommendations: Advisory in nature, not binding on the government. 
• 16th finance Commission Chairman: Arvind Panagariya as Chairman of 16th Finance Commission

What is the Terms Of Reference (TOR) for the 16th Finance Commission?

• ToR: It is the matters to which a study or report is limited.
• Make recommendations to the following matters:
  • Taxes Distribution: Distribution between the Union and the States of the net proceeds of taxes.
  • Grants-in-Aid to States: Principles governing the grants-in-aid of the States’ revenues out of the Consolidated Fund of India and sums to be paid to the States. 
  • Panchayats and Municipalities Resources: The measures needed to supplement the resources of the Panchayats and Municipalities are based on the recommendations made by the Finance Commission of the State.
• Financing Disaster Management: Review the present arrangements on financing Disaster Management initiatives and make appropriate recommendations.
• Report: Make its report available by 31st October 2025 covering a period of five years commencing on the 1st day of April 2026.

Why Were Some States Unhappy?

• Revenue Sharing: 
  • The parameters have to accommodate the interests of all states while factoring in their various stages of development. 
• Term of Referrence: When the Fifteenth Finance Commission was set up, one of the terms of reference was to use the population data of the 2011 census. 
  • Karnataka and Tamil Nadu complained saying that would reduce allocations for them as they had been successful in their population stabilisation initiatives. 
  • The panel then gave weight to population and ‘population performance’ for an equitable allocation.

Continue Reading: Terms Of Reference For 16th Finance Commission

What Challenges does the SFC Need to Address?

• The sustainability of debt at the Central and state levels. 
• The Centre maintains it is on track to achieve its fiscal deficit target below 4.5% of GDP by FY26, and that general government debt will decline in the medium to long term. 
• Expenditure reforms at the state level.