UPSC Prelims 2025Question 66Polity

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.

Options

(a)I, II and III
(b)I, II and IV
(c)I, III and IV
(d)II, III and IV

Correct answer: c

Decision rule

Vertical devolution has stayed at 41% since the 14th Finance Commission; a stated share other than 41% marks that statement false.

Explanation

Correct Answer:

(c) I, III and IV

Explanation of the Correct Answer

Let’s analyze the statements based on the recommendations of the 15th Finance Commission (FC-XV), which covered the period 2021–22 to 2025–26.

Statement-wise Analysis

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.

Correct
The 15th Finance Commission recommended performance-based grants totaling ₹ 4,800 crores to states from 2022–23 to 2025–26 for improving school education outcomes, particularly in foundational literacy and numeracy.

II. 45% of the net proceeds of Union taxes are to be shared with States.

Incorrect
The actual vertical devolution (share of Union taxes to states) recommended by the 15th Finance Commission is 41%, same as the previous commission.
Thus, not 45%, making this statement incorrect.

III. ₹45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms.

Correct
FC-XV recommended ₹45,000 crores as a performance-based incentive for states that implement agricultural reforms, including agricultural marketing, land reforms, and infrastructure development.

IV. It reintroduced tax effort criteria to reward fiscal performance.

Correct
The “tax effort” criterion, which considers per capita own tax revenue, was reintroduced as one of the criteria for determining inter se distribution among states, encouraging fiscal discipline and tax capacity enhancement.

Why Other Options Are Incorrect

(a) I, II and III – Incorrect: Statement II is wrong.
(b) I, II and IV – Incorrect: Statement II is wrong.
(c) I, III and IV – Correct
(d) II, III and IV – Incorrect: Statement II is wrong.

Relevant Supplementary Information

Table: Key Recommendations of the 15th Finance Commission (2021–26)

Parameter	Recommendation
Vertical Devolution	41% of net Union taxes to be shared with states
Total Transfers	Approx. ₹52.24 lakh crores over 5 years
Local Body Grants	₹4.36 lakh crores (Tied + Untied grants)
Performance-Based Grants (Education)	₹4,800 crores for school education outcomes
Agriculture Reform Incentive	₹45,000 crores
Health Sector Grants	₹70,051 crores including for PM-ABHIM
Disaster Risk Management Fund	Continuation of SDRMF with ₹1.6 lakh crores
Tax Effort Criterion	Weightage reintroduced to reward better fiscal performance
Population Criterion	Based on 2011 Census data (15% weight)
Income Distance Criterion	Highest weightage (45%) for horizontal distribution

Current Relevance

The 41% devolution rate continues to shape state finances amid increasing demands for fiscal federalism.
Performance-linked grants encourage states to implement long-term structural reforms, especially in agriculture, education, and health.
The commission also focused on debt sustainability, fiscal transparency, and disaster resilience, all highly relevant in the post-COVID context.

Table: Concepts and Related Ideas – 15th Finance Commission (FC-XV)

Concept / Term	Description	Relevance to the Question	Related Policies / Features
Finance Commission (FC)	A constitutional body under Article 280, constituted every 5 years to recommend devolution of taxes between Centre and States	15th FC was headed by N.K. Singh and submitted its report for 2021–26	Mandated to strengthen fiscal federalism
Vertical Devolution	Share of Union’s net tax revenue devolved to all states	15th FC recommended 41%, not 45%	Retained from 14th FC; adjusted due to J&K reorganization
Horizontal Devolution	Distribution of devolved amount among states using criteria like income distance, population, etc.	Tax effort reintroduced as a criterion	Encourages states to increase their own tax revenue
Tax Effort Criterion	Measures how much tax a state raises per capita relative to its income	Reintroduced in FC-XV to reward efficient fiscal performers	Helps incentivize states to widen tax base
Performance-Based Grants	Grants tied to states achieving certain measurable outcomes	₹4,800 crore for education, ₹45,000 crore for agriculture reforms	A shift from entitlement-based to results-based transfers
Non-lapsable Defence Fund	A separate modernization fund outside annual budget allocations	Recommended by FC-XV for long-term defence preparedness	₹1.5 lakh crore envisaged over 5 years
Local Body Grants	Funds given directly to rural and urban local bodies	₹4.36 lakh crore allocated (60% tied, 40% untied)	Linked to service delivery in sanitation, drinking water
Disaster Risk Management Fund (SDRMF)	Fund to support disaster preparedness and response	Continued with funding formula and enhanced flexibility	Linked to State Disaster Response Fund (SDRF) mechanism
Agricultural Reform Incentives	₹45,000 crore fund to support reforms in agricultural marketing, land records, infrastructure	Directly mentioned in the question	Encourages states to adopt long-pending agri reforms
Population Criterion (2011 Census)	Used to determine horizontal share of states	15% weight given in FC-XV	Replaced earlier use of 1971 Census to reflect current demographics

Key Takeaways

Topic	Significance
Fiscal Federalism	Shows evolving Centre-State financial relations
Cooperative Federalism	Performance grants encourage reform-oriented governance
Social Sector Incentives	Grants for education and health show focus on human development
Agriculture Reform	Reflects intent to modernize agri-markets through fiscal levers
Local Governance	Increased funding to panchayats and urban local bodies ensures grassroots delivery of services

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