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Q2 (IAS/2015) Economy › Government Finance & Budget › Finance Commission transfers Official Key

With reference to the Fourteenth Finance Commission, which of the following statements is/are correct? 1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent. 2. It has made recommendations concerning sector-specific grants. Select the correct answer using the code given below.

Result
Your answer: —  ·  Correct: A
Explanation

The correct answer is option A (1 only).

The Fourteenth Finance Commission (FFC) indeed increased the share of states in the central divisible pool from 32 percent to 42 percent,[2] which was the biggest ever[3] increase in vertical tax [1]devolution. This was a landmark recommendation that significantly enhanced fiscal federalism in India.

However, statement 2 is incorrect. The sector-specific grants mentioned in the sources refer to state-specific grants that are tied grants covering six broad themes including social needs, administrative governance, water conservation, culture preservation, physical infrastructure, and tourism, which fall under formula-based devolution (41%) and other grants.[4] These are not referred to as "sector-specific grants" in the context of the FFC's recommendations. The Commission's main achievement was the substantial increase in untied tax devolution, while grants were categorized differently as state-specific grants addressing special needs and cost disabilities.

Therefore, only statement 1 is correct.

Sources
  1. [1] https://www.indiabudget.gov.in/budget2015-2016/es2014-15/echapvol1-10.pdf
  2. [3] https://documents.worldbank.org/curated/en/634911468180255296/pdf/100453-P156828-make-PUBLIC-10-29-530pm-DC-time-Box393236B-India-Development-Update-October-2015.pdf
  3. [4] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 5. State Specific Grants > p. 184
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. With reference to the Fourteenth Finance Commission, which of the following statements is/are correct? 1. It has increased the share of S…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10

This question tests the 'Headline' vs the 'Fine Print'. Statement 1 was the famous 42% figure (the Headline), but Statement 2 tested the structural trade-off (the Fine Print): to afford this hike, the Commission removed sector-specific tied grants. You must study major reports as a package of 'Gives' and 'Takes'.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Did the Fourteenth Finance Commission increase the share of States in the central divisible pool from 32% to 42%?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"The FFC has radically enhanced the share of the states in the central divisible pool from the current 32 percent to 42 per cent which is the biggest ever increase in vertical tax devolution."
Why this source?
  • Explicitly states the FFC increased the states' share from 32 percent to 42 percent.
  • Identifies this as a radical/enormous increase compared to previous commissions.
Web source
Presence: 5/5
"The share of states in divisible pool of taxes has increased from 32% to 42% following the FFC recommendations: an increase much higher"
Why this source?
  • States' share in the divisible pool is explicitly reported to have increased from 32% to 42% following FFC recommendations.
  • Provides an independent academic confirmation of the change.
Web source
Presence: 5/5
"The 14th Finance Commission recommended increasing states’ share in the central divisible pool of tax revenues (which are untied resources) from 32 to 42 percent."
Why this source?
  • World Bank document states the 14th Finance Commission recommended increasing the states' share from 32 to 42 percent.
  • Frames the increase as a transfer of untied resources to states, confirming the nature of the change.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Recommendations of 15th FC (for FY 2020-21) > p. 122
Strength: 5/5
“Recommendations of 15 th FC (for FY 2020-21) The 15 th FC has projected nominal GDP growth rates of 10 per cent for 2019-20 and 11 per cent for 2020-21. 1. Sharing of Union Taxes: 41 per cent of union taxes to be shared with states in 2020-21 (in 2019-20, it was 42%). Justification given for this reduction is that 1 per cent is to be retained for financing the requirements of newly formed UTs, J&K and Ladakh.”
Why relevant

States' share percentages year-to-year are reported (15th FC: 41% in 2020-21; 'in 2019-20, it was 42%'), showing that the divisible-pool share can be expressed and tracked across commissions/years.

How to extend

A student could use this reported 42% for 2019-20 (which lies in the 14th FC period) to infer that the preceding commission's recommendation likely set a ~42% share and compare that to earlier commissions' shares (e.g., a hypothesized 32%) from historical data.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > The XV Finance Commission has recommended the following transfers for 2021-26: > p. 182
Strength: 4/5
“(i) As percentage share of central taxes (this is called vertical devolution), which will be 41% of the divisible pool of Central taxes and will be distributed among 28 States. This never becomes part of the Consolidated Fund of India and is untied grants which mean no restriction is imposed on States on how to spend. (No UT either with or without Assembly gets this vertical devolution.”
Why relevant

The 15th Finance Commission's vertical devolution figure (41% of central taxes) is given, illustrating that successive Finance Commissions change the percentage shared with states.

How to extend

Use the 15th FC's 41% as a point of comparison to see if the 14th's percentage (which covered 2015–20) was higher (42%) or a jump from an earlier lower figure (32%).

Introduction to the Constitution of India, D. D. Basu (26th ed.). > Chapter 25: DISTRIBUTION OF FINANCIAL POWERS > The States, similarly, have their receipts from- > p. 390
Strength: 4/5
“The 14th Finance Commission has submitted its recommendations for the period 2015-16 to 2020-21. They are likely to have major implications for the Center-State relations. The 15th Finance Commission was constituted in November 2017 to give recommendations on the transfer of resources from the Centre to States for the five-year period from 2020 to 2025. The 15th Finance Commission has been constituted with the objective of strengthening co-operative federalism and improving the quality of public spending, and helping protect fiscal stability. Safeguarding the interests of the States in the shared Taxes.”
Why relevant

Identifies the time period the 14th Finance Commission covered (2015–16 to 2020–21), so any share percentage reported for years inside that period (e.g., 2019–20) can be attributed to the 14th FC's recommendations.

How to extend

A student can map the 2019–20 42% figure (from other snippets) to the 14th FC period to support assessing whether the 14th set that level.

Indian Polity, M. Laxmikanth(7th ed.) > Chapter 15: Centre-State Relations > I I Finance Commission > p. 156
Strength: 4/5
“[I I Finance Commission Article 280 provides for a Finance Commission as a quasi-judicial body. It is constituted by the President every fifth year or even earlier. It is required to make recommendations to the President on the following matters: • The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states, the respective shares of such proceeds.• The principles which should govern the grants-in-aid to the states by the Centre (Le. , out of the Consolidated Fund of India) Till 1960, the Commission also suggested the amounts paid to the States of Assam, Bihar, Orissa and West Bengal in lieu of assignment of any share of the net proceeds in each year of export duty on jute and jute products.”
Why relevant

Explains the Finance Commission's constitutional role to recommend the distribution of net proceeds of taxes between Centre and States (i.e., the percentage share is a core FC function).

How to extend

Knowing FCs set these shares, a student can look up which FC covered which years and attribute observed share changes (e.g., from 32% to 42%) to the relevant FC's recommendations.

Introduction to the Constitution of India, D. D. Basu (26th ed.). > Chapter 25: DISTRIBUTION OF FINANCIAL POWERS > The States, similarly, have their receipts from- > p. 388
Strength: 3/5
“It submitted its final report in July 1969, and recommended that the States' share of income-tax should be raised to 75% and of Union Excise duties should be raised to 20%. Finance Commission, headed by Sri The Sixth Finance Brahmananda Reddy, submitted its Report in October, 1973. This Commission was, for the first time, required to go into the question of the debt position of the States and their non-plan capital gap. The Seventh Finance Commission. The Fifth Finance Commission. A Seventh Finance Commission was appointed in June, 1977 in relation to the next quinquennium from 1979, with Sri Shelat, a retired Judge of the Supreme Court as its Chairman.”
Why relevant

Gives historical examples where Finance Commissions substantially changed share percentages (e.g., earlier commissions raised states' shares), showing precedent for large percentage changes by a FC.

How to extend

A student could treat past precedent of large changes as plausibility support and then seek the specific numeric history (to confirm if a 32→42 jump occurred at the 14th FC).

Statement 2
Did the Fourteenth Finance Commission make recommendations regarding sector-specific grants to States?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 5. State Specific Grants > p. 184
Presence: 5/5
“These are tied grants and help overcome special needs and cost disabilities of States that could not be covered under formula-based devolution (41%) and other sector specific grants. These grants are recommended to all the 28 States and fall under six broad themes: (a) social needs, (b) administrative governance and related infrastructure, (c) conservation and sustainable use of water, drainage and sanitation, (d) preserving culture and historical monuments, (e) high-cost physical infrastructure and (f) tourism.”
Why this source?
  • Directly describes 'state specific grants' as tied/sectoral grants recommended to all 28 States and lists the sectoral themes.
  • Explicitly uses the phrase 'other sector specific grants', linking the concept of sectoral/tied grants to Finance Commission recommendations.
Indian Polity, M. Laxmikanth(7th ed.) > Chapter 15: Centre-State Relations > I I Finance Commission > p. 156
Presence: 4/5
“[I I Finance Commission Article 280 provides for a Finance Commission as a quasi-judicial body. It is constituted by the President every fifth year or even earlier. It is required to make recommendations to the President on the following matters: • The distribution of the net proceeds of taxes to be shared between the Centre and the states, and the allocation between the states, the respective shares of such proceeds.• The principles which should govern the grants-in-aid to the states by the Centre (Le. , out of the Consolidated Fund of India) Till 1960, the Commission also suggested the amounts paid to the States of Assam, Bihar, Orissa and West Bengal in lieu of assignment of any share of the net proceeds in each year of export duty on jute and jute products.”
Why this source?
  • States the constitutional role of the Finance Commission (Article 280) to recommend principles governing grants‑in‑aid to states.
  • Implicates that sector‑specific or state‑specific grants fall within the Commission's remit to recommend.
Introduction to the Constitution of India, D. D. Basu (26th ed.). > Chapter 25: DISTRIBUTION OF FINANCIAL POWERS > The States, similarly, have their receipts from- > p. 390
Presence: 3/5
“The 14th Finance Commission has submitted its recommendations for the period 2015-16 to 2020-21. They are likely to have major implications for the Center-State relations. The 15th Finance Commission was constituted in November 2017 to give recommendations on the transfer of resources from the Centre to States for the five-year period from 2020 to 2025. The 15th Finance Commission has been constituted with the objective of strengthening co-operative federalism and improving the quality of public spending, and helping protect fiscal stability. Safeguarding the interests of the States in the shared Taxes.”
Why this source?
  • Confirms the 14th Finance Commission submitted recommendations for 2015–16 to 2020–21, establishing that it made recommendations in that period.
  • When combined with evidence about state‑specific/sectoral grants, supports that the 14th FC's recommendations could include such grants.
Pattern takeaway: UPSC focuses on the 'Structural Shift' in policy. They don't just ask 'What is the new number?'; they ask 'What mechanism was replaced or removed to make space for the new number?'
How you should have studied
  1. [THE VERDICT]: Sitter for 2015. The 'Reddy Commission' recommendations were the biggest economic news of that year, covered in the Economic Survey and all dailies.
  2. [THE CONCEPTUAL TRIGGER]: Fiscal Federalism > Finance Commission (Article 280) > Vertical vs. Horizontal Devolution.
  3. [THE HORIZONTAL EXPANSION]: Memorize 15th FC Criteria (N.K. Singh): Income Distance (45%), Area (15%), Population 2011 (15%), Demographic Performance (12.5%), Forest & Ecology (10%), Tax Effort (2.5%). Contrast this with the 14th FC which used 1971 population.
  4. [THE STRATEGIC METACOGNITION]: Do not view reports as static lists. View them as 'Deltas'. Ask: 'What did the 14th FC stop doing that the 13th did?' (Answer: It stopped sector-specific grants). 'What did the 15th do differently?' (Answer: Reintroduced performance grants).
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Finance Commission's role in vertical devolution
💡 The insight

The Finance Commission is constitutionally tasked with recommending the distribution (vertical devolution) of central taxes to states, as described in the provided references.

High-yield for UPSC: questions often ask about the Finance Commission's constitutional role and the mechanics of tax devolution. This connects to Centre–State fiscal relations and budgetary federalism. Prepare by memorising Article 280 functions and practicing application-based questions on devolution and grants.

📚 Reading List :
  • Indian Polity, M. Laxmikanth(7th ed.) > Chapter 15: Centre-State Relations > I I Finance Commission > p. 156
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > The XV Finance Commission has recommended the following transfers for 2021-26: > p. 182
🔗 Anchor: "Did the Fourteenth Finance Commission increase the share of States in the centra..."
📌 Adjacent topic to master
S1
👉 14th Finance Commission — period and significance
💡 The insight

One reference identifies the 14th Finance Commission as the body whose recommendations covered 2015–16 to 2020–21 and notes its likely major implications for Centre–State relations.

UPSC relevance: knowing the timeframe and impact of specific Finance Commissions helps answer policy-history and federalism questions. Link this to subsequent commissions (e.g., 15th) to trace changes in policy. Study commission reports' key recommendations and timelines for comparative questions.

📚 Reading List :
  • Introduction to the Constitution of India, D. D. Basu (26th ed.). > Chapter 25: DISTRIBUTION OF FINANCIAL POWERS > The States, similarly, have their receipts from- > p. 390
🔗 Anchor: "Did the Fourteenth Finance Commission increase the share of States in the centra..."
📌 Adjacent topic to master
S1
👉 Numeric shares of union taxes to states across recent Finance Commissions
💡 The insight

The references give concrete percentage shares used by recent commissions (e.g., 42% in 2019–20 and 41% in 2020–21), highlighting that the tax-share percentage can change between commissions.

Useful for factual/analytical UPSC questions on fiscal federalism and recent policy shifts. Candidates should track major percentage changes across commissions and the reasons cited for adjustments (e.g., new UTs), and practice interpreting implications for state finances.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Recommendations of 15th FC (for FY 2020-21) > p. 122
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > The XV Finance Commission has recommended the following transfers for 2021-26: > p. 182
🔗 Anchor: "Did the Fourteenth Finance Commission increase the share of States in the centra..."
📌 Adjacent topic to master
S2
👉 Functions of the Finance Commission (grants & devolution)
💡 The insight

The Finance Commission's constitutional duty includes recommending distribution of tax proceeds and the principles for grants‑in‑aid to states, which is the legal basis for any sector‑specific grant recommendations.

High‑yield for UPSC: questions often ask about Article 280, FC functions and its role in centre‑state fiscal relations. Connects to federalism, fiscal federalism and budgetary allocations. Prepare by memorising statutory functions and examples of grants recommended by commissions.

📚 Reading List :
  • Indian Polity, M. Laxmikanth(7th ed.) > Chapter 15: Centre-State Relations > I I Finance Commission > p. 156
  • Laxmikanth, M. Indian Polity. 7th ed., McGraw Hill. > Chapter 46: Finance Commission > FUNCTIONS > p. 431
🔗 Anchor: "Did the Fourteenth Finance Commission make recommendations regarding sector-spec..."
📌 Adjacent topic to master
S2
👉 State‑specific (tied/sectoral) grants
💡 The insight

Evidence describes 'state specific grants' as tied grants addressing special needs/cost disabilities and lists sectoral themes — directly relevant to 'sector‑specific grants'.

Useful for questions on types of central transfers (devolution vs grants), conditionality of funds, and policy implications. Helps answer application and analytical questions on how fiscal transfers address regional disparities. Study by reviewing types, purposes and examples of tied grants in recent FCs.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 5. State Specific Grants > p. 184
🔗 Anchor: "Did the Fourteenth Finance Commission make recommendations regarding sector-spec..."
📌 Adjacent topic to master
S2
👉 Fourteenth Finance Commission — period & significance
💡 The insight

Identifies the 14th FC and the five‑year period for which it submitted recommendations, framing any discussion of its contents (including grants).

Important for timeline questions and for linking specific FC recommendations to policy outcomes (2015–16 to 2020–21). Helps answer 'which commission recommended X' and assess changes across commissions. Memorise commission numbers, periods and headline reforms.

📚 Reading List :
  • Introduction to the Constitution of India, D. D. Basu (26th ed.). > Chapter 25: DISTRIBUTION OF FINANCIAL POWERS > The States, similarly, have their receipts from- > p. 390
🔗 Anchor: "Did the Fourteenth Finance Commission make recommendations regarding sector-spec..."
🌑 The Hidden Trap

The 'Demographic Performance' criterion (12.5%) in the 15th FC. This was the specific policy patch introduced to pacify Southern States that were penalized for controlling population when the base year shifted from 1971 to 2011.

⚡ Elimination Cheat Code

Use 'Zero-Sum Game' logic. A 10% jump in devolution (32% to 42%) is fiscally massive. The Centre cannot afford this mandatory hike *plus* continue generous discretionary grants. If Statement 1 is true (huge hike), Statement 2 is logically likely to be false (cuts elsewhere to balance the books).

🔗 Mains Connection

Mains GS-2 (Federalism): The shift from 32% to 42% represents a move from 'Patronage Federalism' (Centre giving tied grants for specific sectors) to 'Fiscal Autonomy' (States getting untied cash to decide their own priorities).

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SIMILAR QUESTIONS

IAS · 2025 · Q66 Relevance score: 0.86

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.

NDA-I · 2013 · Q63 Relevance score: 0.45

Which of the following statements is/are correct? 1. The 14th Finance Commission was constituted under the Chairmanship of Shri Vijay Kelkar. 2. The 14th Finance Commission has been specifically asked also to recommend how non- priority PSUs be relinquished. Select the correct answer using the code given below.

CDS-II · 2006 · Q79 Relevance score: 0.28

Consider the following statement s about 11 Finance Commission 1. It was constituted to go recommendations on specified aspects of Centre - State fiscal relations during 2005- 2010. 2. It has recommended that the share of states in the net proceeds of share alike Central taxes shall be 50%. Which of the statements given above is/ are correct ?

IAS · 2012 · Q58 Relevance score: -0.26

Which of the following is/are among the noticeable feature of the recommendations of the Thirteenth Finance Commission? 1. A design for the Goods and Services Tax, and a compensation package linked to adherence to the proposed design 2. A design for the creation of lakhs of jobs in the next ten years in consonance with India’s demographic dividend 3. Devolution of a specified share of central taxes to local bodies as grants Select the correct answer using the codes given below: