UPSC Prelims 2023 Q29: 15th Finance Commission Devolution Criteria
Consider the following:
1. Demographic performance
2. Forest and ecology
3. Governance reforms
4. Stable government
5. Tax and fiscal efforts
For the horizontal tax devolution, the Fifteenth Finance Commission used how many of the above as criteria other than population area and income distance?
- Only two
- Only three
- Only four
- All five
Answer: (b) Only three
Statement-wise explanation
- 1: correct — Demographic performance was a new criterion added by the 15th Finance Commission, with a 12.5% weight for 2021-26. It rewards states that kept fertility low, so states with a lower total fertility rate score higher. It was included because using 2011 population data on its own would penalise states that had controlled population growth.
- 2: correct — Forest and ecology carries a 10% weight. It is measured as each state's share of dense forest in the total dense forest of all states. The 14th Finance Commission's 'forest cover' criterion (7.5%) was replaced by this one.
- 3: incorrect — Governance reforms is not one of the 15th Finance Commission's horizontal devolution criteria. The Commission linked reforms to performance-based grants and incentives (for example, grants to local bodies tied to conditions). It did not use reforms in the tax-sharing formula.
- 4: incorrect — No Finance Commission has used political stability or a 'stable government' as a devolution criterion. The formula relies only on measurable economic, demographic and geographic indicators.
- 5: correct — Tax and fiscal efforts carries a 2.5% weight. It is the ratio of a state's average per capita own tax revenue to its average per capita GSDP over 2016-17 to 2018-19. It rewards states that collect more tax relative to the size of their economy.
How to eliminate
Statement 4 is the easiest to drop. A Finance Commission formula uses measurable indicators, and 'stable government' cannot be measured objectively or neutrally between parties. Rejecting it removes 'All five'. Statement 3 sounds plausible, but 'governance reforms' is how the Commission framed its performance-based grants, not its tax-sharing formula. To choose between 'Only three' and 'Only four' you need the actual list. Remember the six 15th FC criteria and weights: income distance 45, population (2011) 15, area 15, demographic performance 12.5, forest and ecology 10, tax and fiscal efforts 2.5. A simple test: each criterion is a number you can calculate from data (TFR, dense forest area, own tax revenue to GSDP).
Know more
Horizontal devolution decides how the states' combined share of the divisible pool is split among individual states. Vertical devolution fixes that combined share. The 15th Finance Commission (chair N.K. Singh) set it at 41% for 2021-26. That is 1 point below the 14th FC's 42%, an adjustment for the new Union Territories of Jammu & Kashmir and Ladakh. Its final report was tabled in Parliament on 1 February 2021.
| Criterion | 14th FC (2015-20) | 15th FC (2021-26) |
|---|---|---|
| Income distance | 50.0 | 45.0 |
| Population (1971) | 17.5 | — |
| Population (2011) | 10.0 | 15.0 |
| Area | 15.0 | 15.0 |
| Forest cover | 7.5 | — |
| Forest and ecology | — | 10.0 |
| Demographic performance | — | 12.5 |
| Tax and fiscal efforts | — | 2.5 |
What each criterion does:
- Income distance (equity): how far a state's per capita income is below that of the richest state. Poorer states get more.
- Population and area (need): larger populations and territories cost more to serve.
- Demographic performance (reward): a lower fertility rate scores higher. This answered southern states' concern that switching from 1971 to 2011 Census data would penalise them for controlling population.
- Forest and ecology (ecological service): a state's share of dense forest makes up for land that cannot be used for development.
- Tax and fiscal efforts (efficiency): own tax revenue relative to GSDP.
This shows the equity vs efficiency debate. Income distance favours poorer states, while demographic performance and tax effort reward performance. The 16th Finance Commission (2026-31) kept the vertical share at 41% and revised the horizontal weights. Compare the two formulas.
NCERT Concepts to Revise
- Horizontal devolution: The question asks only about horizontal devolution criteria, meaning the formula that splits the states' share among states.
- Demographic performance criterion: Statement 1 names this criterion directly. Know what it measures and why the 15th FC introduced it.
- Vertical devolution: Separates the 41% states' share (vertical) from the formula this question tests (horizontal), a common source of confusion.
- Divisible pool: Devolution criteria split the divisible pool. Knowing what the pool contains places the formula in context.