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The Terms of Reference (ToR) for Finance Commissions have evolved to include contemporary challenges. Which of the following was a NEW ToR for the 15th Finance Commission (2020-25) not emphasized in earlier Commissions?
- Vertical devolution of tax revenues
- Grants for local bodies
- Performance-based incentives for States
- Defense and internal security funding
Answer: Performance-based incentives for States
Finance Commission ToR evolution: (a) Traditional ToR: Vertical devolution (Union-State tax share), horizontal distribution (among States), grants for local bodies, disaster management - consistent across FCs, (b) 15th Finance Commission new ToR: (i) Performance-based incentives: Reward States for reforms in power sector, ease of doing business, tax compliance, demographic performance (population control), (ii) Sector-specific grants: Health, education, rural local bodies with outcome-based monitoring, (iii) Fiscal discipline: Incentivize States to maintain fiscal deficit, debt targets, (c) Rationale for performance incentives: (i) Encourage reforms: Reward States implementing difficult but necessary reforms (power sector, tax administration), (ii) Outcome orientation: Link grants to measurable outcomes (health indicators, education quality), not just inputs, (iii) Fiscal prudence: Incentivize States to maintain fiscal discipline, avoid excessive borrowing, (d) Applications: (i) Power sector reforms: States improving distribution company performance receive additional grants, (ii) Ease of doing business: States implementing regulatory reforms receive incentives, (iii) Demographic performance: States controlling population growth receive additional devolution, (e) Challenges: (i) Measurement: Defining, measuring performance indicators objectively, avoiding manipulation, (ii) Equity: Ensuring performance incentives don't disadvantage needier States with lower capacity for reforms, (iii) Implementation: Monitoring outcomes, ensuring grants used for intended purposes, (f) Illustrates adaptive fiscal federalism: FC ToR evolve to address contemporary challenges (reforms, outcomes, fiscal discipline); performance incentives encourage State-level innovation while maintaining equity.