14TH FINANCE COMMISSION

PHASE I – GENERAL AWARENESS

PHASE II- FINANCE AND MANAGEMENT

TOPIC- FINANCE COMMISSION

14th Finance Commission Report

 

The Fourteenth Finance Commission chaired by Dr. Y.V.Reddy, former Governor Reserve Bank of India, has submitted its recommendation to the President. The government has in principle accepted the recommendations.
There are many first-timers in the 14th FC recommendations; firstly being the significant increase in the total devolution to states from 32% to 42%.

Besides, the commission has discontinued the practice of recommending grants and has also not distinguished between plan and non-plan expenditure. These innovative recommendations have however generated their own debates. While some have called them positive, some have called them negative.

Functions of Finance Commission, as given in Article 280 of The Constitution of India –

It shall be the duty of the Commission to make recommendations to the President as to

  • the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under this Chapter and the allocation between the States of the respective shares of such proceeds;
  • the principles which should govern the grants in aid of the revenues of the States out of the Consolidated Fund of India;
  • any other matter referred to the Commission by the President in the interests of sound finance

 

Recommendations of 14th Finance Commission

  • Sharing of Union Taxes :The 14th FC has recommended increasing the share of tax devolution between Centre and the State, to 42 per cent of the divisible pool (Vertical Transfer).
    Criteria for Transfers between States (Horizontal Transfers) –
Criteria Weight
Population 17.5
Demographic Change 10
Income Distance 50
Area 15
Forest Cover 7.5
  • The 14th FC has not recommended sector specific grants (except few like Local Body Grant). Thus, 14TH FC has not taken into account Plan and Non Plan categories of fund transfer. Based on 13th FC recommendations, these grants in aid accounted to 7% of net transfers from Centre to State.
  • Revenue Deficit Grant:A total revenue deficit grant of Rs. 1,94,821 crore is recommended during the award period for eleven States – Andhra Pradesh, Himachal Pradesh, Jammu and Kashmir, Manipur, Mizoram, Nagaland, Tripura, Assam, Kerala, Meghalaya and West Bengal. The objective of inter-governmental transfers is to offset the fiscal disabilities arising from low revenue raising capacity and higher unit cost of providing public services.
  • Grants to Local Bodies:The total size of the grant to be Rs.2,87,436 crore for the period 2015-20, constituting an assistance of Rs. 488 per capita per annum at an aggregate level. Of this, the grant recommended to panchayats is Rs.2,00,292.20 crore and that to municipalities is Rs.87,143.80 crore. The grants are composed of two parts – a basic grant and a performance grant for duly constituted gram panchayats and municipalities.
  • Disaster Management:The 14th FC has recommended that the Union Government consider ensuring an assured source of funding for the NDRF. The financing of the NDRF has so far been almost wholly through the levy of cess on selected items

 

Other Recommendations

  • Set up an independent council to undertake assessment of fiscal policy implications of Budget proposals
  • Replace existing FRBM Act with a debt ceiling & fiscal responsibility law
  • Wind up National Investment Fund and maintain all disinvestment receipts in the consolidated fund
  • Amend electricity Act to provide for penalties for delay in payment of subsidies by state governments
  • Submission of states on minimum guaranteed devolution turned down
  • Steps for states to augment revenues, such as property tax reforms and issuance of municipal bonds suggested
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