VISIONIAS

www.visionias.in

14th Finance Commission

Table of Content

1. A Brief Introduction of Finance Commission .......................................................................................................... 2

2. Fourteenth Finance Commission ............................................................................................................................ 2
3. Major recommendations of FFC ............................................................................................................................. 2
3.1. Sharing of Union Taxes .................................................................................................................................... 2
3.2. Local Governments .......................................................................................................................................... 2
4. Comparison with 13th Finance Commission .......................................................................................................... 3
5. Criticism .................................................................................................................................................................. 3

Copyright by Vision IAS

All rights are reserved. No part of this document may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without prior permission of Vision IAS
1

www.visionias.in

Vision IAS

1. A Brief Introduction of Finance Commission

Article 280 of the Constitution of India provides for a finance commission as a quasi-judicial body. It is
constituted by the President of India every fifth year. It consists of a chairman and four other members to be
appointed by the president.
It makes recommendations about the following to the President of India:

The distribution of the net proceeds of taxes between the centre and the states and the allocation between
the states of the respective shares of such proceeds
The principles that should govern the grants in aid to the states by the centre
The measures needed to augment the consolidated fund of states to supplement the resources of the local
governments in the states on the basis of the recommendations made by the State Finance Commissions.
Any other method referred to it by the President in the interests of the sound finance.

The recommendations made by finance commission are only advisory in nature and hence, are not binding on
the government.

2. Fourteenth Finance Commission

The 14th Finance Commission (FFC) was appointed under the Chairmanship of Dr. Y. V. Reddy.
Its Terms of References are as Follows:

Primary objectives as mentioned above

Principles which would govern the quantum and distribution of grants-in-aid(non-planned grants to states
The measures to augment state government finances to supplement the finances of local government
To review the state of finances, deficit and debt conditions at different levels of government

3. Major recommendations of FFC

3.1. Sharing of Union Taxes

Increasing the share of tax devolution to 42 per cent of the divisible pool would serve the twin objectives of
increasing the flow of unconditional transfers to the States and yet leave appropriate fiscal space for the
Union to carry out specific purpose transfers to the States.
No minimum guaranteed devolution to the States.
As service tax is not levied in the State of Jammu & Kashmir, proceeds cannot be assigned to this State.

3.2. Local Governments

Local bodies should be required to spend the grants only on the basic services within the functions assigned
to them under relevant legislations.
Distribution of grants to the States using 2011 population data with weight of 90 per cent and area with
weight of 10 per cent. The grant to each state will be divided into two, a grant to duly constituted Gram
panchayats and a grant to duly constituted Municipalities, on the basis of urban and rural population of that
state using the data of census 2011.
The grants to be divided in two parts - a basic grant and a performance grant for duly constituted gram
panchayats and municipalities. In the case of gram panchayats, 90 per cent of the grant will be the basic
grant and 10 per cent will be the performance grant. In the case of municipalities, the division between basic
and performance grant will be on an 80:20 basis.
The grants should go only to those gram panchayats, which are directly responsible for the delivery of basic
services, without any share for other levels using the formula given by the recent SFC. Similarly, the basic
grant for urban local bodies will be divided into tier-wise shares and distributed across each tier, namely the
www.visionias.in

Vision IAS

Municipal corporations, Municipalities (the tier II urban local bodies) and the Nagar panchayats (the tier III
local bodies) using the formula given by the respective SFCs.
In case the SFC formula is not available, then the share of each gram panchayat as specified above should be
distributed across the entities using 2011 population with a weight of 90 per cent and area with a weight of
10 percent. In the case of urban local bodies, the share of each of the three tiers will be determined on the
basis of population of 2011 with a weight of 90 per cent and area with a weight of 10 per cent and then
distributed among the entities in each tier in proportion to the population of 2011 and area in the ratio of
90:10.
Performance grants are being provided to address the following issues: (i) making available reliable data on
local bodies' receipt and expenditure through audited accounts; and (ii) improvement in own revenues.

4. Comparison with 13th Finance Commission

Enhanced the share of the states in

the central divisible pool from 32%
(by 13th FC) to 42% which is the
biggest ever increase in vertical tax
devolution.
It
has
not
made
any
recommendation
concerning
sector-specific grants unlike the
13th FC.

5. Criticism

Social sector allotment is reduced.

Backward Regions Grant Fund (BRGF) is wound up. Bihar which got 30% weightage for funding through this
criterion will be badly affected. Bihar being among least developed states it is a matter of concern to the
economy. It is likely to affect the Gross Domestic State Product (GDSP) of Bihar adversely.
Pruning of Planning Commission to be NITI Ayog has led to loss of plan grants to states which are performing
well. Karnataka stands to lose plan grants. Rashtriya Krishi Vikas Yojna which contributed significantly to
agricultural productivity and transformation is removed through the process which will affect the sector. To
compensate for all this some extra funding will have to be mobilized by the GOI which caused it. States can
ask for higher untied grants for the reason.
With GOI revenue as a percentage of GDP is shrinking by 1% which makes devolution of funds to states
questionable. How the GOI estimates and plans to face its increasing expenditure in the situation is to be
seen. IT export income has declined to 6 year low this year due to inward bound policies of the west and
USA.
With back ward region grants discontinuation, absence of plan funds to states, reduction of social sector
funding and decline in central kitty will all lead to larger estimable inequities in the devolution of funds to
states in addition to other diversities. So there could be surging fiscal inequalities among the states. How
cooperative federalism can be ushered in given the situation is not clear.
May be 42% unconditional grants are expected to do the job. But this devolution will give a free hand to
states to operate the finances. Inequities with freedom to states are what could be expected.
Good amount of devolution is ordered to local bodies and more clarity of flow is also directed. But there is
no sanction against default in devolution of funds to local bodies. So as always, flow of funds to local bodies
is not ensured. There is no preventive measure against dependence on states either. A special body for
monitoring cooperative federalism is advised which may or may not happen.
In brief there is sacrifice of equity principle in the process of extending a flat unconditional grant of 42%.This
may cause federal chaos instead of cooperative federalism unless additional and strong institutional
arrangement is made to guard the objectives of the present governance.
www.visionias.in

Vision IAS