The Fourteenth Finance Commission (FFC), constituted in 2013 and chaired by former Reserve Bank of India Governor Y.V. Reddy, played a pivotal role in reshaping the financial landscape of India’s federal system. Its recommendations, covering the period from 2015-2020, significantly altered the distribution of tax revenues between the Union government and the states, aiming for a more equitable and efficient resource allocation.
A key highlight of the FFC was the substantial increase in the states’ share of the divisible pool of central taxes. It recommended raising this share from 32% (as suggested by the Thirteenth Finance Commission) to 42%. This represented the largest ever increase in the share of states in the Union’s tax revenue. The rationale behind this significant augmentation was to provide states with greater autonomy and flexibility in planning and implementing development programs tailored to their specific needs and priorities.
The FFC acknowledged the diverse developmental challenges faced by different states. To address this, it adopted a revised formula for horizontal distribution, which determines the share of each state from the divisible pool. This formula considered factors like population (as per the 2011 census), demographic change, income distance (the gap between a state’s per capita income and the highest per capita income), area, forest cover, and tax effort. The increased weightage given to demographic change and forest cover aimed to incentivize population control and environmental conservation respectively.
Furthermore, the FFC recommended the abolition of the distinction between Plan and Non-Plan grants, simplifying the transfer mechanism and giving states greater discretion in utilizing funds. This simplification reduced bureaucratic complexities and empowered states to allocate resources according to their own development strategies.
In addition to tax devolution, the FFC also addressed other crucial areas like local government finances, disaster management, and state-specific grants. It emphasized the need to strengthen local bodies, recommending grants to rural and urban local bodies based on population and performance. It also recommended strengthening disaster management frameworks and advocated for capacity building at the state and local levels. Specific grants were allocated to certain states to address their unique challenges and development deficits.
The FFC’s recommendations had a profound impact on the financial health of the states. The increased devolution provided states with substantial additional resources, enabling them to invest in infrastructure, education, healthcare, and other crucial sectors. This led to improved service delivery and accelerated economic growth in many states. However, the implementation of the FFC’s recommendations also faced some challenges, including concerns about the fiscal discipline of states and the effective utilization of increased resources.
In conclusion, the Fourteenth Finance Commission played a significant role in strengthening cooperative federalism in India. By recommending a substantial increase in the states’ share of central taxes and simplifying the transfer mechanism, the FFC empowered states to pursue their development goals more effectively, fostering a more balanced and equitable growth trajectory for the nation.
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