14th Finance Commission: Key Highlights and Recommendations

The Fourteenth Finance Commission (FFC), constituted under Article 280 of the Constitution, submitted its report to the President of India on December 15, 2014. Headed by Dr. Y.V. Reddy, the commission’s primary task was to recommend the principles governing the distribution of tax revenues between the Union and the States for the period 2015-2020. The FFC’s recommendations had significant implications for fiscal federalism in India, shaping the financial relationship between the central and state governments.

Enhanced Devolution to States

A cornerstone of the FFC’s report was a substantial increase in the share of central taxes devolved to the states. The commission recommended raising this share to 42% of the divisible pool, a significant jump from the 32% recommended by the Thirteenth Finance Commission. This increase aimed to provide states with greater fiscal autonomy and resources to address their specific developmental needs.

Rationale Behind the Increased Devolution

The FFC justified the enhanced devolution by arguing that it would empower states to plan and execute development programs more effectively. It acknowledged the increasing responsibilities of states in areas such as education, healthcare, and infrastructure development. Moreover, the commission believed that a larger share of untied funds would enable states to address regional disparities and promote inclusive growth.

Performance-Based Grants and Local Body Strengthening

While increasing the share of tax devolution, the FFC also emphasized the importance of performance-based grants to incentivize states to improve their fiscal management and service delivery. The commission recommended grants for various sectors, including education, health, and environmental protection, linked to specific performance indicators. Furthermore, the FFC strongly advocated for the strengthening of local bodies (Panchayats and Municipalities) by providing them with adequate financial resources and empowering them to plan and implement development projects at the grassroots level. It allocated substantial grants to local bodies, contingent on them fulfilling certain basic conditions.

Addressing Fiscal Capacity and Equity

The FFC aimed to address the fiscal capacity of different states through its formula for distributing the divisible pool. It considered factors such as population, area, forest cover, income distance (the gap between a state’s per capita income and the highest per capita income among all states), and demographic change. This multi-dimensional approach aimed to ensure a more equitable distribution of resources, taking into account the diverse needs and challenges faced by different states.

Impact and Legacy

The recommendations of the Fourteenth Finance Commission had a profound impact on the fiscal landscape of India. The increased devolution to states provided them with greater financial flexibility and autonomy, enabling them to invest in crucial development programs. The focus on performance-based grants encouraged states to improve their governance and service delivery. The FFC’s report played a crucial role in strengthening fiscal federalism and promoting inclusive and sustainable development across the country. It set a new benchmark for future Finance Commissions in terms of its comprehensive approach and commitment to equity and efficiency in resource allocation.