14th Finance Commission

  Introduction 

Article 280 of the Constitution of India requires the Constitution of a Finance Commission every five years, or earlier. For the period from 1st April, 2015 to 31st March, 2020, the 14th Finance Commission (FFC) was constituted under chairmanship of Y. V. Reddy by the orders of President on 2nd January, 2013 and submitted its report on 15th December, 2014. 

Term of Reference

 • The Finance Commission is required to recommend the distribution of the net proceeds of taxes of the Union between the Union and the States (commonly referred to as vertical devolution); 

• The allocation between the States of the respective shares of such proceeds (commonly known as horizontal devolution). 

• To recommend on ‘the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State’ 

Recommendations 

• With regard to vertical distribution, FFC has recommended that the States’ share in the net proceeds of the Union tax revenues be 42%, a huge jump from the 32% recommended by the 13th Finance Commission.

 • FFC has taken the view that tax devolution should be primary route of transfer of resources to States. It may be noted that in reckoning the requirements of the States, the FFC has ignored the Plan and Non-Plan distinction. 

• In recommending horizontal distribution, the FFC has used broad parameters of population (1971) and changes of population since, income distance, forest cover and area. FFC has recommended distribution of grants to States for local bodies using 2011 population data with weight of 90% and area with weight of 10%.

 • FFC has recommended grants in two parts; a basic grant, and a performance grant, for duly constituted Gram Panchayats and municipalities. The ratio of basic to performance grant is 90:10 with respect to Panchayats and 80:20 with respect to Municipalities.

 • FFC has recommended out a total grant of Rs 2,87,436 crore for five year period from 1.4.2015 to 31.3.2020. Of this the grant recommended to Panchayatas is Rs 2,00,292.20 crores and that to municipalities is Rs 87,143.80 crores. 

• Revenue deficit to be progressively reduced and eliminated. 

• Fiscal deficit to be reduced to 3% of the GDP by 2017-18. 

• A target of 62% of GDP for the combined debt of centre and states. 

• The Medium Term Fiscal Plan (MTFP) should be reformed and made the statement of commitment rather than a statement of intent. 

• FRBM Act need to be amended to mention the nature of shocks which shall require targets relaxation. 

• Both centre and states should conclude ‘Grand Bargain’ to implement the model Goods and Services Act (GST). 

• Initiatives to reduce the number of Central Sponsored Schemes (CSS) and to restore the predominance of formula based plan grants. 

• States need to address the problem of losses in the power sector in time bound manner.