The 14th Finance Commission of India: Key Recommendations and Impact

The 14th Finance Commission (FFC), constituted in January 2013 and headed by former Reserve Bank of India (RBI) Governor, Y.V. Reddy, was a pivotal institution tasked with recommending the principles governing the distribution of tax revenues between the Union Government and the State Governments of India. Its recommendations covered the period from April 1, 2015, to March 31, 2020.

A key recommendation of the FFC was a significant increase in the share of states in the divisible pool of central taxes. The Commission recommended raising the states’ share to 42%, a substantial jump from the 32% recommended by the 13th Finance Commission. This landmark increase aimed to provide states with greater fiscal autonomy and resources for their development priorities. The rationale behind this increase was to empower states to address their specific needs more effectively, fostering greater fiscal decentralization and cooperative federalism.

The FFC also recommended a revised formula for horizontal distribution, which determines the allocation of the divisible pool among the states. This formula considered factors like population (17.5%), demographic change (10%), income distance (50%), area (15%), and forest cover (7.5%). The inclusion of demographic change acknowledged states’ efforts in managing population growth, while forest cover incentivized environmental conservation. The ‘income distance’ criterion, which measures the gap between a state’s per capita income and the highest per capita income among all states, continued to be a crucial factor in addressing inter-state disparities.

Beyond tax devolution, the FFC addressed the issue of revenue deficit grants. These grants were recommended for states that were projected to face revenue deficits after the tax devolution. The objective was to ensure that states could meet their essential expenditure needs without facing undue fiscal constraints. The commission also made specific recommendations on local body grants, focusing on improving basic services like sanitation and drinking water at the local level.

The impact of the 14th Finance Commission’s recommendations was far-reaching. The increased devolution of taxes to states provided them with significantly more resources, enabling them to invest in infrastructure, social welfare programs, and other developmental activities. The greater fiscal autonomy allowed states to tailor their policies to their specific needs and priorities. However, the increase in devolution also came with increased responsibility for states to manage their finances prudently and efficiently.

While the increase in tax devolution was generally welcomed, some concerns were raised about the potential impact on the central government’s fiscal space. The central government had to adjust its expenditure priorities to accommodate the increased share for states. Moreover, the actual revenue receipts sometimes deviated from the projections, affecting the actual transfer to states. Despite these challenges, the 14th Finance Commission’s recommendations played a crucial role in strengthening fiscal federalism in India and empowering states to drive economic growth and development.