The 14th Finance Commission (FFC) of India, constituted in January 2013 under the chairmanship of Dr. Y.V. Reddy, made recommendations covering the period from April 1, 2015, to March 31, 2020. Its primary mandate was to make recommendations on the distribution of tax revenues between the Union and the States (vertical devolution) and among the States (horizontal devolution). Beyond this core function, the FFC also addressed matters related to local bodies, disaster management, and the overall fiscal responsibility framework.
A key feature of the FFC’s recommendations was a significant increase in the share of the Union’s divisible tax pool to be devolved to the States. It recommended increasing this share from 32% (as suggested by the 13th Finance Commission) to 42%. This marked the largest ever increase in devolution recommended by any Finance Commission. The rationale behind this substantial increase was to provide States with greater fiscal autonomy and flexibility in planning and implementing development programs, enabling them to better address their specific needs and priorities.
In determining the horizontal devolution formula, the FFC placed considerable emphasis on equity and efficiency. The formula comprised various criteria, including population (1971 Census), demographic change (2011 Census), income distance (a measure of the gap between a state’s per capita income and the highest per capita income among all states), area, forest cover, and tax effort. The weighting assigned to each criterion reflected the Commission’s judgment on their relative importance in achieving a fair and equitable distribution of resources.
While the FFC retained population (1971 Census) as a factor, albeit with a lower weight, it also incorporated demographic change based on the 2011 Census to reflect current population dynamics. The inclusion of forest cover aimed to incentivize states to protect and enhance their forest resources, recognizing their crucial role in environmental sustainability. The tax effort criterion aimed to reward states that demonstrated greater efficiency in tax collection.
Beyond tax devolution, the FFC also made recommendations regarding grants to local bodies, both rural and urban. It emphasized the importance of strengthening local governance and empowering local bodies to deliver essential services effectively. The grants were earmarked for specific purposes, such as sanitation, drinking water, and waste management, to ensure their effective utilization and impact on local communities.
The FFC’s recommendations had a significant impact on the fiscal landscape of India. The increased devolution provided States with greater resources, enabling them to undertake more ambitious development programs. The focus on equity in the horizontal devolution formula aimed to reduce regional disparities and promote inclusive growth. However, some States raised concerns about the weighting assigned to different criteria, highlighting the inherent challenges in balancing competing priorities in a diverse country like India.
In conclusion, the 14th Finance Commission played a crucial role in shaping the fiscal relations between the Union and the States. Its recommendations on tax devolution, grants to local bodies, and fiscal responsibility contributed to strengthening federalism and promoting equitable development across the country. The Commission’s emphasis on equity, efficiency, and sustainability has had a lasting impact on India’s fiscal policy framework.
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