14th Finance Commission Mandate

The 14th Finance Commission (FFC), constituted in 2013 and in effect from April 1, 2015, to March 31, 2020, played a pivotal role in shaping India’s fiscal federalism. Its core mandate revolved around recommending principles governing the distribution of tax revenue between the Union and the States, and the allocation of these revenues among the States themselves. Crucially, it also assessed the resources of the Union and the States, and suggested measures to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities. The FFC’s recommendations were underpinned by several key considerations. Primarily, it aimed to promote fiscal prudence and accountability at all levels of government. It also sought to ensure equity and efficiency in resource allocation, addressing regional disparities and fostering inclusive growth. The Commission was explicitly tasked with considering the impact of Goods and Services Tax (GST) on the finances of both the Union and the States, although GST was implemented after its initial report. One of the most significant recommendations of the FFC was a substantial increase in the share of States in the divisible pool of central taxes. The Commission recommended raising this share from 32% to 42%, a quantum leap that significantly empowered States with greater fiscal autonomy. This increased devolution aimed to provide States with more resources to finance their development needs, especially in sectors like health, education, and infrastructure. The FFC also refined the formula for horizontal distribution of tax revenue among the States. The formula gave considerable weight to population (17.5%), demographic change (10%), income distance (50%), area (15%), forest cover (7.5%). Income distance, measured as the difference between a state’s per capita income and that of the state with the highest per capita income, remained the single most important factor. Forest cover was introduced as a new criterion to incentivize states to protect their forests and contribute to environmental sustainability. Demographic change acknowledged states that had made progress in controlling population growth. Beyond tax devolution, the FFC made significant recommendations regarding grants-in-aid to States. These grants were broadly categorized into revenue deficit grants, local body grants, and disaster management grants. Revenue deficit grants were provided to States that faced a revenue gap after devolution, ensuring that essential services were not compromised. Local body grants, further subdivided into grants for rural and urban local bodies, were designed to strengthen local governance and improve the delivery of public services at the grassroots level. The Commission also recommended a revised framework for disaster management, emphasizing prevention, mitigation, and preparedness. Furthermore, the FFC examined the financial position of the Union government and offered suggestions to improve its fiscal management. It advocated for better targeting of subsidies, greater efficiency in government spending, and measures to enhance revenue mobilization. The Commission emphasized the importance of maintaining fiscal discipline and adhering to the targets set under the Fiscal Responsibility and Budget Management (FRBM) Act. The implementation of the 14th Finance Commission’s recommendations significantly altered the landscape of fiscal federalism in India. The enhanced devolution to States, coupled with grants-in-aid, provided them with greater resources and flexibility in planning and executing their development programs. While the increased devolution was widely welcomed, the changes to the horizontal distribution formula led to some debate and discussion among States, particularly those that perceived a relative decline in their share. Overall, the 14th Finance Commission made a substantial contribution to strengthening cooperative federalism and promoting balanced and sustainable development across the country.

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