The 14th Finance Commission: Key Recommendations and Impact

The 14th Finance Commission (FFC), constituted in 2013 and chaired by Dr. Y.V. Reddy, submitted its report to the President of India in December 2014. Its recommendations, covering the period from 2015-16 to 2019-20, significantly reshaped the fiscal landscape of India, particularly concerning Centre-State financial relations. The FFC aimed to promote cooperative federalism and improve the quality of public spending.

Key Recommendations:

1. Increased Devolution to States: The most impactful recommendation was a substantial increase in the share of states in the divisible pool of central taxes from 32% to 42%. This marked the largest ever increase recommended by any Finance Commission. The objective was to provide states with greater autonomy and flexibility in planning and implementing development programs according to their specific needs.
2. Criteria for Devolution: While increasing the overall share, the FFC also revised the criteria for distributing this share among the states. The criteria included:
   • Income distance (50% weight)
   • Population (1971 census – 17.5% weight)
   • Area (15% weight)
   • Forest cover (7.5% weight)
   • Demographic change (10% weight)

   This formula aimed to balance equity (addressing income disparities) with efficiency and ecological considerations.

3. Revenue Deficit Grants: The FFC recommended grants to states to cover their revenue deficits. However, it emphasized fiscal discipline and encouraged states to reduce their revenue deficits through improved resource mobilization and expenditure management.
4. Local Government Grants: The Commission recommended significant grants to local bodies (Panchayats and Municipalities) to improve their financial capacity and enable them to deliver essential services effectively. The grants were to be used for basic services like sanitation, water supply, and solid waste management.
5. Disaster Management: The FFC examined the existing disaster management framework and recommended strengthening the State Disaster Response Funds (SDRFs) to enhance preparedness and response to natural calamities.

Impact and Significance:

The FFC’s recommendations had a profound impact on the Indian economy and federal structure. The increased devolution provided states with greater financial resources, allowing them to undertake more ambitious development projects and address local needs more effectively. The focus on local government grants empowered Panchayats and Municipalities to improve service delivery at the grassroots level.

However, the increased devolution also placed greater responsibility on states to manage their finances prudently and improve their revenue generation capacity. The emphasis on fiscal discipline was intended to ensure long-term fiscal sustainability.

While the FFC’s recommendations were largely accepted, some states raised concerns about the new devolution formula, particularly regarding the weight given to the 1971 population census. Despite these concerns, the FFC’s report played a crucial role in strengthening cooperative federalism and promoting inclusive growth in India.