GS Mains Model Question & Answer: Discuss the main recommendations of 14th Finance Commission

Q. Discuss the main recommendations of 14th Finance Commission. (12.5 Marks)

(General Studies Mains Paper III- Economy: Indian Economy and issues relating to planning)

Model Answer :

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 by the orders of President on 2nd January, 2013 and submitted its report on 15thDecember, 2014.

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

Main Recommendations of 14th Finance Commission :

The 14th Finance Commission is of the view that tax devolution should be the primary route for transfer of resources to the States.
In understanding the States’ needs, it has ignored the Plan and non-Plan distinctions
According to the Commission, the increased devolution of the divisible pool of taxes is a ``compositional shift in transfers’’ – from grants to tax devolution
In recommending an horizontal distribution, it has used broad parameters – population (1971), changes in population since then, income distance, forest cover and area, among others.
It has recommended distribution of grants to States for local bodies using 2011 population data with weight of 90 per cent and area with weight of 10 per cent
State grants include grant to: Duly constituted gram panchayats, municipal bodies
Grants divided into two namely - a basic grant and a performance grant for gram panchayats and municipal bodies
Ratio of basic to performance grant is 90:10 for panchayats and for municipalities, 80:20
Total grant recommended is INR 2.8 lakh crore for a given year period. Around INR 2 lakh crore is allocated to panchayats and the rest to municipalities
Commission has departed from previous conventions regarding grants-in-aid to States by Central government
States given greater fiscal responsibility for scheme implementation
Commission has pegged fiscal deficit target at 3.6% for 201-2016 and 3% in coming years
Commission has estimated that between 2015-2016 and 2019-2020, the decline will be from 10.8% to 9.6% of the GDP mainly due to reduction in subsidy expenditure from 1.70% in 2015-2016 to 1% in 2019-2020
The Commission is of the view that sharing pattern in respect to various Centrally-sponsored schemes need to change. It wants the States to share a greater fiscal responsibility for the implementation of such schemes.

Other recommendations of the FFC

In addition to the recommendations regarding Vertical, and Horizontal devolution and grants, the FFC has made certain other recommendations. These relate to cooperative federalism, Goods & Services Tax, Fiscal Consolidation Roadmap, Pricing of Public Utilities and Public Sector Enterprises. The recommendations of the Finance Commission will be examined by the Government in due course in consultation with the concerned stakeholders.

Impact of Recommendation

"The higher tax devolution will allow States greater autonomy in financing and designing schemes as per their needs and requirements," says the report. Practically, it will give more power to states in determining how they spend this money.

As against a total devolution of Rs. 3.48 lakh crore approximately in 2014-15, the total devolution to the States in 2015-16 will be Rs. 5.26 lakh crore approximately, a year-on-year increase of Rs. 1.78 lakh crore approximately.

Implication of Recommendation

It comes at a time when the Centre is trying to push GST (goods and services tax). Perhaps, higher devolution will help to reassure the States that they will not be at the wrong end of the stick if GST is introduced.