The 14th Finance Commissionof India
Composition of Finance Commission
Functions of the Finance Commission:
Fourteenth Finance Commission of India
Recommendations made by the 14th Finance
Commission of India
Implications of 14th Finance Commission
The Finance Commission of India came into existence in 1951.
It was established under Article 280 of the Indian Constitution by the
President of India. It was formed to define the financial relations
between the central and the state.
The Finance Commission Act of 1951 states the terms of qualification,
appointment and disqualification, the term, eligibility and powers of
the Finance Commission. As per the Constitution, the commission is
appointed every five years and consists of a Chairman and four other
COMPOSITION OF FINANCE
Article 280 of the constitution deals with composition, functions and
role of the Finance Commission:
The Constitution provides that Finance Commission shall consist of a
Chairman and four other members to be appointed by the President.
The Chairman or members are eligible for re-appointment.
The Constitution authorizes Parliament to make provisions related to
qualifications, conditions of service of members or powers of Finance
Qualifications – The Chairman shall have vast experience in Public
affairs and other four members shall be selected among persons
who a) have qualifications as par with a judge of High Court, b)
has special knowledge of Finance and Accounts of government, c)
have vast experience in financial matters and d) have special
knowledge of economics.
Disqualifications – A member or Chairman is become disqualified
if he a) is of unsound mind, b) is an undischarged solvent
(bankrupt), c) is convicted of an offence and d) has such financial
or other interest which is likely to affect prejudicially his functions
as a member of the commission.
FUNCTIONS OF THE FINANCE
COMMISSIONThe Finance Commission is a quasi – judicial body. But primarily, the
Finance Commission makes recommendations to the President on the
following matters :
To distribute central funds between the Center and the states based
on their respective contributions of the taxes.
To determine the principles which should govern Grants-in-Aid to
the States by the Central government
To recommend the measures required to augment the Consolidated
Fund of a State in order to supplement the resource of the Panchayats
and Municipalities in the States based on the recommendations of the
State Finance Commission in this regard (This function has been
added in the 73rd and 74th Constitutional Amendment Act, 1992).
Any matter referred to the Commission by the President.
14TH FINANCE COMMISSION OF INDIA
The Fourteenth Finance Commission (FC-XIV) was constituted
by the President on 2 January 2013 to make recommendations
for the period 2015-20.
Dr. Y. V. Reddy was appointed the Chairman of the
Ms. Sushama Nath, Dr. M. Govinda Rao and Dr. Sudipto Mundle
were appointed full time Members.
Prof. Abhijit Sen was appointed as a part-time Member.
Shri Ajay Narayan Jha was appointed as Secretary to the
RECOMMENDATIONS MADE BY THE 14th
FINANCE COMMISSION OF INDIA
The Major Recommendations of 14th Finance Commission headed by
Prof. Y V Reddy are given below:
The standout recommendation of the 14th Finance Commission (FFC)
is its recommendation that the share of states in the net proceeds of
the shareable Central taxes should be 42% against 32% recommended
in the 13th Finance Commission, i.e., 10% higher than the
recommendation of 13th Finance Commission. Revenue deficit to be
progressively reduced and eliminated.
Fiscal deficit to be reduced to 3% of the GDP by 2017–18, which is a
carbon copy of the 13th Finance Commission.
A target of 62% of GDP for the combined debt of centre and states;
an improvement over the 13th Finance Commission which targeted
68% of GDP for the combined debt of centre and states.
The Medium Term Fiscal Plan (MTFP) should be reformed and made
the statement of commitment rather than a statement of intent.
FRBM Act need to be amended to mention the nature of shocks
which shall require targets relaxation.
Both centre and states should conclude 'Grand Bargain' to implement
the model Goods and Services Act (GST).
Initiatives to reduce the number of Central Sponsored Schemes (CSS)
and to restore the predominance of formula based plan grants.
States need to address the problem of losses in the power sector in
time bound manner.
Owing to this increase in the states’ share, it was envisaged that the
increase in their shares to be utilized in accumulating capital assets.
The FFC has also proposed a new horizontal formula for the
distribution of the states’ share in divisible pool among the states.
There are changes both in the variables included/excluded as well as
the weights assigned to them. Relative to the Thirteenth Finance
Commission, the FFC has incorporated two new variables: 2011
population and forest cover; and excluded the fiscal discipline
Note: There has not been a significance change in recommendations no. 2, 5,
6, 7, 8 and 9.
IMPLICATIONS OF 14TH FINANCE
COMMISSION With greater fiscal space – there has been a 10% increase in the states’
share of the shareable of the central taxes – states can meaningfully
contribute to the overall growth and development in their regions,
thereby adding to the aggregate growth of the nation.
Huge tax devolution could put some strain on center’s finances. At the
same time, in order to ensure that the Centre’s fiscal space is secure,
the suggestion is that there will be commensurate reductions in the
Central Assistance to States (CAS) known as “plan transfers”.
With regards to the new horizontal formula proposed by the 14th
Finance Commission for the distribution of states’ share, all states
stand to gain from FFC transfers in absolute terms. However, to assess
the distributional effects, the increases should be scaled by
population, Net State Domestic Product (NSDP) at current market price,
or by states’ own tax revenue receipts
The biggest gainers in absolute terms under General Category States
(GCS) are Uttar Pradesh, West Bengal and Madhya Pradesh while for
Special Category States (SCS) it is Jammu & Kashmir, Himachal
Pradesh and Assam.
A better measure of impact is benefit per capita. The major gainers in
per capita terms turn out to be Kerala, Chhattisgarh and Madhya
Pradesh for GCS and Arunachal Pradesh, Mizoram and Sikkim for SCS.
The 14th Finance Commission reinforced the idea of the 13th Finance
Commission to reduce or if possible eliminate revenue deficits; that in
essence could mean that 13th Finance Commission was failed in this
case, or that the government has not been able to raise its revenue
India’s high fiscal deficit is clearly pictured by the recommendation of
this commission to reduce fiscal deficit again by 3% after
recommendation made by the 13th Finance Commission to reduce the
same by the same per cent
It appears there is a dissent from unanimity in the recommendations
of the 14th Finance Commission. Sen has criticised the
recommendation of the 14th Finance Commission that states' share of
taxes should be 42%, much higher than the current 32%. In his note,
Sen notes that the increased devolution is about a third of all current
Some caveats or complications to this exercise must be noted. First,
they are sensitive to the assumptions underlying GDP growth, revenue
and expenditure estimations/projections for 2014-15 and 2015-16.
Secondly, assumptions are also made about Central Assistance to
States (CAS) amounts in 2014-15 and about reductions in Central
Assistance to States (CAS) amounts in 2015-16. So, these must be
treated as illustrative calculations. For example, another option would
simply be to transfer those schemes that are on State list back to the
states. Also, estimates have only been presented for the year 2015-
16. Thereafter, additional factors such as Goods and Services Act
(GST) implementation and the next Pay Commission awards will affect
projections beyond the coming year.
With these caveats, the main conclusions are that the 14th Finance
Commission has made far-reaching changes in tax devolution that
will move the country toward greater fiscal federalism, conferring
more fiscal autonomy on the states.
This will be enhanced by the 14th Finance Commission - induced
imperative of having to reduce the scale of other central transfers to
the states. In other words, states will now have greater autonomy on
A collateral benefit of moving from Central Assistance to States (CAS)
to 14th Finance Commission transfers is that overall progressivity will
improve. To be sure, there will be transitional costs entailed by the
reduction in Central Assistance to States (CAS) transfers. But the
scope for dislocation has been minimized because the extra 14th
Finance Commission resources will flow precisely to the states that
have the largest Central Assistance to States (CAS) financed schemes.
In sum, the far-reaching recommendations of the 14th Finance
Commission, along with the creation of the NITI Adyog, will further
the Government’s vision of cooperative and competitive federalism.
The necessary, indeed vital, encompassing of cities and other local
bodies within the embrace of cooperative and competitive federalism
is the next policy challenge.
Ministry of Finance (Department of Economic Affairs) - Explanatory
memorandum as to the action taken on the recommendations made by
the 14th Finance Commission in its report submitted to the President on
December 15th, 2014. Dated 24th February, 2015.
FICCI Economic Affairs and Research Division – Highlights of 14th
Finance Commission Report, February 2015.
The Fourteenth Finance Commission (FFC) – Implications for Fiscal
Federalism in India (http://Indiabudget.nic.in15/echapvo-10.pdf).
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