14TH FINANCE COMMISSION, Bits on 14th Finance Commission, Indian Economy Bits, Indian Polity Bits

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 15^th December, 2014.

 The Finance Commission is required to recommend 

i)                   the distribution of the net proceeds of taxes of the Union between the Union and the States (commonly referred to as vertical devolution);

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

 With regard to vertical distribution, FFC has recommended by majority decision that the States’ share in the net proceeds of the Union tax revenues be 42%. 

The recommendation of tax devolution at 42% is a huge jump from the 32% recommended by the 13th Finance Commission. 

  In recommending horizontal distribution, the FFC has used broad parameters of population (1971) and changes of population since, income distance, forest cover and area.  

 The Finance Commission is also required to recommend on ‘the measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State’.

FFC has recommended distribution of grants to States for local bodies using 2011 population data with weight of 90% and area with weight of 10%.

The grants to States will be divided into two, a grant to duly constituted Gram Panchayats and a grant to duly constituted Municipal bodies, on the basis of rural and urban population. 

 FFC has recommended grants in two parts; a basic grant, and a performance grant, for duly constituted Gram Panchayats and municipalities.

 The ratio of basic to performance grant is 90:10 with respect to Panchayats and 80:20 with respect to Municipalities.

 

 FFC has recommended out a total grant of Rs 2,87,436 crore for five year period from 1.4.2015 to 31.3.2020. 

Of this the grant recommended to Panchayatas is Rs 2,00,292.20 crores and that to municipalities is Rs 87,143.80 crores.

 

The transfers in the year 2015-16 will be Rs 29,988 crores.  

 The Government has accepted the recommendations of the Finance Commission with regard to grants to local bodies. 

The Finance Commission is also required to ‘review the present arrangements as regards financing of Disaster Management with reference to the National Calamity Contingency Fund and the Calamity Relief Fund and the funds envisaged in the Disaster Management Act, 2005 (Act 53 of 2005), and make appropriate recommendations thereon’.

 FFC has recommended that up to 10 percent of the funds available under the SDRF can be used by a State for occurrences which State considers to be ‘disasters’ within its local context and which are not in the notified list of disasters of the Ministry of Home Affairs.

 In view of the above, with regard to disaster relief, the Government has decided that the percentage share of the States will continue to be as before, and that the flows will also be of the same order, as in the existing system; and that, once GST is in place, the recommendation of FFC on disaster relief would be implemented in the manner recommended by the Finance Commission.

  The Finance Commission is also required to make recommendation regarding the principles governing grants-in-aid of the States’ revenues, by the Centre.

As noted by the FFC in Para 11.28, while calculating grants to the States they “have departed significantly from previous Finance Commissions, by taking into consideration a States’ entire revenue expenditure needs without making a distinction between Plan and Non-Plan”.  

Taking thus into account the expenditure requirements of the States, the tax devolution to them, and the revenue mobilization capacity of the States, the FFC have recommended “Post-Devolution Revenue Deficit Grants” of a total of Rs. 1,94,821 crores, for the five year period.  

The States of Andhra Pradesh, Assam, J&K, Himachal Pradesh, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and West Bengal (a total of 11 States) have been identified for receiving these revenue deficit grants.

Grants-in-Aid to States

                                                                                     (Rs. crore)

1	Local Government(all States)	287436
2	Disaster Management(all States)	55097
3	Post-devolution Revenue Deficit  (11 States)	194821
	Total	537354

Over 30 Centrally Sponsored Schemes have been identified which ought to have been transferred to the States because expenditure on them has already been taken into account as State expenditure, in arriving at the greater devolution of 42% to the States.

   However, keeping in mind that many of these schemes are national priorities, and some are legal obligations (such as MGNREGA) and in order to underline the Central Government’s continued support to national priorities, especially with regard to schemes meant for the poor, most of these are proposed to be continued.  The Government has decided that only 8 Centrally Sponsored Schemes be delinked from support from the Centre.