14th Finance Commission

The 14th Finance Commission was constituted by the President of India on January 2, 2013, under the chairmanship of Dr. Y.V. Reddy, former Governor of the Reserve Bank of India. Its primary mandate was to make recommendations regarding the distribution of tax revenues between the Union and the States, and among the States themselves, for the period from April 1, 2015, to March 31, 2020. The Commission also addressed issues related to debt sustainability, local body finances, and disaster management.

Key Recommendations

The 14th Finance Commission significantly increased the share of states in the divisible pool of central taxes from 32% to 42%. This marked a substantial increase in fiscal devolution, aimed at providing states with greater autonomy and resources to address their developmental needs. The Commission emphasized the importance of fiscal decentralization and empowering states to manage their finances effectively.

Regarding horizontal equity (distribution among states), the Commission used a formula that gave significant weight to population (17.5%) and income distance (50%). Income distance refers to the gap between a state’s per capita income and the highest per capita income among all states, reflecting relative economic backwardness. The Commission also factored in demographic change (10%), forest cover (7.5%), and area (7.5%) to address specific needs and challenges faced by different states. Efficiency in fiscal management was incentivized through a tax effort parameter (7.5%).

The Commission recommended grant-in-aid for local bodies, both rural (Panchayats) and urban (Municipalities), to strengthen their financial position and enable them to provide essential services effectively. These grants were designed to improve infrastructure, enhance service delivery, and promote participatory governance at the local level. The grants were divided into basic and performance components, incentivizing local bodies to improve their performance.

Furthermore, the 14th Finance Commission addressed issues related to disaster management and recommended specific grants to states for this purpose. These grants were intended to strengthen the states’ capacity to respond to natural disasters and build resilience against future calamities. The Commission also emphasized the need for effective coordination between the Union and the States in disaster management.

Impact and Significance

The recommendations of the 14th Finance Commission had a profound impact on the fiscal landscape of India. The increased devolution of tax revenues to the states provided them with greater fiscal autonomy and resources to pursue their development priorities. The formula for horizontal equity aimed at addressing regional disparities and promoting inclusive growth.

The Commission’s emphasis on local body finances and disaster management also helped to strengthen governance at the grassroots level and improve the country’s ability to respond to natural disasters. Overall, the 14th Finance Commission played a crucial role in shaping the fiscal relations between the Union and the States and promoting equitable and sustainable development in India.