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14th Finance Commission - A Paradigm Shift

Economic Affairs Financial Institutions
  • Published on: 25-Feb-15
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14th Finance Commission - A Paradigm Shift
  • The government has accepted the recommendation of the 14th Finance Commission for a record 10% increase in the share of states in Central taxes. 
  • The major takeaway of the report of the 14th Finance Commission, headed by former RBI Governor YV Reddy for 2015-2020, is the increase from 32% to 42% in the devolution of the divisible pool of resources to states. 
  • The Finance Commission gives recommendations on specified aspects of Centre-State fiscal relations. As against a total devolution of Rs 3.48 lakh crore in 2014-15, the states will get Rs 5.26 lakh crore this fiscal. States had sought greater autonomy in implementing schemes as per their requirements as the centrally sponsored schemes did not meet the local needs.
  • The commission has also recommended a grant of 1.94 lakh crore over five years to meet the revenue deficit of 11 states including Jammu & Kashmir, Himachal Pradesh, Kerala, West Bengal among others. After the increased devolution of 42%, Punjab would not remain a revenue deficit state although its problem of old debt will remain.
  • The commission has also recommended on the inter-se distribution of the states’ share amongst the states of the total pool based on criteria like population, changes in population, income distance, forest cover and area. Based on this, Punjab has a share of 1.577%, Haryana 1.084%, Himachal 0.713%, Uttarakhand 1.052% and J-K 1.854%.
  • The commission has also made a fundamental shift in the pattern of financing revenue expenditures. It assumes all central assistance to state plan revenue expenditure to be part of the states' revenue burden and determines devolution on this basis

For the first time in independent India's history the Centre has surrendered 10 per cent more of its tax revenue to states, an outcome of perhaps having a former Chief Minister as Prime Minister. Mr Modi has walked the talk on cooperative federalism. There is a bailout for cash-starved panchayats and municipal bodies. According to media reports, panchayats will get Rs 2 lakh crore between 2015 and 2020. It is not yet clear whether NITI Aayog will have lower amounts to share with states. The 14th Finance Commission has suggested that the states suffering revenue losses due to the GST (goods and service tax) should be compensated for three years after its rollout. It is thus a major shift in resource allocations. A strong Centre has nudged India towards greater federalism.

By: Vishal
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