The Fourteenth Finance Commission of India was a finance commission constituted on 2 January 2013. The commission's chairman was former Reserve Bank of India governor Y. V. Reddy and its members were Sushma Nath, M. Govinda Rao, Abhijit Sen, Sudipto Mundle, and AN Jha. The recommendations of the commission entered force in April 2015; they take effect for a five-year period from that date.
The government of India on 24 February 2015 accepted the recommendations of the fourteenth finance commission for increasing share of states in central taxes to 42% ,the single largest increase ever recommended. It has recommended distribution of goods to states for local bodies using 2011 population data with weight of 90% & area with weight of 10%.
Review of the previous term Fiscal performance Sr.Num Particulars as percentage of GDP 2001-02 2004-05 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013 Change 2012–13 over 2007-08 2013-2014(RE) 2014-2015(BE) I Total Revenue Receipts (a+b) 8.55 9.44 10.87 9.60 8.84 10.13 8.34 8.69 -2.17 9.06 9.24 a) Non Tax Revenue 2.88 2.50 2.05 1.72 1.79 2.81 1.35 1.36 -0.69 1.70 1.65 b) Net Tax Revenue 5.67 6.93 8.81 7.87 7.05 7.32 6.99 7.34 -1.48 7.36 7.59 II Revenue Expenditure 12.80 11.85 11.92 14.10 14.08 13.37 12.72 12.30 0.38 12.33 12.18 Of which: Interest 4.56 3.92 3.43 3.41 3.29 3.01 3.03 3.10 -0.33 3.35 3.32 III Capital Expenditure 2.58 3.50 2.37 1.60 1.74 2.01 1.76 1.65 -0.72 1.68 1.76 IV Total Expenditure (II+III) 15.38 15.35 14.29 15.70 15.82 15.38 14.48 13.95 -0.34 14.01 13.94 V Revenue Deficit (II-I) 4.3 2.5 1.1 4.5 5.2 3.2 4.4 3.6 2.5 3.3 2.9 VI Fiscal Deficit 6.1 4.0 2.5 6.0 6.5 4.8 5.7 4.8 2.3 4.6 4.1 VII Non-debt Capital Receipts 0.85 2.05 0.88 0.12 0.51 0.45 0.41 0.40 -0.48 0.32 0.57
Union Union debt had remained with in the limits set by the previous commission. This is primarily because of a high nominal growth in GDP. Gross tax revenues, after reaching a peak of 11.9 per cent of GDP in 2007–08, had declined by over 1.7 percentage points in 2012–13. Rates of excise duties and service tax were reduced in response to the global economic crisis. The tax-GDP ratio had declined. Interest receipts on loans outstanding from State Governments had declined. There was fluctuation in non-debt capital receipts. Disinvestment receipts fell short of the estimates. States were excluded from much of the divisible pool because of forgone revenues, tax expenditures, and expanding cess and surcharge rates. Quality of fiscal management was characterized by a less than desirable growth in revenues, a steep reduction in capital expenditures and high level of subsidies.
States There was improvement in the fiscal position of all States taken together. Aggregate gross fiscal deficit and revenue deficit, relative to GDP, declined by 1.4 percentage points each. The primary deficit, relative to GDP, declined by 0.2 percentage points. The fiscal health was possible due to an increase in the aggregate revenue receipts by 1.2 percentage point relative to GDP. States' own tax receipts, relative to GDP, had increased by 0.9 percentage point. Tax devolution to the states from Union had increased by 0.5 percentage point. Grants in aid from the central schemes had increased by 0.2 percentage point. Own non-tax revenues had decreased by 0.2 percentage point. Capital expenditures fell marginally relative to GDP and there was only a marginal change in overall expenditures relative to GDP. Interest payments had reduced by 1.2 percentage points and so the revenue expenditure decreased by the 1.2 percentage points. Pension increased the expenditure by 0.2 percentage points Social services increased the expenditure by 0.9 percentage point. Economic services increased the expenditure by 0.1 percentage point. The aggregate outstanding debt and liabilities, as a percentage of GDP, also progressively reduced.
Recommendations Sharing of Union tax revenues with states Transfers from Union to states consist of tax devolution, non-Plan grants, Plan grants and grants for various Central Supported Schemes (CSS) including those which were transferred directly to the implementing agencies bypassing the budget.
Inputs to the commission View Stakeholder The Commission Keep the current devolution ratios Union Rejected Increase in the share of tax devolution States Accepted Expansion of the divisible pool with cess and surcharges States Rejected Minimum guaranteed tax devolution States Rejected Reduced role of Centrally sponsored schemes (CSS) States Accepted Keep 50% of proceeds from a state in devolution States Rejected Earmark 10–30% of devolution for special category status States Rejected Include demographic change in criteria States Accepted Equality adjusted Human Development Index as criteria States Rejected
Vertical devolution The fourteenth finance commission is of the view that tax devolution should be the primary route of resources to the states. The commission recommends to increase the tax devolution of the divisible pool to states to 42% for years 2015 to 2020. This is 10% more compared to 32% target set by 13th financial commission.
The commission recommended that the new tax devolution should be the primary route of transfer of resources to States since it is formula based and thus conducive to sound fiscal federalism. However, to the extent that formula-based transfers do not meet the needs of specific States, they need to be supplemented by grants-in-aid.
The commission felt that new target serve the twin objectives of increasing the flow of unconditional transfers to the States and yet leave appropriate fiscal space for the Union to carry out other duties and specific purpose transfers to the States.
Horizontal devolution The commission came up with new formula to divide the 42% share of the divisible pool between the states.
Area The commission followed the method adopted by the 12th commission and put the floor limit at 2 percent for smaller States and assigned 15 percent weight.
Forest cover The commission assigned 7.5 per cent weight to forest cover as the new criteria to balance the benefit of the huge ecological benefits and the opportunity cost in terms of area not available for other economic activities that becomes indicator of fiscal disability.
Population The commission felt that allocation based on dated population data is not fair, and assigned a 17.5 percent weight to the 1971 population and assigned 10 percent a weight to the 2011 population to capture the demographic changes since 1971, both in terms of migration and age structure.
Income distance The commission assigned 50% weight to income distance as it is the only measure of fiscal capacity. It is the distance of actual per capita income of a state from the state with the highest per capita. The commission calculated the income distance following the method used the 12th commission. A three-year average (2010-11 to 2012–13) per capita comparable GSDP has been taken for all the twenty-nine states. Income distance has been computed by taking the distance from the state having highest per capita GSDP. Goa had the highest, followed by Sikkim. Since these two are very small states, income distance had been computed from the third, Haryana. Goa, Sikkim and Haryana are assigned the same distance as obtained for Haryana.
Criteria 13th Commission Weight(%) 14th Commission Weight (%) Population 1971 25 17.5 Population 2011 0 10 Income Distance 47.5 50 Fiscal Discipline 15 0 Area 10 15 Forest Cover 0 7.5 Sum 100 100
Horizontal share of States The commission came up with the following share of States based on the criteria and the consideration that service tax is not levied and so can not be shared with the State of Jammu & Kashmir.
States Share(%) Andhra Pradesh 4.305 Arunachal Pradesh 1.370 Assam 3.311 Bihar 9.665 Chhattisgarh 3.080 Goa 0.378 Gujarat 3.084 Haryana 1.084 Himachal Pradesh 0.713 Jammu & Kashmir 1.854 Jharkhand 3.139 Karnataka 4.713 Kerala 2.500 Madhya Pradesh 7.548 Maharashtra 5.521 Manipur 0.617 Meghalaya 0.642 Mizoram 0.460 Nagaland 0.498 Odisha 4.642 Punjab 1.577 Rajasthan 5.495 Sikkim 0.367 Tamil Nadu 4.023 Telangana 2.437 Tripura 0.642 Uttar Pradesh 17.959 Uttarakhand 1.052 West Bengal 7.324 Sum 100.000
Local governments The commission had allocated grants and also identified many sources of income for local bodies and provided the guidelines to Union and State governments to empower them.
Grant allocation The grants by Union government are to be used only on the basic services within the functions assigned to them by legislation, water supply, sanitation, sewerage, storm water drainage, solid waste management, street lighting, local body roads and footpaths, parks, playgrounds etc.
The Commission fixed the total size of the grant to be Rs. 2,87,436 crore for the period 2015–20, constituting an assistance of Rs. 488 per capita per annum at an aggregate level. Of this, the grant for panchayats is Rs. 2,00,292.2 crore and for municipalities is Rs. 87,143.8 crore.
Local Body Amount(crores) Panchayats 2,00,292.2 Municipalities 87,143.8 Sum 2,87,436
Grant devolution The Commission recommended that distribution of grants shall be given to the States using 2011 population data with weight of 90 percent and area with weight of 10 per cent. The grant to each State will be divided into two - a grant to duly constituted gram panchayats and a grant to duly constituted municipalities, on the basis of urban and rural population of that State using the data of Census 2011.
Criteria 13th Commission Weight(%) 14th Commission Weight (%) Population in 2011 90 Area 10
Timetable
Each grant has two components, basic and performance. The commission recommends that 50 per cent of the basic grant for the year is to be released to the State as the first installment of the year. The remaining basic grant and the full performance grant for the year may be released as the second instalment for the year. The State Government have to release the grants to the local bodies within fifteen days of it being credited to their account by the Union Government. In case of any delay, the State Governments have to pay the installment with interest paid from its own funds.
Gram Panchayats In the case of gram panchayats, 90 per cent of the grant will be the basic grant and 10 per cent will be the performance grant. The grants for Panchayats should go only to them without any share for other levels of government in State. State Governments has to take care of the needs of the other levels and districts.
Grants for gram panchayats with in a State will be distributed using the formula chosen by a state finance commission. In case the SFC formula is not available, then the share of each gram panchayat will be on the basis on 2011 population with a weight of 90 per cent and area with a weight of 10 per cent.
Municipalities In the case of municipalities, the division between basic and performance grant will be on an 80:20 basis. The basic grant for urban local bodies will be divided into tier-wise shares and distributed across each tier, the municipal corporations, municipalities (the tier II urban local bodies) and the nagar panchayats (the tier III local bodies) using the formula given by a state finance commission. In case the SFC formula is not available for urban local bodies, shares of each of the three tiers will be on the basis of population of 2011 with a weight of 90 percent and area with a weight of 10 percent, and then distributed among the entities in each tier in proportion using same formula. local body are tender process are not transparent local body are tenderRule hard so some near people come in tender and
Performance Grants The performance grants will be given from the second year or 2016 onwards. To be eligible for performance grants,