14th Finance Commission - Advantages and Disadvantages

14th Finance Commission - Advantages and Disadvantages

Q.2: The 14th Finance Commission provides assistance to some states and is a deterrent for others. Discuss the advantages and disadvantages of the recommendations of the 14th Finance Commission.

Advantages of the 14th Finance Commission

• It provides rebalancing of Union and States in economic and fiscal management through recognition of capacity and potential of various developmental models across the nation,

• The commission also acknowledges the associated need for according of larger policy discretion to the units of the federation

• The 14th Commission also preserves the leading policy responsibilities of the union for overall management of the macroeconomic situation

• It adopts the seventh schedule of the Indian constitution as its guiding principle neatly dividing the areas of jurisdiction between centre, states and concurrent fields

• Increased share of tax devolution through the centre to the states is seen in this context; resources are used via the centrally sponsored scheme and states are reoriented towards tax devolution; this marks a shift from discretionary resource transfer to unconditional sharing

• The 14th Finance Commission also restructures resource sharing namely composition and discretionary aspects which is a marked improvement from previous finance commissions

• The commission also facilities horizontal division of taxes among the states through a comprehensive 5 factor formula: census 1971, census 2011, forest cover, area and income distance

• Moreover, the centre’s fiscal space is also well preserved through the recommendations of the 14th Finance Commissio

• The suggestions of the 14th Finance Commission are wider in scope


• There may be a rise ind evolution of the Centre but support has to be mobilised for supporting state specific schemes in many of the states such as Maharashtra

• States will have more funds and the freedom to use these as per their discretion

• Another disadvantage is that the grants are sector specific

• Higher devolution means state has to decide on certain expenditures as Centre as disassociated itself from 8 centrally sponsored schemes and change the sharing ratio for an additional 24%

• Additional burden of funding priority sectors such as health and education fall on the state where central support may be less

• Earlier tax devolution of 32% was far better than the current 42% for many states

• States such as West Bengal with debt of INR 3 lakh crore will not be able to righten their distorted finances through the recommendations of the 14th Finance Commission

• 14th Finance Commission recommendations focus excessively on development of backward regions without resolving the reduction of debt burden

• The Centre’s decision for increasing the devolution of taxes have been neutralised by huge reduction of funds for programmes and projects which are sponsored by the central government ; for example, in Karnataka, the fund allocated for housing schemes have been lowered to INR 14,287 crore and INR 32,912 crore for education

• The Union government has also increased the state’s share in central taxes through withdrawal of monetary support to centrally sponsored schemes; this 10% rise in central taxes to states is a re-distribution of resources and it is not beneficial for the development of states like AP and Telangana

• Reduction of the horizontal devolution percentage has been lessened significantly affecting states like TN and Odisha adversely

• The deletion of the criterion of fiscal discipline and inclusion of the new criterion called demographic change has led to a decrease in the share of revenue of certain states like Odisha

Facts and Stats

Among the wider recommendations of the 14th Finance Commission are the following:

• Reorienting the determinants of tax share of individual states from fiscal discipline to per capita income and area

• Establishment of an independent, autonomous GST Compensation Fund via legislation

• Establishment of an independent fiscal council for undertaking ex-ante assessment of fiscal policy

• Maintenance of fiscal deficit of the centre is pegged at 3% of the GDP from 2016-2017 onwards with fiscal deficit linked to similar annual limits likewise

• Steady lowering of subsidy bill from 2% to 1.6% of the GDP

• Replacement or modification of the current FRBM/Fiscal Responsibility and Budget Management Act with a debt ceiling and fiscal responsibility law
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