Fourteenth Finance Commission: Key Recommendations and Impact on Cooperative Federalism

Fourteenth Finance Commission: Key Recommendations and Impact on Cooperative Federalism

Q. “The Fourteenth Finance Commission Report will go a long way towards promoting cooperative federalism.” Discuss and explain.

Fourteenth Finance Commission: Recommendations

14th Finance Commission headed by former RBI governor Y.V. Reddy

• 14th Finance Commission holds that tax devolution is the primary route for resource transfer to the State
• No distinction between plan and non-plan
• Increased devolution of the divisible pool of taxes is a compositional shift in transfers to tax devolution from grants
• Broad parameters used in recommending horizontal distribution
• Distribution of grants to States for local bodies through 2011 population data with weightage of 90 percent and area with weight of 10 percent

• State grants include grant to: Duly constituted gram panchayats, municipal bodies

• Grants divided into two namely - a basic grant and a performance grant for gram panchayats and municipal bodies

• Ratio of basic to performance grant is 90:10 for panchayats and for municipalities, 80:20

• Total grant recommended is INR 2.8 lakh crore for a given year period. Around INR 2 lakh crore is allocated to panchayats and the rest to municipalities

• Commission has departed from previous conventions regarding grants-in-aid to States by Central government

• States given greater fiscal responsibility for scheme implementation

• Commission has pegged fiscal deficit target at 3.6% for 201-2016 and 3% in coming years

• Commission has estimated that between 2015-2016 and 2019-2020, the decline will be from 10.8% to 9.6% of the GDP mainly due to reduction in subsidy expenditure from 1.70% in 2015-2016 to 1% in 2019-2020

Impact on Cooperative Federalism


• State and Centre viewed as equal partners in development
• FFC has not adhered to the scheme and grants based support to States
• Moved towards greater devolution of funds from within the divisible pool of tax revenues of the Centre
• Centre will share 42% of the divisible pool with the states, a total of 10 percentage points higher than current levels
• Recommendation accepted despite drop in Centre’s share of revenue
• Centre seeking to re-evaluate schemes sponsored for the States
• Centre to offset loss of revenue as States come up with their own spending programmes
• Recommendation made for a grants in aid of INR 48,906 crore for 11 revenue deficit states including AP, WB and J&K for 2015-2016
• For period close to 2020, it will increase to INR 1.94 lakh crore
• Total devolution to states in 2015-2016 will be INR 5.26 lakh crore as against INR 3.48 lakh crore in 2014-2015; increase of around INR 1.78 lakh crore and total devolution to states during 2019-2020 will be INR 39.48 lakh crore
• Higher tax devolution will allow greater autonomy for design and finance of the scheme
• GST design to be a good tax system with broad base, low rate, minimal rate differentiation as well as low compliance cost and less distortions to the economy
• 100% compensation to be paid in 1st, 2nd and 3rd years and 75% compensation in the fourth and 50% in the fifth year
• Autonomous and independent GST compensation fund to be allocated in a way that is beneficial to the States
• Regarding centrally sponsored schemes/CSS, FFC has suggested 30 schemes for transfer to states following higher devolution


• States have been given differential access to resources and some have to come up with their share of funds
• Certain states given a priority over others
• Schemes and legal obligations necessitated that only 8 centrally sponsored schemes would be delinked from support from the centre
• States have to make with the type of grants that are given to them
• ATR on revenue deficit a roadblock for FFC recommendations


The recommendations of the Fourteenth Finance Commission carry a constitutional force and they should be followed to ensure that the spirit of cooperative federalism is well promoted in India.
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