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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.[1]

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

States

by 1.2 percentage point relative to GDP.

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,

The undisbursed amount should be distributed on an equitable basis among all the eligible local bodies for the performance grant in the State.

Empowering local bodies

State governments has to ensure that local bodies get revenue from all local sources.

Fiscal plan

Devolution to special States

Good and Services Tax (GST)

The commission recommended the Union to establish GST compensation fund. This compensation is to be used to address 100% of the shortfall in the first year, 75% in the second year and 50% in the third year. This additional fiscal burden on the Union government has to be taken as investment to get yields in the medium and long run.

National Disaster Relief Fund

The financing of the NDRF had been from levying cess on some selected items and some of them will be subsumed by GST. The commission recommended the Union Government to ensure an assured source of funding. The commission recommended to consider tax exemption to private contributions to the NDRF.

The commission recommended to review the reimbursement of expenditure incurred by the defense forces to not hinder their efficiency during disaster relief.

The commission recommended the Union Government to expedite the development and scientific validation of the Hazard Vulnerability Risk Profiles of States.

The commission recommended to keep an aggregate corpus for all States of Rs. 61,219 crore for the five years based on the expenditure from the past years. The commission recommended all States to contribute 10 per cent and Union with the remaining 90 per cent. Considering the need for regard to state-specific disasters, the commission recommended that up to 10 per cent of the funds available under the SDRF can be used by States for natural disasters that they consider to be 'disasters' within the local context in the State and which are not included in the notified list of disasters of the Ministry of Home Affairs.

Public utilities

Power

The commission recommend3e that 100 per cent metering be achieved in a time-bound manner for all electricity consumers.

The Electricity Act, 2003, currently does not have any provision of penalties for delays in the payment of subsidies by State Governments. The commission recommended that the Act be suitably amended to facilitate levy of such penalties.

Electricity Act allows a State Electricity Regulatory Commission Fund by State Governments, to enable the SERCs to perform their responsibilities. The commission recommended all States to set up SERC Fund, as statutorily provided.

Transport

The commission recommended Rail Tariff Authority (RTA) to do expeditious replacement of the advisory body with a statutory body with needed amendments to the Railways Act, 1989.

The commission recommended accounting systems in the SRTUs to make explicit all forms of subsidy, the basis for determining the extent of subsidies, and also the extent of reimbursement by State Governments.

The commission recommended to set up independent regulators for the passenger road sector to help in tariff setting, regulation of service quality, and the collection and dissemination of sector information. SASAS

Water supply

The commission recommended all States to set up Water regulation authority (WRA) to set up pricing of water for domestic, irrigation and other uses. It recommended all States to invest in volumetric measurement of the use of irrigation water. It also recommended the States and local bodies to progressively move towards 100 per cent metering of water and to complete metering by 2017 with the cost to be borne by the consumers. The commission recommended to give new connections in urban bodies only when the functioning meters are set up.

Public sector companies

The commission recommended that a Financial Sector Public Enterprises Committee be appointed to examine and recommend parameters for appropriate future fiscal support to financial sector public enterprises, recognizing the regulatory needs and the multiplicity of units in each activity.

The commission recommended to categorize public sector companies as high, low and non priority to decide current policy and future course of action.

The commission recommended to wind up the National Investment Fund and to keep all the receipts from disinvestment to be kept with the Consolidated Fund of India.

References

  1. ^ Jagannathan, K. T. (24 February 2015). "All you need to know about Finance Commission". The Hindu. Retrieved 18 November 2017.

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