The 14th Finance Commission of India
The 14th Finance Commission (FFC), constituted under Article 280 of the Indian Constitution, played a pivotal role in shaping the fiscal landscape of India from 2015-2020. Chaired by former Reserve Bank of India (RBI) Governor, Dr. Y.V. Reddy, its recommendations aimed to enhance fiscal federalism and promote balanced development across states.
Key Recommendations and Impacts
A significant departure from previous commissions was the FFC’s substantial increase in the states’ share of the divisible pool of central taxes. It recommended increasing this share from 32% to 42%. This was a landmark decision, devolving significantly more financial resources to state governments, thereby empowering them to implement their own developmental priorities and reduce reliance on central grants. This enhanced fiscal autonomy was widely welcomed by states.
The FFC continued to use a formula-based approach to determine the inter-state distribution of the divisible pool. However, it modified the formula by giving greater weight to factors reflecting fiscal capacity and efficiency. The criteria included income distance (a measure of disparity in per capita income), population, area, forest cover, and tax effort. A crucial addition was the inclusion of “demographic change,” acknowledging the need to address the challenges posed by varying demographic profiles across states.
The Commission also emphasized the importance of revenue mobilization by states. It recommended performance-based incentives for states that demonstrated significant improvements in their tax revenue collection. This was intended to encourage fiscal responsibility and reduce dependence on central transfers.
Regarding local bodies (Panchayats and Municipalities), the FFC allocated substantial grants to them. These grants were meant to strengthen local governance, improve service delivery at the grassroots level, and address critical gaps in infrastructure and essential services in rural and urban areas.
Another key area addressed by the FFC was the management of public finances. The Commission advocated for greater transparency and accountability in public spending. It emphasized the need for states to adopt sound fiscal management practices, including prudent borrowing policies and efficient allocation of resources.
The 14th Finance Commission’s recommendations had a profound impact on the Indian economy and the relationship between the Centre and the states. The enhanced devolution of funds to states provided them with greater flexibility and resources to address their specific developmental challenges. This led to increased investment in infrastructure, social sectors, and other priority areas. The emphasis on fiscal responsibility and revenue mobilization also contributed to improved fiscal health of states. While the significant increase in devolution was lauded, some concerns were raised regarding potential inequalities and the need for better monitoring of the utilization of funds at the state level.
In conclusion, the 14th Finance Commission played a crucial role in strengthening fiscal federalism in India. Its recommendations, particularly the significant increase in devolution to states, had a lasting impact on the country’s economic development and the relationship between the Centre and the states.
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