14 Finance Commission Head

The 14th Finance Commission (FFC) was constituted in 2013 under the chairmanship of Y.V. Reddy to make recommendations on the distribution of tax revenues between the Union and the States for the period spanning from 2015-2020.

Key Features and Recommendations

The FFC's recommendations marked a significant shift in fiscal federalism in India. Its core objective was to enhance fiscal autonomy for states while ensuring fiscal prudence and stability at the national level.

• Increased Devolution: The most notable recommendation was an increase in the states' share of the divisible pool of central taxes from 32% to 42%. This was the largest ever increase recommended by any Finance Commission, giving states significantly more resources to finance their own development priorities.
• Criteria for Devolution: The Commission refined the criteria used to determine the share of individual states in the divisible pool. While population continued to be a major factor, the FFC placed greater emphasis on factors like:
  • Fiscal Discipline: rewarding states that demonstrated sound fiscal management.
  • Demographic Change: recognizing and addressing the challenges faced by states with declining fertility rates.
  • Forest Cover: incentivizing states to maintain and increase their forest cover, reflecting environmental concerns.
  • Income Distance: maintaining a focus on equity by giving higher weight to states with lower per capita income.
• Revenue Deficit Grants: The FFC recommended revenue deficit grants to states that were projected to have a revenue deficit even after the increased devolution. These grants were designed to help states bridge the gap and maintain essential public services.
• Local Government Grants: The Commission also recommended grants for local governments (Panchayats and Municipalities) to improve basic services and infrastructure at the grassroots level. These grants were linked to specific conditions to ensure accountability and effectiveness.
• Disaster Management: Recognizing the increasing frequency and severity of natural disasters, the FFC emphasized the need for better disaster preparedness and mitigation. It recommended strengthening the National Disaster Management Authority (NDMA) and State Disaster Management Authorities (SDMAs).

Impact and Significance

The 14th Finance Commission's recommendations had a profound impact on the financial landscape of India. The increased devolution empowered states to take greater ownership of their development agenda and reduce their dependence on central government grants. The focus on fiscal discipline, demographic change, and environmental concerns reflected a more nuanced understanding of the challenges facing Indian states.

However, the increased devolution also placed greater responsibility on states to manage their finances prudently and generate their own revenues. The implementation of the FFC's recommendations required close coordination between the Union and the States and ongoing monitoring to ensure that the intended benefits were realized.

Y.V. Reddy's leadership of the 14th Finance Commission was instrumental in shaping a more decentralized and equitable fiscal framework for India, setting the stage for a new era of cooperative federalism.