Recommendations of 14th Finance Commission

Recommendations of 14th Finance Commission

Question: Recently, states such as Bihar and Tamil Nadu have said that the recommendations of the 14th Finance Commission are averse to their interests. Discuss the recommendations of the 14th Finance Commission

The recommendations of the 14th Finance Commission are as follows:

1. Tax devolution is associated with area, population, income distance, forest cover and demography. Largest weightage of 50% is provided to distance from the highest per capital income district, following the population(71 census) pegged at 17.5% , demography(2011 census) at 10% and area at 15%. Forest cover is at 7.5%.

2. For the Centre: Fiscal deficit should reach 3.6% of GDP in the year 2015-2016 from projected 4.1% in 2014-2015. It should then reach 3% in the following year and kept there for three more years. The commission also focuses on revenue deficit to come down from 2.9% in FY2015 to 2.56% in FY2016 and reduce on a progressive basis to 0.93% by 2019-2020

3. For the State: Fiscal deficit should be 2.76% in FY2016 and lower to reach 2.74% by FY2020 though it may rise in the middle. Commission also envisages revenues to be surplus through these years

4. Regarding Central Debt: This should be lowered rom 45.4% in FY2015 to 43.6% in FY2016 and reduce in a progressive manner to 36.3% in FY2020.

5. Regarding State Debt: This is projected to rise from 21.9% in FY2016 to 22.38% in FY2020

6. NSSF/National Small Saving Fund: States will no longer be involved in operation of NSSF from the next fiscal

7. Consolidated Sinking Fund/CST: The chance of setting this up for debt amortisation of the Union government will be explored

8. Rail Tariff Authority: Replacement of the advisory body with the statutory through required amendments to the Railways Act 1989

9. States should impose advertisement tax via local bodies to augment revenue

10. The commission also provided a boost for state’s share in net proceeds of tax revenues

11. Tax devolution will be the primary route of transfer of resources, according to this commission

12. Grants for local bodies are to be based on the population count as per the 2011 census and further divided into two broad categories of urban and rural

13. Grants are required to be in 2 parts namely basic and performance. Ratio of basic to performance grant is 90:10 for panchayats and 80:20 for urban municipalities

Facts and Stats

• 14th Finance Commission submitted its report to the President on December 15, 2014

• Total grants recommended by the commission are INR 287436 crore for a 5 year period from April 2015 to March 2020

• From this, INR 200292.20 is to be provided to rural panchayats and INR 87,143.80 crore to be provided to urban municipalities. Transfer for FY 2015-2016 will be INR 29998 crore

• Commission has also said that with respect to disaster relief, percentage share will continue and follow current mechanism to the tune of INR 55,097 crore; following implementation of GST, panel on disaster relief’s recommendations will be implemented

• Panel has made the recommendation for post devolution revenue deficit grants for a maximum of INR 194821 crore on the basis of expenditure requirements of states, tax devolution and capacity for mobilising revenue for the states.

• Grants will be provided to 11 states

• 8 centrally sponsored schemes will be delinked from central support; there will also be change in sharing patterns of numerous centrally sponsored schemes with states bearing a higher fiscal burden for scheme implementation

• The 14th Finance Commission has also made recommendations regarding price of utility services, functioning of PSUs, map for fiscal consolidation, GST and cooperative federalism.