Friday, October 09, 2015

Finance Commission of Indian: Meaning and recommendation of 14th Finance Commission

Meaning of Finance commission
Finance Commission is constituted to define financial relations between the centre and the states. According to the provision of Article 280 of the Constitution, The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President.

Role of Finance commission

The main function of finance commission is to recommend how the Union government should share taxes levied by it with the states. These recommendations are meant for the period of five years. The commission also lays down rules by which the centre should provide grants-in-aid to states out of the Consolidated Fund of India and also in case of special provision of states. Finance Commission is also assigned the duty of suggesting measures to augment the resources of states and ways to supplement the resources of Panchayati Raj institutes and municipalities.

The commission is also mandated to review the state of finances of the Union and states and suggest a plan by which the Governments collectively and severally may bring about a restructuring of public finances, restoring budgetary balances, achieving macro-economic stability and debt restructuring along with equitable growth.

In making its recommendations on various matters, the Commission shall generally take the base of population figures as of 1971 in all cases where population is a factor for determination of devolution of taxes and duties and grants-in-aid; however, the Commission may also take into account the demographic changes that have taken place subsequent to 1971.

14th Finance Commission and its recommendation
The 14th Finance Commission (FFC) was constituted by the orders of President on 2 January 2013 in accordance to the Article 280 of the Constitution of India. The commission submitted its report with recommendations to the President Pranab Mukherjee on 15 December 2014. The commission was formed to suggest recommendations for the period from 1 April 2015 to 31 March 2020.

Recommendation of 14th Finance Commission
1)      The 14th Finance Commission is of the view that tax devolution should be the primary route for transfer of resources to the States.

2)      In understanding the States’ needs, it has ignored the Plan and non-Plan distinctions

3)      According to the Commission, the increased devolution of the divisible pool of taxes is a ``compositional shift in transfers’’ – from grants to tax devolution

4)      In recommending an horizontal distribution, it has used broad parameters – population (1971), changes in population since then, income distance, forest cover and area, among others.

5)      It has recommended distribution of grants to States for local bodies using 2011 population data with weight of 90 per cent and area with weight of 10 per cent

6)      Grants to States are divided into two
Ø  One, grant to duly constituted gram panchayats
Ø  Two, grant to duly constituted municipal bodies
Ø  And, it has divided grants into two parts - A basic grant, and a performance one for gram panchayats and municipal bodies
Ø  The ration of basic to performance grant is 90:10 for panchayats; and 80:20 for municipalities

7)      The total grant recommended is Rs. 2,87,436 crores for a five-year period. Out of which, the grant to panchayats is Rs.2,00,292 crores and, the reminder goes to municipalities

8)      The Commission has significantly departed from previous commission vis-à-vis recommendation of the principles governing grants-in-aid to the States by the Centre

9)      It has chosen to take the entire revenue expenditure for this purpose. Hence, it has decided to take into account a state’s entire revenue expenditure needs without making a distinction between plan and non-plan expenditure


10)   The Commission is of the view that sharing pattern in respect to various Centrally-sponsored schemes need to change. It wants the States to share a greater fiscal responsibility for the implementation of such schemes.

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