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Key Recommendations of 14th Finance Commission

Horizontal Devolution Formula – 
  • Horizontal devolution means transfer of finance between states. The Commission added a new criterion of forest cover for devolution of Central taxes which has gone against the nine states. The panel has assigned 7.5 per cent weight to forest cover for inter-se determination of the shares of taxes to the states, while population carries 17.5 per cent weight, demographic change 10 percent, income distance 50 and area 15 per cent weight. With the addition of the new criterion, Uttar Pradesh is the biggest loser followed by Bihar. Meanwhile, 19 states stand to gain from the new arrangement. Arunachal Pradesh is the biggest gainer.
Devolution to states: 
  • It has recommended that devolution should be primary mode of funds transfers to states. States’ share in net proceeds from tax collections be 42% — a huge jump from 32% recommend by the 13th Finance Commission, and the largest change ever in the percentage of devolution. The higher tax devolution will allow states greater autonomy in financing and designing of schemes as per their needs and requirements.
Resource transfer: 
  • Tax devolution be the primary route resource transfer to states
Delinking of schemes: 
  • Eight centrally sponsored schemes (CSSes) will be delinked from support from the Centre; Consequent to the higher devolution of funds, the Centre is likely to re-evaluate several schemes that it sponsors for the States.
Cooperative federalism: 
  • There are recommendations on cooperative federalism, GST, fiscal consolidation road map, pricing of public utilities and PSUs, too.
  • Set up an independent council to undertake assessment of fiscal policy implications of Budget proposals.
  • Replace existing FRBM Act with a debt ceiling & fiscal responsibility law.
  • Wind up National Investment Fund and maintain all disinvestment receipts in the consolidated fund.
  • Amend electricity Act to provide for penalties for delay in payment of subsidies by state governments.
  • Set up autonomous and independent GST compensation fund
  • The commission suggested performance-based grants to panchayats and local bodies. It was recommended the ratio of basic-to-performance grant be kept at 90:10 for panchayats and 80:20 for municipalities.
  • The Commission had also asked to do away with a distinction between Plan and non-Plan expenditure.
  • 2% kept aside for natural calamities
Recommendations concerning PRIs and ULBs
o 5% devolved to ULBs
o New measures to augment local government resources were suggested such as municipal bonds.

The acceptance of the recommendations marks at least five major shifts from the past. They are:
  • The sizeable increase in tax devolution.
  • To suggest institutional mechanisms for better monitoring of fiscal rules (like replacement of FRBM Act with a new institution) and to achieve ‘cooperative federalism’.
  • Discontinuing the distinction between special category and other states.
  • Taking into account plan revenue expenditures while assessing revenue deficit grants.
  • Desisting from awarding sector/state specific grants or to subject grants to conditionality.
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