Finance Commission: Civil Services Mentor Magazine - May - 2015

Finance Commission

Article 280 of the constitution of India gives President of India the power to constitute the finance commission every five years. If the President thinks it is required earlier it can give the order to constitute it even earlier as well. The Finance Commission is required to recommend the distribution of the net proceeds of taxes of the Union between the Union and the States (commonly referred to as vertical devolution); and the allocation between the States of the respective shares of such proceeds (commonly known as horizontal devolution). Though recommendations of finance commission are non-binding, the Centre generally accepts the recommendation of the expert body. Fourteenth finance commission under the chairmanship of former RBI governor Y.V.Reddy has submitted its report for the period of 2015-2020. Report was submitted to central government with a dissent note from Abhijit sen and central government has accepted the recommendation.

Highlights of the Recommendation

  • States share from the net proceeds from the central tax collection to be 42 percentage, which is a huge jump of 10 percent from the 32 percent recommended by the 13th finance commission. As compared to the total devolutions in 2014-15 the total devolution of the States in 2015-16 will increase by over 45%. This change in share has become possible because planning commission has been abolished and its funds have been transferred to finance commission and ministries.

  • FFC has taken the view that tax devolution should be primary route of transfer of resources to States. The government has accepted the recommendations keeping in mind the spirit of National Institution for Transforming India (NITI). It may be noted that in reckoning the requirements of the States, the FFC has ignored the Plan and Non-Plan distinction.

  • Tax devolution with in the states will be based on the factors of Area, population, Demography, Income distance and forest cover. Individual weight among those is- 50 per cent is given to distance from the highest per capita income district, followed by population (1971 census) at 17.5 per cent, changes of population since 1971 at 10 per cent, area at 15 per cent and forest cover at 7.5 per cent.

  • Finance commission has recommended that Fiscal Deficit of Union government should be 3.6 per cent of GDP in 2015-16 and 3 per cent the year after. Three percentage fiscal deficit should be kept for three following years. Finance commission has also recommended that revenue deficit to come down from 2.9 per cent in FY15 to 2.56 per cent in FY16 and then progressively reduce to 0.93 per cent by 2019-20.

  • Fourteenth Finance Commission(FFC) has recommended distribution of grants to States for local bodies using 2011 population data with weight of 90% and area with weight of 10%. The grants to States will be divided into two, a grant to duly constituted Gram Panchayats and a grant to duly constituted Municipal bodies, on the basis of rural and urban population. FFC has recommended grants in two parts; a basic grant, and a performance grant, for duly constituted Gram Panchayats and municipalities. The ratio of basic to performance grant is 90:10 with respect to Panchayats and 80:20 with respect to Municipalities.

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