1. A Brief Introduction of Finance Commission Article 280 of the Constitution of India provides for a finance commission as a quasi-judicial body. It is constituted by the President of India every fifth year. It consists of a chairman and four other members to be appointed by the president. It makes recommendations about the following to the President of India: ? The distribution of the net proceeds of taxes between the centre and the states and the allocation between the states of the respective shares of such proceeds ? The principles that should govern the grants in aid to the states by the centre ? The measures needed to augment the consolidated fund of states to supplement the resources of the local governments in the states on the basis of the recommendations made by the State Finance Commissions. ? Any other method referred to it by the President in the interests of the sound finance. The recommendations made by finance commission are only advisory in nature and hence, are not binding on the government. 2. Fourteenth Finance Commission The 14th Finance Commission (FFC) was appointed under the Chairmanship of Dr. Y. V. Reddy. Its Terms of References are as Follows: ? Primary objectives as mentioned above ? Principles which would govern the quantum and distribution of grants-in-aid(non-planned grants to states ? The measures to augment state government finances to supplement the finances of local government ? To review the state of finances, deficit and debt conditions at different levels of government 3. Major recommendations of FFC 3.1. Sharing of Union Taxes ? Increasing the share of tax devolution to 42 per cent of the divisible pool would serve the twin objectives of increasing the flow of unconditional transfers to the States and yet leave appropriate fiscal space for the Union to carry out specific purpose transfers to the States. ? No minimum guaranteed devolution to the States. ? As service tax is not levied in the State of Jammu & Kashmir, proceeds cannot be assigned to this State. 3.2. Local Governments ? Local bodies should be required to spend the grants only on the basic services within the functions assigned to them under relevant legislations. ? Distribution of grants to the States using 2011 population data with weight of 90 per cent and area with weight of 10 per cent. The grant to each state will be divided into two, a grant to duly constituted Gram panchayats and a grant to duly constituted Municipalities, on the basis of urban and rural population of that state using the data of census 2011. ? The grants to be divided in two parts – a basic grant and a performance grant for duly constituted gram panchayats and municipalities. In the case of gram panchayats, 90 per cent of the grant will be the basic grant and 10 per cent will be the performance grant. In the case of municipalities, the division between basic and performance grant will be on an 80:20 basis. ? The grants should go only to those gram panchayats, which are directly responsible for the delivery of basic services, without any share for other levels using the formula given by the recent SFC. Similarly, the basic grant for urban local bodies will be divided into tier-wise shares and distributed across each tier, namely the 3 www.visionias.in ©Vision IAS Municipal corporations, Municipalities (the tier II urban local bodies) and the Nagar panchayats (the tier III local bodies) using the formula given by the respective SFCs. ? In case the SFC formula is not available, then the share of each gram panchayat as specified above should be distributed across the entities using 2011 population with a weight of 90 per cent and area with a weight of 10 percent. In the case of urban local bodies, the share of each of the three tiers will be determined on the basis of population of 2011 with a weight of 90 per cent and area with a weight of 10 per cent and then distributed among the entities in each tier in proportion to the population of 2011 and area in the ratio of 90:10. ? Performance grants are being provided to address the following issues: (i) making available reliable data on local bodies’ receipt and expenditure through audited accounts; and (ii) improvement in own revenues. 4. Comparison with 13th Finance Commission ? Enhanced the share of the states in the central divisible pool from 32% (by 13th FC) to 42% which is the biggest ever increase in vertical tax devolution. ? It has not made any recommendation concerning sector-specific grants unlike the 13th FC. 5. Criticism ? Social sector allotment is reduced. ? Backward Regions Grant Fund (BRGF) is wound up. Bihar which got 30% weightage for funding through this criterion will be badly affected. Bihar being among least developed states it is a matter of concern to the economy. It is likely to affect the Gross Domestic State Product (GDSP) of Bihar adversely. ? Pruning of Planning Commission to be NITI Ayog has led to loss of plan grants to states which are performing well. Karnataka stands to lose plan grants. Rashtriya Krishi Vikas Yojna which contributed significantly to agricultural productivity and transformation is removed through the process which will affect the sector. To compensate for all this some extra funding will have to be mobilized by the GOI which caused it. States can ask for higher untied grants for the reason. ? With GOI revenue as a percentage of GDP is shrinking by 1% which makes devolution of funds to states questionable. How the GOI estimates and plans to face its increasing expenditure in the situation is to be seen. IT export income has declined to 6 year low this year due to inward bound policies of the west and USA. ? With back ward region grants discontinuation, absence of plan funds to states, reduction of social sector funding and decline in central kitty will all lead to larger estimable inequities in the devolution of funds to states in addition to other diversities. So there could be surging fiscal inequalities among the states. How cooperative federalism can be ushered in given the situation is not clear. ? May be 42% unconditional grants are expected to do the job. But this devolution will give a free hand to states to operate the finances. Inequities with freedom to states are what could be expected. ? Good amount of devolution is ordered to local bodies and more clarity of flow is also directed. But there is no sanction against default in devolution of funds to local bodies. So as always, flow of funds to local bodies is not ensured. There is no preventive measure against dependence on states either. A special body for monitoring cooperative federalism is advised which may or may not happen. ? In brief there is sacrifice of equity principle in the process of extending a flat unconditional grant of 42%.This may cause federal chaos instead of cooperative federalism unless additional and strong institutional arrangement is made to guard the objectives of the present governance.