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The Big Picture – 14th Finance Commission: Breaking new path?


The fourteenth finance commission’s report has been released. The most important recommendation is to raise the devolution of state’s share of tax revenue to 42% from the existing 32% at 10% hike. This is being seen as an important step towards the government’s promise of taking the country towards the path of cooperative federalism. The key aspect of this recommendation which has been accepted is that Panchayats and Urban local bodies will directly be getting fund which was a badly felt need for years. It would also mean that the states would have more flexibility to decide their own schemes and plans. The other recommendations of the commission are aimed at fiscal consolidation and discipline as well some basic changes in the structure and management of Finances.

This is being touted as the biggest thing that has ever happened as far as the fiscal relations between the centre and state is concerned. Acceptance of these recommendations along with the abolition of the planning commission is the structural change that the new government has made. Many of the funds which were transited through the planning commission earlier will now directly go to the states. Now, the central government with 10% less resources available has to reorganise its programs and policies.

Some also say that this move would not have any impact on the fiscal position of the states at least in the short run. It is because the centre’s share in many centrally sponsored schemes will go down while at the same time state’s share may go up. Winding up of some schemes may solve the problem. This would also have a negative effect on the 12th five year plan. The Finance Commission has also proposed for a smooth transition from 32% to 42%. There is a need to establish structures at the local level to absorb the funds devolved. There is also a need for mechanism to ensure that these funds are not misused by the states.