Previous Year Question
With reference to the Fourteenth Finance Commission, which of the following statements is/are correct?
It increased the share of States in the Central divisible pool from 32% to 42%.
It made recommendations concerning sector-specific grants.
Select the correct answer using the code given below:
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Correct Answer: A
Detailed Solution
The Fourteenth Finance Commission was constituted under Article 280 of the Constitution. It was chaired by former RBI Governor Dr. Y. V. Reddy.
Its recommendations principally covered the period from 1 April 2015 to 31 March 2020.
Statement 1 is correct
The Fourteenth Finance Commission recommended increasing the States’ share in the Divisible Pool of Central Taxes from 32% to 42%.
This represented an increase of 10 percentage points:
42% - 32% = 10 percentage points
Relative to the earlier 32% share, it represented an increase of approximately 31.25%:
The objective was to provide more untied funds to the States and strengthen Fiscal Federalism. Untied funds allow State Governments greater freedom to spend according to their own requirements and priorities.
The 42% share referred to the Centre’s divisible tax pool, not 42% of the Centre’s entire gross tax revenue. Cesses, surcharges and collection costs generally remain outside the divisible pool.
Statement 2 is incorrect
The Fourteenth Finance Commission did not recommend separate sector-specific grants for the States.
Its approach was that the substantial increase in tax devolution should give States greater autonomy in determining their development priorities.
Its principal grants included:
Local Bodies Grants
Disaster Management Grants
Post-devolution Revenue Deficit Grants
It did not recommend separate grants earmarked for sectors such as health, education or roads.
Important fact
The Commission used the following criteria for Inter-State distribution:
Criterion | Weight |
Income Distance | 50% |
Population—1971 | 17.5% |
Demographic Change—2011 | 10% |
Area | 15% |
Forest Cover | 7.5% |
It introduced the 2011 population through a 10% Demographic Change criterion, while retaining a 17.5% weight for the 1971 population.