{"id":102009,"date":"2026-05-05T18:02:35","date_gmt":"2026-05-05T12:32:35","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=102009"},"modified":"2026-05-05T18:02:35","modified_gmt":"2026-05-05T12:32:35","slug":"14th-finance-commission","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/14th-finance-commission\/","title":{"rendered":"14th Finance Commission, Recommendations, Chairman, Devolution Formula"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The 14th Finance Commission of India was set up to recommend how money should be shared between the Centre and the States. It was formed in 2013 under the <\/span><b>chairmanship of Y. V. Reddy. Its recommendations (2015-2020)<\/b><span style=\"font-weight: 400;\"> aimed to give States more financial independence and strengthen cooperative federalism.<\/span><\/p>\n<h2><b>About 14th Finance Commission<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The 14th <strong><a href=\"https:\/\/vajiramandravi.com\/upsc-exam\/finance-commission\/\" target=\"_blank\">Finance Commission of India<\/a><\/strong> was a constitutional body set up to decide how financial resources should be shared between the Central Government and the States.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It was formed in <\/span><b>2013 under the chairmanship of Y. V. Reddy,<\/b><span style=\"font-weight: 400;\"> and its recommendations were applicable from <\/span><b>2015 to 2020.<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Commission mainly focused on <\/span><b>giving more financial power and independence to States, <\/b><span style=\"font-weight: 400;\">so they could plan their own development according to their needs.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Overall, it played an important role in <\/span><b>improving Centre-State financial relations<\/b><span style=\"font-weight: 400;\"> and strengthening cooperative federalism in India.<\/span><\/li>\n<\/ul>\n<h2><b>Major Recommendation &#8211; Increase in Tax Devolution<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The most important recommendation was the <\/span><b>increase in States\u2019 share in the divisible pool of central taxes from 32% to 42%, <\/b><span style=\"font-weight: 400;\">which was the highest increase ever recommended by any Finance Commission.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This move provided States with a much larger share of <\/span><b>untied funds,<\/b><span style=\"font-weight: 400;\"> meaning they could use the money freely according to their own priorities rather than depending on centrally sponsored schemes.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It reduced the dependence of States on conditional grants from the Centre and allowed them to design policies based on their <\/span><b>specific developmental needs.<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This change marked a shift towards a more <\/span><b><a href=\"https:\/\/vajiramandravi.com\/current-affairs\/decentralization\/\" target=\"_blank\">decentralized<\/a> and state-driven model of governance.<\/b><\/li>\n<\/ul>\n<h2><b>Horizontal Devolution Formula (Distribution Among States)<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Commission adopted a formula to fairly distribute funds among States based on multiple factors:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Income distance (50%)<\/b><span style=\"font-weight: 400;\"> to support poorer States and reduce regional inequalities.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Area (15%)<\/b><span style=\"font-weight: 400;\"> to account for administrative and development challenges in larger States.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>1971 Population (17.5%)<\/b><span style=\"font-weight: 400;\"> to maintain continuity with past practices.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>2011 Population (10%)<\/b><span style=\"font-weight: 400;\"> to reflect current demographic realities.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Forest cover (7.5%)<\/b><span style=\"font-weight: 400;\"> to encourage environmental conservation and sustainable development.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This balanced approach ensured that both equity and efficiency were considered while distributing resources.<\/span><\/li>\n<\/ul>\n<h2><b>Grants-in-Aid to States<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Commission recommended <\/span><b>revenue deficit grants<\/b><span style=\"font-weight: 400;\"> to States that would still face financial gaps even after receiving their share of taxes.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A total of around <\/span><b>\u20b91.94 lakh crore<\/b><span style=\"font-weight: 400;\"> was allocated for this purpose during the five-year period.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These grants helped ensure that financially weaker States could meet their <\/span><b>basic expenditure requirements<\/b><span style=\"font-weight: 400;\"> without facing fiscal stress.<\/span><\/li>\n<\/ul>\n<h2><b>Grants to Local Governments<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A significant focus was placed on strengthening <\/span><b>local governance institutions<\/b><span style=\"font-weight: 400;\"> like Panchayats and Municipalities.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Commission recommended total grants of around <\/span><b>\u20b92.87 lakh crore for local bodies.<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These grants were divided into:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Basic grants,<\/b><span style=\"font-weight: 400;\"> which formed the major portion and could be used for general purposes.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Performance grants,<\/b><span style=\"font-weight: 400;\"> aimed at encouraging better financial management, transparency, and revenue generation by local bodies.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This move strengthened grassroots democracy and reduced the financial burden on State governments for local development.<\/span><\/li>\n<\/ul>\n<h2><b>Fiscal Discipline and Deficit Targets<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Commission recommended that States should maintain a <\/span><b><a href=\"https:\/\/vajiramandravi.com\/current-affairs\/fiscal-deficit\/\" target=\"_blank\">fiscal deficit<\/a> limit of 3% of their Gross State Domestic Product (GSDP)<\/b><span style=\"font-weight: 400;\"> to ensure financial stability.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It allowed additional <\/span><b>flexibility of 0.25% to 0.5%<\/b><span style=\"font-weight: 400;\"> under certain conditions, such as:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Low debt levels<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Lower interest burden<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This ensured a balance between <\/span><b>development spending and fiscal responsibility.<\/b><\/li>\n<\/ul>\n<h2><b>Reforms in Fiscal Framework (FRBM Act)<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Commission suggested reforms in the <\/span><a href=\"https:\/\/vajiramandravi.com\/current-affairs\/fiscal-responsibility-budget-management-act\/\" target=\"_blank\"><b>Fiscal Responsibility and Budget Management (FRBM) Act, 2003<\/b><\/a><span style=\"font-weight: 400;\"> to improve transparency and accountability.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It recommended setting up an <\/span><b>independent fiscal council<\/b><span style=\"font-weight: 400;\"> to evaluate government budget proposals before implementation.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It also proposed moving towards a <\/span><b>debt-based fiscal framework,<\/b><span style=\"font-weight: 400;\"> which would focus more on managing overall debt rather than just deficits.<\/span><\/li>\n<\/ul>\n<h2><b>GST Compensation to States<\/b><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">The Commission recommended the creation of a separate GST Compensation Fund to support States in case of revenue loss due to the introduction of GST.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">It suggested compensation for a period of <\/span><b>5 years:<\/b>\n<ul>\n<li><b>100% compensation for the first 3 years<\/b><\/li>\n<li><b>75% compensation in the 4th year<\/b><\/li>\n<li><b>50% compensation in the 5th year<\/b><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">This ensured a<\/span><b> smooth transition to the GST regime<\/b><span style=\"font-weight: 400;\"> and protected State revenues.<\/span><\/li>\n<\/ul>\n<h2><b>Impact of the 14th Finance Commission<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Commission significantly improved the <\/span><b>financial autonomy of States<\/b><span style=\"font-weight: 400;\"> by giving them a larger and more predictable share of central taxes.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It reduced the dependence of States on the Centre and allowed them to <\/span><b>prioritize their own development needs.<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It strengthened <\/span><a href=\"https:\/\/vajiramandravi.com\/upsc-exam\/cooperative-federalism\/\" target=\"_blank\"><b>cooperative federalism<\/b><\/a><span style=\"font-weight: 400;\"> by promoting trust and partnership between the Centre and States.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Increased funding to local bodies<\/span><b> improved grassroots governance and service delivery.<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Overall, it played a crucial role in creating a more <\/span><b>balanced, transparent, and efficient fiscal system in India.<\/b><\/li>\n<\/ul>\n<h2><b>Revenue-Sharing Formula in 14th vs 15th Finance Commission<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The revenue-sharing formulas of the 14th and 15th Finance Commissions determine how financial resources are distributed among States. They use different criteria and weightages to ensure balanced and fair allocation. The key differences between these formulas are discussed below.<\/span><\/p>\n<table style=\"width: 96.1451%; height: 456px;\">\n<tbody>\n<tr>\n<td class=\"tb-color\" style=\"text-align: center;\" colspan=\"3\"><b>Revenue-Sharing Formula in 14th vs 15th Finance Commission<\/b><\/td>\n<\/tr>\n<tr>\n<td>\n<p><b>Criteria<\/b><\/p>\n<\/td>\n<td>\n<p><b>14th Finance Commission<\/b><\/p>\n<\/td>\n<td>\n<p><b>15th Finance Commission<\/b><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p><span style=\"font-weight: 400;\">Income Distance<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">50%<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">45%<\/span><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p><span style=\"font-weight: 400;\">Population<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">27.5%<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">15%<\/span><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p><span style=\"font-weight: 400;\">Area<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">15%<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">15%<\/span><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p><span style=\"font-weight: 400;\">Forest &amp; Ecology<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">7.5%<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">10%<\/span><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p><span style=\"font-weight: 400;\">Demographic Performance<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">&#8211;<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">12.5%<\/span><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p><span style=\"font-weight: 400;\">Tax Effort<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">&#8211;<\/span><\/p>\n<\/td>\n<td>\n<p><span style=\"font-weight: 400;\">2.5%<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n","protected":false},"excerpt":{"rendered":"<p>14th Finance Commission increased states\u2019 tax share to 42%, boosting fiscal autonomy. Learn key recommendations, grants, and impact on federal finances.<\/p>\n","protected":false},"author":29,"featured_media":101966,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[786],"tags":[7363,5104,5105],"class_list":{"0":"post-102009","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-general-studies","8":"tag-14th-finance-commission","9":"tag-economy","10":"tag-economy-notes","11":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/102009","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/29"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=102009"}],"version-history":[{"count":4,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/102009\/revisions"}],"predecessor-version":[{"id":102044,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/102009\/revisions\/102044"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/101966"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=102009"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=102009"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=102009"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}