The 14th Finance Commission, under the chairmanship of Y V Reddy, had ushered in a monumental change in the fiscal architecture of the country.
The Commission had recommended that the states’ share in the divisible tax pool be raised to 42 per cent between 2015 and 2020, up from 32 per cent during 2010-15 as proposed by the 13th Finance Commission (Chart 1).
This increase in the share of untied funds meant that state governments had greater flexibility to decide on their expenditure priorities. But it also meant that central government funding for certain schemes would be curtailed. As a consequence, transfers to states, which included Finance Commission transfers and other transfers, were pegged to rise from 61.88 per cent of the divisible tax pool in 2014-15 to 63.44 per cent per cent during 2015-20, as seen in Chart 2. Looking back, the past Finance Commissions have not only differed on the parameters that were adopted to determine a state’s share in the tax pool but also on the weights to be assigned to these parameters. For instance, the 11th Finance Commission included parameters such as infrastructure, fiscal discipline and tax effort as seen in Chart 3. But these were not factored in by the 14th Finance Commission. As a consequence, the weights assigned to the common parameters varied between Commissions.
On the contentious issue of population figures, the terms of reference of the 14th Finance Commission had stated the Commission might take into account the demographic changes that had taken place subsequent to 1971. As a consequence, the Commission gave a 17.5 per cent weight to population and a 10 per cent weight to demographic change as seen in Chart 4.
And while the share of southern states such as Andhra Pradesh, Kerala, Tamil Nadu and Karnataka in the tax pool has declined, as has the share of states like West Bengal and Odisha as seen in Chart 5. On the other hand, Gujarat and Maharashtra have seen a rise in their share.