Economic Survey 2015 - The Fourteenth Finance Commission (FFC) - Implications for Fiscal Federalism in India

Major Recommendation of FFC

•  Enhanced the share of the states in the central divisible pool from the current 32 percent to 42 per cent.
• Proposed a new horizontal formula for the distribution of the states' share in divisible pool among the states. There are changes both in the variables included/excluded as well as the weights assigned to them.
• FFC has incorporated two new variables: 2011 population and forest cover.

• The FFC has not made any recommendation concerning sector specific-grants unlike the Thirteenth Finance Commission.

Implications Of FFC Recommendations For Fiscal Federalism: A Way Ahead

• More spending capacity of States.
• The FFC transfers have more favorable impact on the states (only among the GCS) which are relatively less developed which is an indication that the FFC transfers are progressive i.e. states with lower per capita NSDP receive on average much larger transfers per capita.\end{itemize}

Balancing Fiscal Autonomy And Fiscal Space

• The spirit behind the FFC recommendations is to increase the automatic transfers to the states to give them more fiscal autonomy and this is ensured by increasing share of states.
• to ensure that the Centre's fiscal space is secured, there will be commensurate reductions in the Central Assistance to States (CAS) known as "plan transfers."
• CAS transfers per capita are only mildly progressive. This is a consequence of plan transfers moving away from being Gadgil formula-based to being more discretionary.Greater central discretion evidently reduced progressivity. FFC recommendations would increase progressivity because progressive tax transfers would increase and discretionary and less progressive plan transfers would decline.
• The far-reaching recommendations of the FFC, along with the creation of the NITI Aayog, will further the Government's vision of cooperative and competitive federalism.