How have the recommendations of the 14th Finance Commission of India enabled the states to improve their…

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How have the recommendations of the 14th Finance Commission of India enabled the states to improve their fiscal position?

Ghissu Editorial · Accepted Answer

The 14th Finance Commission improved state finances by raising their share of the divisible pool from 32% to 42% as untied money, backed by revenue deficit, local body and disaster grants. Devolution reached 34.9% of the Centre's gross tax revenue, the highest of any commission.

**Introduction**

The 16th Finance Commission (2026) kept the states' share of the divisible pool at 41%, a level that rests on the leap made by the 14th Finance Commission (chair Y.V. Reddy, 2015-20). Under Article 280, it made tax devolution the main channel of transfers, giving states more money and more freedom.

**Larger and Untied Resources for States**

SKETCH: comparison | 13th FC vs 14th FC
a: 13th FC
b: 14th FC
- 32% of pool :: 42% of pool
- Population 25% :: Population 27.5%
- Area 10% :: Area 15%
- Fiscal distance 47.5% :: Income distance 50%
- Fiscal discipline 17.5% :: Criterion dropped
- No forest weight :: Forest cover 7.5%

1. **Ten-point jump**: Raising the share from 32% to 42% lifted devolution to 34.9% of the Centre's gross tax revenue (World Bank paper for the 16th FC, 2025), and devolved taxes carry no conditions.
2. **Revenue deficit grants**: Rs 1,94,821 crore went to 11 states, including Andhra Pradesh, Kerala and West Bengal, to close their post-devolution revenue gaps.
3. **Local body grants**: Rs 2,87,436 crore to panchayats and municipalities eased the cost of civic services on state budgets.

**Fiscal Space, Equity and the Limits of the Gain**

1. **Borrowing headroom**: States with debt below 25% of GSDP and interest below 10% of revenue receipts could borrow up to 0.5% above the 3% fiscal deficit anchor.
2. **Equalising formula**: A 50% weight on income distance kept devolution progressive for lower-income states, and a new forest-cover weight rewarded forest-rich states.
3. **Gains clawed back**: The CAG notes that unshared cesses and surcharges rose to 19.7% of gross tax revenue by 2020-21, and states' share in most centrally sponsored schemes rose to 40%.

**Conclusion**

By making devolution larger, untied and more equalising, the 14th FC widened the states' fiscal space and autonomy, a shift its successors have largely preserved. It showed that fiscal federalism works best when states are trusted as partners.

How have the recommendations of the 14th Finance Commission of India enabled the states to improve their fiscal position?

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