With reference to the Fourteenth Finance Commission, which of the following statements is/are correct? 1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent. 2. It has made recommendations concerning sector-specific grants. Select the correct answer using the code given below.
Contents16
- A1 only
- B2 only
- CBoth 1and 2
- DNeither 1 nor 2
Show answer
Answer: (A) 1 only
Statement 1 is correct:
The Fourteenth Finance Commission (FFC) made a radical change by increasing the States' share in the central divisible pool of taxes from 32% to 42% — a massive 10 percentage point jump.
This was the biggest-ever increase in vertical tax devolution and was discussed in detail in the Economic Survey 2014-15 (Volume 1, Chapter 10).
Statement 2 is incorrect:
Unlike the Thirteenth Finance Commission, the FFC did NOT recommend any sector-specific grants (like grants specifically for education, health, etc.).
Instead, it gave states more untied funds, trusting them to allocate resources based on their own priorities.
This is an important distinction — FFC believed in giving states flexibility rather than earmarking funds for specific sectors.
The Fourteenth Finance Commission made the largest-ever increase in states' share of central taxes, jumping from 32% to 42% — a 10 percentage point increase that fundamentally changed India's fiscal federalism.
The Economic Survey 2014-15 extensively discussed this historic change in tax devolution, making it a major current affairs topic for the 2015 exam.
UPSC is testing whether students understand the FFC's philosophy of giving states untied funds with flexibility rather than sector-specific grants with conditions.
Fourteenth Finance Commission
Indian Polity Fourteenth Finance Commission
Fourteenth Finance Commission: Key Recommendations & UPSC Traps
14th FC increased States' share from 32% to 42% — biggest-ever jump in tax devolution
No sector-specific grants — gave untied funds instead for State flexibility
Constituted in 2013, submitted report in February 2015
Chaired by Y.V. Reddy (former RBI Governor)
Revolutionary Change
The Fourteenth Finance Commission made the most radical change in India's fiscal federalism by increasing States' share in central taxes from 32% to 42% — a massive 10 percentage point jump. This was coupled with a philosophy shift: give States more money but let them decide how to spend it.
Key Recommendations
Area | Recommendation | Impact |
|---|---|---|
Tax Devolution | 32% to 42% increase | ₹3.08 lakh crore additional to States |
Grants Approach | No sector-specific grants | More flexibility to States |
Local Bodies | ₹2.87 lakh crore for 5 years | Strengthened Panchayati Raj |
Disaster Relief | National + State Disaster Response Fund | Better calamity management |
Question Context
This PYQ tests the contrast between 13th FC (sector-specific grants) and 14th FC (untied funds). Statement 1 is correct — the 42% share is the defining feature. Statement 2 is the trap — 14th FC deliberately avoided earmarked grants.
Trap: Confusing 13th FC (gave sector-specific grants) with 14th FC (gave untied funds)
Trap: Mixing up the percentage — 14th FC raised it to 42%, not by 42%
Trap: Assuming all Finance Commissions recommend grants — 14th FC was different
Finance Commission System
Indian Polity
Finance Commission: Constitutional Framework & Functions
Article 280 mandates Finance Commission every 5 years
President appoints, determines tax sharing between Centre & States
15th FC currently operational (2020-2026) under N.K. Singh
Constitutional Basis
Article 280 of the Constitution mandates that the President shall constitute a Finance Commission every 5 years to recommend the distribution of tax revenues between the Centre and States. This ensures regular review of fiscal arrangements as India's economy evolves.
Key Functions
Function | Scope | Constitutional Provision |
|---|---|---|
Tax Distribution | Share of net proceeds between Centre & States | Article 280(3)(a) |
Grants-in-Aid | Assistance to States from Consolidated Fund | Article 280(3)(b) |
State Finance Commissions | Measures to augment State resources | Article 280(3)(c) |
Other Matters | Referred by President in public interest | Article 280(3)(d) |
FC Appointment Process
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**President's Order**
President constitutes FC under Article 280`"]
s2["`**Terms of Reference**
President defines specific tasks & scope`"]
s3["`**Commission Work**
FC studies finances, consults stakeholders`"]
s4["`**Report Submission**
FC submits report to President`"]
s5["`**Parliamentary Tabling**
President places report before Parliament`"]
s1 --> s2
s2 --> s3
s3 --> s4
s4 --> s5Trap: FC is not a permanent body — constituted every 5 years
Trap: FC recommends, government decides — recommendations not binding
Trap: Confusing State FC (Article 243-I) with Central FC (Article 280)
Tax Devolution Evolution
Indian Polity 32 percent 42 percent central divisible pool
Evolution of Tax Devolution: From 10th to 15th Finance Commission
Tax devolution has progressively increased from ~20% to 42% over decades
14th FC's 42% was the biggest single jump in Indian fiscal history
15th FC maintained 41% — slight reduction from 14th FC
Historical Trend
Tax devolution to States has shown a progressive increase over decades, reflecting India's move toward greater fiscal decentralization. The 14th Finance Commission's jump to 42% marked the most dramatic shift, while subsequent commissions have maintained this elevated level.
Finance Commission Tax Shares
Finance Commission | Period | States' Share | Key Change |
|---|---|---|---|
10th FC | 1995-2000 | ~29% | Baseline period |
11th FC | 2000-2005 | 29.5% | Marginal increase |
12th FC | 2005-2010 | 30.5% | Steady growth |
13th FC | 2010-2015 | 32% | Pre-14th FC level |
14th FC | 2015-2020 | 42% | +10 percentage points |
15th FC | 2020-2026 | 41% | Marginal adjustment |
Why 14th FC Increased Devolution
The 14th FC justified the massive increase by arguing that States are better placed to assess local needs and priorities. Higher devolution with fewer conditional grants would improve allocative efficiency and strengthen cooperative federalism.
Trap: 14th FC raised share to 42%, not by 42%
Trap: 15th FC reduced it to 41%, not maintained 42%
Trap: Don't confuse tax devolution % with total transfers (which include grants)
Grants-in-Aid Types
Indian Polity sector-specific grants
Types of Grants-in-Aid: Conditional vs Untied Transfers
Conditional grants tie money to specific sectors like health, education
Untied funds give States flexibility to allocate based on priorities
13th FC favored conditional grants, 14th FC preferred untied transfers
Philosophy Difference
Finance Commissions face a key choice: give States earmarked money for specific purposes (conditional grants) or give them flexible money to spend as they see fit (untied transfers). This reflects different views on State autonomy vs Central guidance.
Grant Types Comparison
Grant Type | Usage | Advantage | Disadvantage | FC Preference |
|---|---|---|---|---|
Conditional/Sector-Specific | Must spend on designated sector | Ensures priority areas get funding | Reduces State flexibility | 13th FC |
Untied/General | State decides allocation | Matches local priorities | May neglect some sectors | 14th FC |
Matching Grants | State must contribute too | Ensures State commitment | May burden poor States | Rare |
Performance-Based | Linked to outcome targets | Incentivizes efficiency | Complex monitoring | 15th FC trend |
14th FC's Approach
The 14th FC deliberately avoided sector-specific grants, arguing that higher tax devolution with untied funds would be more efficient. States know their priorities better than the Centre, so give them money and let them decide — this was the 14th FC philosophy.
Trap: 13th FC gave sector-specific grants, 14th FC gave untied funds
Trap: Higher devolution often comes with fewer conditional grants
Trap: Don't assume all FCs recommend the same type of grants