The Fourteenth Finance Commission assigned different weights to the following parameters for distribution of tax proceeds to the States:
1. Income distance
2. Population
3. Demographic changes
4. Area
Arrange the aforesaid parameters in descending order in terms of their weights.

Question

The Fourteenth Finance Commission assigned different weights to the following parameters for distribution of tax proceeds to the States:

1. Income distance

2. Population

3. Demographic changes

4. Area

Arrange the aforesaid parameters in descending order in terms of their weights.

Prepp Team · Accepted Answer

Fourteenth Finance Commission Weights for State Tax Distribution

The Fourteenth Finance Commission (FFC), constituted under Article 280 of the Constitution of India, was tasked with making recommendations on the distribution of net proceeds of taxes between the Union and the States (vertical devolution) and among the States themselves (horizontal devolution).

For the horizontal distribution of the divisible pool of taxes among the states, the FFC used various criteria or parameters, each assigned a specific weight. The question asks about the weights given to four specific parameters: Income distance, Population, Demographic changes, and Area.

The weights assigned by the Fourteenth Finance Commission to these parameters for the distribution of tax proceeds to the states were as follows:

Parameter (as per question)	Parameter Number	Weight Assigned by FFC14
Income distance	1	\(\text{50%}\)
Population (2011 data)	2	\(\text{17.5%}\)
Demographic changes (Demographic Performance, 1971-2011)	3	\(\text{10%}\)
Area	4	\(\text{15%}\)

Let's understand what these parameters represent:

Income Distance: This is the difference between the per capita income of a state and the state with the highest per capita income (which was Haryana during the FFC14 period). States with lower per capita income have a greater income distance and receive a larger share, promoting equity. The FFC gave the maximum weight (\(\text{50%}\)) to this criterion.
Population (2011): The FFC used the 2011 population data, giving it a weight of \(\text{17.5%}\). This reflects the size of the population in each state.
Demographic changes (Demographic Performance): This criterion, with a weight of \(\text{10%}\), was introduced to reward states that have made efforts towards population control. It is measured based on the ratio of the total fertility rate of a state to the total fertility rate of the most fertile state in 2011. States with lower fertility rates receive a higher share under this criterion. (Sometimes referred to based on population growth between 1971 and 2011).
Area: This parameter considers the geographical area of the state. The FFC assigned a weight of \(\text{15%}\) to Area, giving slightly more weight to larger states.

Now, let's arrange the parameters based on their weights in descending order:

Income distance: \(\text{50%}\)
Population: \(\text{17.5%}\)
Area: \(\text{15%}\)
Demographic changes: \(\text{10%}\)

Mapping the parameters back to their numbers provided in the question (1=Income distance, 2=Population, 3=Demographic changes, 4=Area), the descending order of weights corresponds to the parameter numbers:

Income distance (1) - \(\text{50%}\)
Population (2) - \(\text{17.5%}\)
Area (4) - \(\text{15%}\)
Demographic changes (3) - \(\text{10%}\)

Therefore, the parameters in descending order in terms of their weights assigned by the Fourteenth Finance Commission are 1-2-4-3.

Revision Table: FFC14 Parameter Weights and Order

Rank	Parameter (as per question)	Parameter Number	Weight Assigned by FFC14
1	Income distance	1	\(\text{50%}\)
2	Population	2	\(\text{17.5%}\)
3	Area	4	\(\text{15%}\)
4	Demographic changes	3	\(\text{10%}\)

The descending order of parameters by weight is Income distance > Population > Area > Demographic changes, which corresponds to the sequence 1-2-4-3.

Additional Information on Finance Commission and Tax Distribution

The Finance Commission is a constitutional body that makes recommendations on the distribution of financial resources between the central government and state governments, as well as among the state governments.

Vertical Devolution: This refers to the distribution of taxes between the Union government and the states. The FFC recommended that states be allocated \(\text{42%}\) of the net proceeds of Union taxes, a significant increase from the \(\text{32%}\) recommended by the Thirteenth Finance Commission.
Horizontal Devolution: This refers to the distribution of the states' share of taxes among the individual states. This distribution is done based on criteria like Income Distance, Population, Area, Demographic Performance, and sometimes Forest Cover/Ecology, to ensure equitable distribution considering various factors like need, cost of services, and fiscal capacity.
The criteria and their weights used for horizontal distribution can vary between different Finance Commissions, reflecting evolving policy priorities and data availability.
The FFC used the 2011 Population data, shifting away from solely relying on the 1971 Population data, which had been a contentious issue.
The introduction of 'Demographic Performance' aimed to balance the use of recent population data (2011) with incentivizing states that have controlled population growth, which might otherwise be penalized by using 2011 data alone.