Which one of the following criteria got the highest weight for determination of shares of States in the formula given by the 14th Finance Commission?
Income distance
Understanding Finance Commission Recommendations for State Fund Sharing
The Finance Commission in India plays a crucial role in recommending how central taxes and duties are to be shared between the Union government and the states, as well as among the states themselves. This process is a cornerstone of fiscal federalism in the country.
Each Finance Commission determines a formula based on various criteria to ensure a fair distribution of resources, taking into account the needs and capacities of different states. The 14th Finance Commission, chaired by Dr. Y. V. Reddy, made recommendations for the period 2015-2020.
Criteria and Weights in the 14th Finance Commission Formula
The 14th Finance Commission used several criteria to determine each state's share in the divisible pool of central taxes. These criteria and their respective weights were designed to address various aspects such as population size, economic capacity, geographical area, and efforts in areas like forest preservation and demographic control.
Here are the criteria and weights used by the 14th Finance Commission:
| Criterion | Weight (%) |
|---|---|
| Population (2011 Census) | 17.5 |
| Income Distance | 50.0 |
| Area | 15.0 |
| Forest Cover | 7.5 |
| Demographic Performance | 10.0 |
Looking at the table, it is clear that the criterion with the highest weight assigned by the 14th Finance Commission for determining the states' shares was Income Distance.
What is Income Distance?
Income distance is a measure used to assess the relative economic capacity of states. It is calculated based on the difference between the per capita income of a state and the average per capita income of the state with the highest per capita income (usually the richest state). States with lower per capita income have a higher 'income distance' and are generally given a larger share of funds to help bridge the development gap. The 14th Finance Commission used the per capita GSDP (Gross State Domestic Product) averaged over the three financial years ending 2011-12 to measure income distance.
Analysis of Other Criteria
- Population: While population is a key factor in determining the needs of a state, the 14th Finance Commission used the 2011 census data and reduced its weight compared to previous commissions, which often used the 1971 census.
- Area: Area represents the costs associated with administering larger states.
- Forest Cover: This criterion rewards states for preserving forests, acknowledging their contribution to environmental sustainability.
- Demographic Performance: This criterion was introduced by the 14th Finance Commission to reward states that have performed well in controlling population growth based on the 2011 census.
Among all these factors, Income Distance was given the predominant weight of 50%, signifying the commission's emphasis on equity and supporting less developed states.
Revision Table: 14th Finance Commission Formula
| Criterion | Weight |
|---|---|
| Population (2011) | 17.5% |
| Income Distance | 50% |
| Area | 15% |
| Forest Cover | 7.5% |
| Demographic Performance | 10% |
Additional Information: Role of Finance Commission
The Finance Commission is a constitutional body under Article 280 of the Indian Constitution. It is constituted every five years (or earlier) by the President of India. Its primary functions include:
- Recommending the distribution of net proceeds of taxes between the Union and the states.
- Recommending the allocation of proceeds of taxes among the states.
- Recommending the principles governing grants-in-aid to the states by the Union government.
- Recommending measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the State Finance Commission.
The recommendations of the Finance Commission are not binding on the government but are usually accepted to maintain cooperative fiscal relations between the centre and states.
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