HORIZONTAL DISTRIBUTION

January 2017, Paper III
Question
While recommending horizontal distribution, which of the following criterion got the least weightage by the 14th Finance Commission?
a) Demographic change
b) Area
c) Population
d) Income distance
Answer A
The Finance Commission is required to recommend the distribution of the net proceeds of taxes of the Union between the Union and the States (commonly referred to as vertical devolution), and the allocation between the States of the respective shares of such proceeds (commonly known as horizontal devolution).
The Fourteenth Finance commission came up with a new formula to divide the 42% share of the divisible pool between the states. Area, Forest cover, Population, Demographic change, and Income distance became the criterion for horizontal devolution.
In the case of area, the commission followed the method adopted by the 12th commission and put the floor limit at 2 percent for smaller States and assigned 15 percent weight. The commission assigned 7.5 percent weight to forest cover as the new criteria to balance the benefit of the huge ecological benefits and the opportunity cost in terms of area not available for other economic activities that become an indicator of fiscal disability. The commission felt that allocation based on dated population data is not fair, and assigned a 17.5 percent weight to the 1971 population and assigned 10 percent weight to the 2011 population to capture the demographic changes since 1971, both in terms of migration and age structure. The commission assigned 50% weight to income distance as it is the only measure of fiscal capacity. It is the distance of the actual per capita income of a state from the state with the highest per capita. The commission calculated the income distance following the method used the 12th commission. A three-year average (2010-11 to 2012-13) per capita comparable GSDP has been taken for all the twenty-nine states.