Q.3 How have the recommendations of the 14th Finance Commission of India enabled the states to improve their fiscal position?

Model Answer:

Introduction

The 14th Finance Commission of India, chaired by Dr. Y.V. Reddy, made several significant recommendations to improve the fiscal position of states and promote cooperative federalism.

Body

Here are the key recommendations and their implications on the fiscal position of states:

Key Recommendations of the 14th Finance Commission:

1. Increased Devolution to States: The Commission recommended increasing the share of states in the divisible pool of central taxes from 32% to 42%. This was the highest ever increase in tax devolution to states, aimed at providing them with greater financial autonomy.
2. Grants-in-Aid: Specific-purpose grants were recommended for local bodies, disaster management, and other sectors. The Commission allocated Rs. 2.87 lakh crore for local bodies and Rs. 55,097 crore for disaster management over the period 2015-2020.
3. Revenue Deficit Grants: To address the issue of revenue deficits in certain states, the Commission recommended revenue deficit grants amounting to Rs. 1.94 lakh crore for the period 2015-2020.
4. Fiscal Discipline: The Commission emphasised the need for fiscal discipline and recommended that states should target a fiscal deficit of 3% of their Gross State Domestic Product (GSDP). It also suggested that states should aim to eliminate revenue deficits by 2019-20.
5. Incentives for Fiscal Performance: The Commission proposed performance-based incentives for states that show improvement in fiscal parameters such as tax effort, efficiency in expenditure, and reduction in debt levels.
6. Disaster Management: The Commission recommended the creation of a National Disaster Response Fund (NDRF) and State Disaster Response Funds (SDRFs) with adequate funding to manage natural disasters effectively.

Fiscal Position of States Post-14th Finance Commission:

1. Increased Fiscal Autonomy: The increased devolution of central taxes provided states with greater fiscal autonomy, allowing them to plan and execute their development programs more effectively.
2. Improved Revenue Position: The higher share of central taxes and revenue deficit grants helped states improve their revenue position, reducing their dependence on central grants.
3. Focus on Local Bodies: The specific grants for local bodies enhanced their financial capacity, enabling them to undertake development activities and improve service delivery at the grassroots level.
4. Fiscal Discipline: The emphasis on fiscal discipline encouraged states to adopt prudent fiscal practices, leading to better management of their finances. However, some states struggled to meet the fiscal deficit targets due to various economic challenges.
5. Disaster Management: The creation of dedicated funds for disaster management improved the states' ability to respond to natural disasters, ensuring timely relief and rehabilitation.

Challenges and Observations:

1. Implementation Issues: While the recommendations were well-received, the implementation faced challenges, particularly in states with weaker administrative capacities.
2. Variations in Fiscal Performance: There were significant variations in the fiscal performance of states. Some states managed to achieve fiscal discipline, while others continued to face revenue deficits and high debt levels.
3. Dependence on Central Transfers: Despite the increased devolution, many states remained heavily dependent on central transfers, highlighting the need for states to enhance their own revenue generation capacities.

Conclusion

The 14th Finance Commission's recommendations marked a significant shift towards greater fiscal federalism in India. By increasing the share of states in central taxes and emphasising fiscal discipline, the Commission aimed to empower states and promote balanced regional development. However, the success of these recommendations depended on the states' ability to implement them effectively and improve their fiscal management practices. The subsequent Finance Commissions have continued to build on these recommendations, addressing emerging fiscal challenges and promoting cooperative federalism.

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