How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position?. UPSC IAS Mains 2021 General Studies (Paper – 2)
The Fourteenth Finance Commission was constituted by the President under Article 280 of the Constitution in 2013 to make recommendations for the period 2015-20. Dr. Y. V. Reddy was appointed the Chairman of the Commission. Finance Commission is a constitutional body created to address issues of vertical and horizontal imbalances of federal finances in India.
The 14th Finance Commission enabled the States to improve their fiscal position in the following ways:
- Share in Centre’s Divisible Pool: The commission recommended an increase in the share of States in the Center’s divisible tax pool to 42% from 32% at present. This will enhance the states autonomy in deciding their expenditure priorities.
- Centrally Sponsored Schemes: The Commission also recommended eight centrally sponsored schemes (CSS) to be delinked from support from the Centre. Thus, States will be sharing a higher fiscal responsibility and autonomy to implement development initiatives.
- Taxation: The Commission has recommended that tax devolution should be the primary source of transfer of funds to States. This would increase the flow of unconditional transfers and give States more flexibility in their spending.
- Grants: Transfers were proposed including grants to rural and urban local bodies, a performance grant along with grants for disaster relief and revenue deficit. These transfers total to approximately 5.3 lakh crore for the period 2015-20.
- Compensation: The commission recommended compensating States fully for three years in case of revenue loss after GST implementation. The Commission suggested that 100% compensation be paid to the States in the first, second and third years, 75% compensation in the fourth year and 50% compensation in the fifth and final year. It also recommended the creation of an autonomous and independent GST compensation fund through legislative actions
The Finance Commission recommendations will reform the State finances which will assume greater significance for macroeconomic management as the fiscal deficit of State governments reached unsustainable levels. After the recommendations, States will get autonomy in deciding their expenditure priority, which will enhance the spirit of “balancing wheel of fiscal federalism”.
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