GS2 PYQ (Mains Answer Writing): 14th Finance Commission

How have the recommendations of the 14th Finance Commission of India enabled the states to improve their fiscal position? (UPSC GS2 Mains)

Finance Commission is constituted by the President under Article 280 of the Constitution, mainly to give its recommendations on the distribution of tax revenues between the Union and the States and amongst the States themselves. Recommendations of the 14th Finance Commission, enabling fiscal position of states.

• Increased devolution to states from the divisible pool of taxes from 32% to 42% [drastic change]. States received a larger volume of untied funds relative to tied funds. This increase made transfers more predictable and stable, reducing states' dependence on time-bound central grants and allowing them greater flexibility to plan and finance state-specific priorities such as health, education and infrastructure. The higher share also improved the capacity of many states to meet expenditure needs without resorting immediately to additional market borrowings.
• Asked Centre to reduce conditional grant-in-aids to states. Reducing the number and value of conditional grants meant that states faced fewer centrally prescriptive conditions when using transferred funds. This strengthened state autonomy in spending decisions and promoted more efficient use of resources aligned to local needs, while at the same time placing the onus on states to demonstrate better fiscal management and accountability.
• Recommended eight centrally sponsored schemes (CSS) to be delinked from support from the Centre, thus states sharing a higher fiscal responsibility and autonomy to implement development initiatives. Delinking selected CSS allowed states to integrate these schemes into their own programmes, tailor implementation to local circumstances and innovate in delivery. It also encouraged rationalisation of overlapping schemes and reduced administrative fragmentation between centre and states.
• States got much autonomy in deciding their expenditure priority; this is in the spirit of the "balancing wheel of fiscal federalism". Greater discretion over expenditure priorities helped states respond to local development needs and social objectives more effectively. At the same time, increased autonomy required stronger state capacity for budgeting, prioritisation and performance monitoring to ensure outcomes for citizens.
• Given due consideration to the fiscal federalism framework in India by devolving a larger amount to local governments. By enabling higher transfers that could flow through states to local bodies, the recommendations supported decentralisation and improved the financial base of panchayats and municipalities. Greater fiscal space at the sub-state level promoted better local service delivery, though it also underlined the need to build administrative and technical capacity at the grassroots.

Topics Covered - Finance Commission, Constitutional Bodies