Model Answer
0 min readIntroduction
The relationship between the Union and the States in India, particularly concerning financial devolution, has undergone significant transformation since independence. Initially, the Union government held a dominant position in resource allocation. However, the 73rd and 74th Constitutional Amendment Acts (1992) mandated the establishment of local bodies and emphasized the need for greater decentralization. This led to a more structured approach to devolution, primarily through the recommendations of the Finance Commissions. Recent changes, particularly those implemented following the 14th and 15th Finance Commissions, reflect a shift towards performance-based incentives, increased untied funds, and a greater focus on fiscal discipline, impacting the methodology and approach to resource transfer.
Historical Context: Pre-1992
Prior to 1992, the devolution of responsibilities and funds from the Union to the States was largely ad-hoc and centrally controlled. Planning Commission played a crucial role in resource allocation, often prioritizing centrally sponsored schemes. States had limited fiscal autonomy, and a significant portion of their revenue depended on Union transfers. The system lacked transparency and predictability.
The Role of Finance Commissions (Post-1992)
The 73rd and 74th Constitutional Amendment Acts mandated the establishment of State Finance Commissions and emphasized the need for greater fiscal decentralization. This led to a more structured approach to devolution through the Finance Commissions. The Finance Commission, constituted every five years (Article 280 of the Constitution), recommends principles governing the distribution of tax revenues between the Union and the States, and among the States themselves.
Evolution of Devolution Methodology: Key Changes
1. Shift in Devolution Criteria (14th Finance Commission - 2015-2020)
The 14th Finance Commission (Chair: Y.V. Reddy) marked a significant departure from previous Commissions. It recommended a substantial increase in the States’ share in the divisible pool of taxes from 32% to 42%. This was a landmark increase, providing States with greater fiscal autonomy. The criteria for devolution were also revised, with greater weightage given to population (1991 census) and income distance (the difference between a state’s per capita income and the highest per capita income among all states). This aimed to address regional disparities.
2. Performance-Based Incentives (15th Finance Commission - 2020-2026)
The 15th Finance Commission (Chair: N.K. Singh) continued the trend of increasing fiscal devolution, recommending a share of 41% (reduced by 1% to accommodate the newly formed Union Territories of Jammu & Kashmir and Ladakh). However, it introduced a greater emphasis on performance-based incentives. This included:
- State-Specific Grants: Grants were linked to specific performance indicators in areas like agriculture, forestry, health, education, and urban local bodies.
- Health Grants: Significant grants were allocated for strengthening primary healthcare infrastructure.
- Revenue Deficit Grants: Grants were provided to states facing revenue deficits, with conditions attached to fiscal consolidation.
3. Increased Untied Funds
Both the 14th and 15th Finance Commissions advocated for increasing the proportion of untied funds transferred to States. Untied funds give States greater flexibility in allocating resources according to their specific needs and priorities, promoting greater ownership and accountability. This contrasts with the earlier practice of predominantly channeling funds through centrally sponsored schemes with rigid guidelines.
4. Changes in Fund Transfer Mechanisms
The Union government has also adopted new mechanisms for transferring funds to States:
- Direct Benefit Transfer (DBT): Increasingly, funds are transferred directly to beneficiaries’ accounts, reducing leakages and improving efficiency.
- National Bank for Agriculture and Rural Development (NABARD): NABARD plays a crucial role in refinancing state governments for rural infrastructure development.
- Goods and Services Tax (GST) Compensation Cess: While the GST compensation cess regime ended in June 2022, it represented a significant mechanism for compensating states for revenue losses due to the implementation of GST.
Impact and Challenges
The recent changes have had a mixed impact. Increased devolution has empowered States financially, enabling them to invest in their priorities. Performance-based incentives have encouraged States to improve their performance in key sectors. However, challenges remain:
- Fiscal Discipline: Ensuring that States maintain fiscal discipline and utilize funds effectively remains a concern.
- Regional Disparities: While income distance is considered, addressing persistent regional disparities requires sustained efforts.
- Capacity Building: States need to build their capacity to effectively utilize untied funds and meet the conditions attached to performance-based grants.
- Data Reliability: Accurate and reliable data is crucial for assessing performance and allocating funds effectively.
Conclusion
The devolution of responsibilities and funds from the Union to the States has undergone a significant evolution, moving from a centrally controlled system to a more decentralized and performance-based approach. The recommendations of the 14th and 15th Finance Commissions have been instrumental in this transformation, increasing States’ fiscal autonomy and promoting greater accountability. However, sustained efforts are needed to address the remaining challenges and ensure that devolution leads to inclusive and sustainable development across all regions of the country. Future Finance Commissions will need to balance the need for fiscal consolidation with the imperative of addressing regional disparities and promoting equitable growth.
Answer Length
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