Model Answer
0 min readIntroduction
The 14th Finance Commission (2015-2020), chaired by Y.V. Reddy, was a pivotal moment in Indian fiscal federalism. Tasked with recommending the principles governing the distribution of tax revenues between the Union and the States for a five-year period, it fundamentally altered the financial landscape for states. Prior to this, states were heavily reliant on centrally sponsored schemes and plan transfers, leading to limited fiscal autonomy. The Commission’s recommendations aimed to address this imbalance by significantly increasing the states’ share in the divisible pool of taxes, thereby empowering them to address their specific developmental needs and improve their fiscal position.
Key Recommendations of the 14th Finance Commission
The 14th Finance Commission made several landmark recommendations, the most significant being a substantial increase in the states’ share of the divisible pool of central taxes.
- Increased Devolution: The Commission recommended increasing the states’ share from 32% to 42% of the divisible pool. This represented a significant increase of 10 percentage points, translating into a substantial rise in untied funds available to states.
- Revenue Deficit Grants: It provided revenue deficit grants to states with weak fiscal positions, ensuring they could meet their essential expenditure obligations. These grants were designed to be phased out as states improved their fiscal health.
- Performance-Based Incentives: The Commission introduced performance-based incentives through grants linked to improvements in areas like fiscal discipline, tax effort, and local body finance.
- Rationalization of Centrally Sponsored Schemes: It advocated for rationalizing the number of centrally sponsored schemes to reduce overlaps and improve efficiency.
Impact on States’ Fiscal Position
The recommendations of the 14th Finance Commission had a profound impact on the fiscal position of states, leading to increased autonomy and improved financial health.
- Enhanced Fiscal Autonomy: The increased devolution of funds provided states with greater flexibility to prioritize their spending based on local needs and conditions. This reduced their dependence on the Union government for funding specific schemes.
- Improved Revenue Position: The higher share in central taxes led to a significant increase in states’ own revenue, enabling them to finance their development programs more effectively.
- Increased Capital Expenditure: With greater financial resources, states were able to increase their capital expenditure, which is crucial for long-term economic growth. States invested more in infrastructure projects like roads, irrigation, and power generation.
- Reduced Fiscal Deficits: While not uniform across all states, many states witnessed a reduction in their fiscal deficits as a result of increased revenue and improved fiscal management.
State-Specific Examples
Several states benefited significantly from the 14th Finance Commission’s recommendations.
| State | Impact |
|---|---|
| Karnataka | Witnessed a substantial increase in its tax revenue, allowing it to invest heavily in infrastructure projects and social welfare programs. |
| Andhra Pradesh | Benefited from revenue deficit grants and increased devolution, enabling it to address its fiscal challenges and fund development initiatives. |
| Rajasthan | Utilized the increased funds to improve its education and healthcare infrastructure, leading to better outcomes in these sectors. |
| Bihar | Received significant revenue deficit grants, which helped it to maintain essential services and initiate development projects. |
However, it’s important to note that the impact varied across states. States with stronger fiscal positions were better equipped to utilize the increased funds effectively, while states with weaker fiscal positions faced challenges in managing the increased resources and maintaining fiscal discipline.
Conclusion
The 14th Finance Commission’s recommendations marked a significant shift towards greater fiscal decentralization and empowered states with increased financial autonomy. The substantial increase in the states’ share of central taxes, coupled with revenue deficit grants and performance-based incentives, led to improved fiscal positions and enhanced capacity for development. While challenges remain in ensuring equitable distribution and effective utilization of funds, the Commission’s legacy continues to shape the landscape of Indian fiscal federalism, fostering a more cooperative and responsive governance structure.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.