The 14th Finance Commission’s recommendations transformed India’s fiscal landscape by increasing the states’ share of central taxes to 42%, empowering them with greater financial autonomy. This bolstered state budgets, enabling investments in crucial sectors and enhancing fiscal management. The decentralized approach aimed to address regional disparities and foster overall economic development.
UPSC Mains General Studies Paper – 2 Mains 2021
UPSC Mains Civil Services IAS Exam Question Paper – 2021
Approach
- Start with a brief intro to the finance commission with the context of constitutional provision related to it.
- Discuss how the 14th Finance Commission enabled the States to improve their fiscal position.
- Conclusion accordingly.
Answer
Introduction
- The Finance Commission is a constitutional body specifically designed to tackle vertical and horizontal imbalances in India’s federal finances. It plays a crucial role in addressing fiscal disparities and ensuring equitable distribution of resources among the different levels of government in the country. The Fourteenth Finance Commission was established in 2013 by the President of India under Article 280 of the Constitution. Its primary objective was to make recommendations for the period 2015-20. Dr. Y. V. Reddy was appointed as the Chairman of the Commission.
Body
The 14th Finance Commission enabled the States to improve their fiscal position: The 14th Finance Commission proposed several important recommendations that aimed to enhance the fiscal autonomy and decision-making powers of the states in India. Some key recommendations are as follows:
- Share in Centre’s Divisible Pool: The Commission recommended increasing the share of states in the Center’s divisible tax pool from the current 32% to 42%. This significant increase provides states with greater autonomy in determining their expenditure priorities.
- Centrally Sponsored Schemes: The Commission suggested delinking eight centrally sponsored schemes from support provided by the central government. This move grants states higher fiscal responsibility and greater autonomy in implementing development initiatives.
- Taxation: The Commission emphasized tax devolution as the primary source of fund transfers to states. This approach increases the flow of unconditional transfers, giving states more flexibility in their spending decisions.
- Grants: The Commission proposed various transfers, including grants for rural and urban local bodies, performance grants, and grants for disaster relief and revenue deficit. These transfers amount to approximately 5.3 lakh crore for the period of 2015-20.
- Compensation: The Commission recommended full compensation to states for a period of three years in case of revenue loss following the implementation of the Goods and Services Tax (GST). It suggested 100% compensation in the first, second, and third years, 75% in the fourth year, and 50% in the fifth and final year. The Commission also recommended the establishment of an autonomous and independent GST compensation fund through legislative actions.
Conclusion
- Hence, The recommendations of the Finance Commission will bring about significant reforms in state finances, particularly considering the unsustainable levels of fiscal deficit in state governments. These recommendations will empower states with greater autonomy in determining their expenditure priorities, further strengthening the concept of “balancing wheel of fiscal federalism.”
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