Roadmap for Answer Writing
1. Introduction
- Briefly introduce the 14th Finance Commission and its role in fiscal federalism.
- State the significance of its recommendations for states’ fiscal positions.
2. Key Recommendations
- Increased Devolution of Central Taxes:
- Highlight the increase in the share of states in the divisible pool of central taxes from 32% to 42%.
- Revenue Deficit Grants:
- Discuss the provision of grants for states with revenue deficits to ensure fiscal stability.
- Fiscal Discipline Incentives:
- Explain incentives for states maintaining fiscal discipline to promote prudent policies.
- Greater Autonomy and Flexibility:
- Mention the emphasis on autonomy in scheme design and resource allocation.
- Strengthening Local Bodies:
- Note the increase in grants to urban and rural local bodies to enhance service delivery. (Source: 14th Finance Commission Report.)
3. Conclusion
- Summarize how these recommendations have collectively improved states’ fiscal positions.
Relevant Facts
- Share Increase: The share of states in central taxes rose from 32% to 42%.
- Revenue Deficit Grants: Specific grants were provided to states facing revenue deficits.
- Incentives for Fiscal Discipline: States maintaining fiscal discipline received incentives.
- Support for Local Bodies: Increased grants for urban and rural local bodies to strengthen local governance.
Using this roadmap, you can craft a concise and focused answer addressing the impact of the 14th Finance Commission’s recommendations on states’ fiscal positions.
Recommendations of the 14th Finance Commission and Their Impact on States’ Fiscal Position
1. Increased Devolution of Funds: The 14th Finance Commission, 2015, significantly increased the share of states in central taxes from 32% to 42%. This enhanced devolution provided states with greater financial resources, enabling them to address their fiscal needs more effectively.
2. Flexible Grants: The Commission introduced the concept of performance-based grants and untied grants, allowing states more flexibility in utilizing funds according to their priorities. This autonomy helped states tailor their expenditure to local needs.
3. Debt Sustainability: The Commission recommended setting up a Debt Relief Fund to assist states in managing their debt burden and improving fiscal sustainability. This measure helped states reduce their fiscal deficits and manage debt more prudently.
4. Fiscal Responsibility: The recommendations encouraged states to adhere to fiscal responsibility norms, promoting better financial management and discipline.
Conclusion: The 14th Finance Commission’s recommendations empowered states with increased resources, flexibility in fund utilization, and better debt management, thereby improving their fiscal health and autonomy.
Model Answer
Introduction
The recommendations of the 14th Finance Commission of India aimed to enhance the financial autonomy of states, allowing them greater flexibility to address their developmental needs. This marked a significant shift in India’s fiscal federalism, leading to improvements in the fiscal positions of various states.
Increased Devolution of Central Taxes
The 14th Finance Commission recommended raising the share of states in the divisible pool of central taxes from 32% to 42%. This is the highest increase in vertical devolution in Indian history.
Revenue Deficit Grants
The Commission identified states with revenue deficits and recommended specific revenue deficit grants to bridge fiscal gaps.
Fiscal Discipline Incentives
To encourage states to adhere to fiscal discipline, the Commission proposed incentives for those maintaining a healthy fiscal position.
Greater Autonomy and Flexibility
The 14th Finance Commission emphasized granting states greater autonomy in designing and implementing their schemes.
Strengthening Local Bodies
The Commission increased grants for urban and rural local bodies, ensuring they had adequate resources for essential public services.
Conclusion
The recommendations of the 14th Finance Commission have significantly strengthened fiscal federalism in India, encouraging states to pursue prudent fiscal policies and efficient resource allocation to effectively address their developmental priorities.