[Model Answer QP2021 GS2] How have the recommendations of the 14th Finance Commission of India enabled the states to improve their fiscal position?

The 14th Finance Commission of India, chaired by Dr. Y.V. Reddy, was constituted in 2013 and submitted its report in 2014.

The recommendations of this Finance Commission led to significant changes in the fiscal dynamics between the centre and the states in India, thereby enabling states to improve their fiscal positions.

Recommendations enabling improve fiscal position of the States:

1. Increased Devolution of Funds to States: Increase the share of states in the central divisible pool of taxes from 32% to 42%. This was the highest ever increase in vertical tax devolution, which gave states more fiscal autonomy and resources to address their needs.

2. Revenue Deficit Grant:  The Commission identified that certain states would be running revenue deficits even after devolution, and hence it recommended a revenue deficit grant for these states. This grant was intended to be used for expenditures on the provision of basic services. This grant significantly improved the fiscal situation of these states.

3. Discontinuation of the Plan and Non-Plan Expenditure Classification: This had a positive impact on the fiscal management capabilities of the states as they could now allocate and re-distribute resources more efficiently based on their needs.

4. Fiscal Responsibility and Budget Management (FRBM) Review: The Commission advised that the states should review their Fiscal Responsibility and Budget Management Acts in line with the central government’s fiscal consolidation path. This was an important recommendation to ensure fiscal prudence and sustainable debt levels at the state level.

5. Grants to Local Bodies: The Commission substantially increased the grants to local bodies to strengthen fiscal decentralization. This not only empowered the local governments but also indirectly improved the states’ fiscal position by relieving them of some financial responsibilities towards local bodies.
The recommendations of the 14th Finance Commission were thus transformative and played a crucial role in strengthening the fiscal health of states in India.

By giving states more autonomy over their finances, it has enabled them to better respond to their unique challenges and priorities.

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