Subject: Indian Polity and Governance

The 14th Finance Commission (2015-20) marked a paradigm shift in fiscal federalism by significantly enhancing states' fiscal autonomy and responsibility through its landmark recommendations. The commission, headed by Dr. Y.V. Reddy, introduced transformative changes in Union-State financial relations.

Key Recommendations Enabling Fiscal Improvement

• Enhanced Devolution of Resources:

  • Increased states' share in divisible pool from 32% to 42%, providing greater fiscal space and autonomy to states.
  • Enabled states to design and implement programs according to local needs and priorities.

• Fiscal Deficit Management:

  • Recommended 3% fiscal deficit limit of Gross State Domestic Product (GSDP).
  • Additional borrowing flexibility of 0.5% GSDP for states meeting specific debt criteria.
  • Aimed to reduce combined debt-to-GDP ratio of Union and States to 68%.

• Performance-Based Incentives:

  • States with debt-to-GSDP ratio ≤25% in preceding year eligible for additional borrowing.
  • Encouraged fiscal discipline and prudent debt management.

Impact on States' Fiscal Position

• Revenue Generation:

  • States implemented innovative revenue generation measures.
  • Greater autonomy in tax collection and administration.
  • Enhanced capacity for local resource mobilization.

• Expenditure Management:

  • Increased spending on priority sectors like health and social welfare.
  • Better allocation of resources based on state-specific needs.
  • Improved fiscal planning and budgeting mechanisms.

Challenges and Way Forward

• State-wise Variations:
  • Impact varied across states based on economic conditions.
  • Need for state-specific fiscal strategies.
  • Differential growth patterns affecting fiscal outcomes.

The recommendations of the 14th Finance Commission have been instrumental in strengthening fiscal federalism in India. The success stories of states like Tamil Nadu and Gujarat in maintaining fiscal discipline while ensuring development demonstrate the positive impact of these reforms. Moving forward, focus should be on strengthening state capacity for revenue generation and ensuring effective implementation of the 15th Finance Commission recommendations.