Q. How have the recommendations of the 14th Finance Commission of India enabled the states to improve their fiscal position?
Question from UPSC Mains 2021 GS2 Paper
Model Answer:
14th Finance Commission Recommendations: Improving State Fiscal Position
The 14th Finance Commission’s recommendations (2015-2020) significantly impacted the fiscal position of Indian states. Key recommendations enabling fiscal improvement include:
• Increase in states’ share of divisible pool from 32% to 42%
• Removal of distinction between special category and general category states
• Emphasis on fiscal consolidation and deficit reduction
These recommendations enhanced states’ fiscal position by:
1. Greater fiscal autonomy and flexibility:
– Increased resources for state-specific development priorities
– Improved ability to manage revenue and fiscal deficits
– Enhanced decision-making power over fund allocation
2. Improved capital expenditure capacity:
– Increased spending on infrastructure development (e.g., roads, power projects)
– Better implementation of social sector schemes (e.g., healthcare, education)
3. Fiscal consolidation:
– Encouraged states to reduce revenue deficits
– Promoted responsible borrowing practices
– Incentivized improvement in tax collection efficiency
4. Equalization of resources:
– Reduced disparities between resource-rich and resource-poor states
– Allowed for more balanced regional development
Challenges faced by states in leveraging these recommendations include:
• Varying impact based on individual fiscal management capabilities
• Need for improved tax collection and revenue generation
• Balancing increased autonomy with fiscal responsibility
Some states effectively utilized the increased funds for development (e.g., Kerala’s healthcare initiatives, Maharashtra’s infrastructure projects), while others struggled to manage the newfound fiscal freedom responsibly.
Conclusion: The 14th Finance Commission’s recommendations significantly improved states’ fiscal positions, promoting autonomy, development, and responsible financial management.
