What are the recommendations of the Fourteenth Finance Commission with respect to the grant to local…

Question

What are the recommendations of the Fourteenth Finance Commission with respect to the grant to local governments, fiscal deficit and FRBM Act?

Ghissu Editorial · Accepted Answer

The Fourteenth Finance Commission recommended about Rs 2,87,436 crore in local body grants for 2015-20, a 3% fiscal deficit anchor, and an FRBM Act review with an independent fiscal council. Prudent states could borrow up to 0.5% of GSDP extra.

**Introduction**

The Fourteenth Finance Commission⟦1⟧ (FFC), under Dr. Y. V. Reddy, reshaped India’s fiscal federalism by enhancing grants to local governments, setting fiscal deficit targets, and recommending reforms to the FRBM Act, aiming to empower local bodies while maintaining fiscal discipline.

**Recommendations on Grants to Local Governments**

1. **Increased Devolution**: The FFC raised states’ share in the divisible pool from 32% to 42%, indirectly boosting resources for local bodies mandated by the 73rd and 74th Amendments.

2. **Direct Grants and Incentives**: It recommended about Rs 2,87,436 crore in grants for 2015-20, roughly Rs 2,00,292 crore for gram panchayats and Rs 87,144 crore for urban local bodies, with performance grants tied to audited accounts and higher own revenue.

4. **Andhra Pradesh⟦4⟧⟦3⟧⟦2⟧’s Fiscal Challenges**: ==The state’s revenue deficit quadrupled in 2022-23, capital expenditure plummeted, and the bifurcation intensified local governance financing needs, highlighting the importance of FFC grants.==

**Recommendations on Fiscal Deficit Targets**

1. **Fiscal Consolidation Roadmap**: The FFC targeted Centre’s deficit at 3% of GDP by 2017-18 and anchored states at 3% of GSDP through 2015-20, with up to 0.5% extra for fiscally prudent states.

3. **Revenue Deficit Grants**: Allocated about Rs 1,94,821 crore to 11 states including ==Andhra Pradesh== to cover revenue shortfalls.

4. **State Fiscal Realities**: ==Andhra Pradesh’s rising revenue deficits in later years show challenges in fiscal consolidation amid regional disparities.==

**Recommendations Related to the FRBM Act**

3. **Development-Linked Fiscal Rules⟦6⟧**: Emphasized balancing deficit targets with capital expenditure needs.

**Conclusion**

The FFC’s recommendations advanced fiscal federalism by empowering local bodies, promoting fiscal discipline, and reforming fiscal responsibility frameworks to support inclusive growth.

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