Discuss the key recommendations of the Fifteenth Finance Commission of India. How do these recommendations…

Question

Discuss the key recommendations of the Fifteenth Finance Commission of India. How do these recommendations influence government budgeting at the centre and state levels?

Ghissu Editorial · Accepted Answer

The Fifteenth Finance Commission set states' tax share at 41%, extended revenue deficit grants to 17 states, and added performance-linked health and education grants and local body grants. This narrows the Centre's discretion, committing over Rs 10.3 lakh crore in grants, and gives states predictable resources tied to fiscal discipline.

**Introduction**

The Fifteenth Finance Commission⟦2⟧⟦1⟧ (FFC) report for 2021-26 redefines fiscal federalism, influencing Centre and state budgets amid evolving challenges like ==Andhra Pradesh⟦4⟧⟦3⟧’s== fiscal pressures. Its recommendations address resource allocation, fiscal discipline⟦5⟧, and cooperative federalism, crucial for macroeconomic stability and inclusive growth.

**Key Recommendations**

1. **Tax Devolution at 41%**: The FFC reduced states’ share from 42% to 41%, factoring in new Union Territories, with criteria including income distance (45%), 2011 population (15%), forest cover (10%), demographic performance (12.5%), and tax effort (2.5%).

3. **Performance-Based Incentives**: Introduced conditional grants⟦6⟧ linked to health and education outcomes, including health grants through local bodies and education grants tied to a Performance Grading Index, promoting accountability.

**Influence on Central Budgeting**

1. **Reduced Fiscal Discretion**: Fixed 41% tax share limits Centre’s spending⟦7⟧ flexibility, requiring optimized expenditure and borrowing, fostering cooperative federalism.

2. **Increased Grants Commitment**: Over Rs 10.3 lakh crore allocated for grants-in-aid, including conditional health and education grants, raising Centre’s fiscal obligations and necessitating fiscal consolidation.

**Influence on State Budgeting**

1. **Predictable Resources and Fiscal Autonomy**: Stable tax devolution aids medium-term planning; ==Andhra Pradesh== projects 28% own tax revenue growth in 2026-27, enhancing fiscal autonomy.

2. **Fiscal Discipline Pressure**: Revenue deficit grants require prudence, yet ==Andhra Pradesh== saw revenue deficit quadruple in 2022-23, highlighting fiscal management challenges despite support.

4. **Local Governance Strengthening**: Grants empower local bodies but require capacity building, a challenge in states like ==Andhra Pradesh== for effective fund utilization.

**Conclusion**

FFC’s recommendations balance fiscal autonomy with accountability, shaping cooperative federalism and inclusive development by ensuring predictable resources, incentivizing performance, and strengthening local governance.

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