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Underutilised Fiscal Space
The hike in tax devolution to states by the Fourteenth Finance Commission to give a larger fiscal space to the states has meant sharp cuts for centrally-sponsored schemes. Studying the case of Maharashtra, it is found that without adequate norms and yardsticks of development expenditure, the state has failed to exploit its fiscal potentials.
The author wishes to thank J Dennis Rajakumar for the suggestions given on an earlier draft of the note
The evolution of centre–state financial relations in India, euphemistically described as fiscal federalism, has been a fascinating story of the sociopolitical assertions made to correct vertical and horizontal imbalances in federal finances. These imbalances are inherent in the constitutional arrangement of assigning major tax sources to the central government, even as large parts of developmental responsibilities in the social and economic spheres lie with the states. The finance commissions set up under Article 280 of the Constitution every fifth year, or earlier, are to address these imbalances.
Previous finance commissions had made varied but gradual changes to correct vertical imbalances between the central and state finances. However, the changes introduced by the Fourteenth Finance Commission (FFC) have been radical as the share of tax devolution to states has been increased at one go by 10 percentage points from 32% to 42% of the divisible pool to increase the flow of unconditional transfers to states, and thus provide them with larger fiscal space.
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