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Finance Commission can create more fiscal space for states through grants

Money Control · 1m

- The declining share of Finance Commission (FC) grants to states is a pressing issue in India's fiscal federal landscape. - The share of FC grants in total central transfers to states has dropped from 6 percent to 3.6 percent over a decade. - This decline in FC grant's share has implications for state finances and leads to fiscal contention between the Union and state governments. - The existing transfer mechanism has a mismatch between expenditure responsibilities and resource generation capacity. - The increasing share of conditional grants poses a threat to fiscal federal landscapes and limits states' autonomy. - There is a need to increase the base of FC grants and advocate for a greater share of unconditional grants relative to conditional allocations to enhance states' autonomy and cater to their specific development needs.