Why in the News?
Some States have raised concerns over indications that the Sixteenth Finance Commission may recommend phasing out or scrapping Revenue Deficit Grants (RDG), arguing that it could adversely impact fiscally weaker States.
What are Revenue Deficit Grants?
- Revenue Deficit Grants are statutory transfers recommended by the Finance Commission to States whose revenue expenditure exceeds revenue receipts even after tax devolution.
- Their objective is to ensure that States can meet basic administrative and social sector expenditure without resorting to excessive borrowing.
Constitutional Basis
- Provided under Article 275 of the Constitution
- Grants are charged on the Consolidated Fund of India
Why are Revenue Deficit Grants Given?
- To correct vertical fiscal imbalance between Centre and States
- To support States with weak revenue raising capacity
- To ensure minimum standards of public services across States
- To prevent revenue deficits from crowding out capital expenditure
What is the Proposal of the 16th Finance Commission?
- Move towards eliminating revenue deficits rather than financing them
- Encourage States to undertake fiscal discipline and tax reforms
- Shift focus from revenue support to performance based and capital linked transfers
- Reduce long term dependence of States on unconditional grants
Concerns Raised by States
- Hill and special category States depend heavily on RDG
- Post GST regime has reduced States’ fiscal flexibility
- Fear of widening inter State fiscal disparities
- Risk of increased borrowing and debt stress
Significance for Fiscal Federalism
- Tests the balance between fiscal autonomy and fiscal responsibility
- Reflects shift from entitlement based transfers to outcome based federalism
- Could redefine the nature of Centre State financial relations
| [2025] Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct?Â
I. It has recommended grants of ₹4,800 crores from the year 2022–23 to 2025–26 for incentivizing States to enhance educational outcomes II. 45% of the net proceeds of Union taxes are to be shared with States III. ₹45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms IV. It reintroduced tax effort criteria to reward fiscal performance. |
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