Deficit Fundamentalism vs Fiscal Federalism: Implications of 13th Finance Commission’s Recommendations

The important recommendations of the Thirteenth Finance Commission (THFC) can be categorised under the following heads: • Enhanced vertical devolution from 30.5 to 32 per cent of divisible pool of taxes. • Revised road maps for fiscal consolidations at the centre and the states. • Suggested design of goods and services tax (GST). • A large number of sector and state specific grants. • Grants for local bodies amounting to 2.5 per cent of the central pool of taxes This paper examines what some of these recommendations mean for the states, given their overall operating fiscal constraints and the fiscal inequality across them. The paper also considers whether states will be able to adhere to the fiscal restructuring paths proposed by the THFC for them and what their fiscal implications will be. Towards this, it undertakes a detailed review of the finances of two states and constructs their future fiscal profiles in accordance with the norms proposed by the THFC for fiscal consolidation from 2010-11 to 2014-15. [Working paper No. 2011-81]. URL:[http://www.nipfp.org.in/newweb/sites/default/files/wp_2011_81.pdf]