Fiscal Space and Expenditure Priorities post -14th Finance Commission: A Study of Five Indian States

Inter-governmental fiscal transfers comprising specific purpose (tied/conditional) and general purpose (untied/unconditional) transfers, underwent a significant change following the 14th Finance Commission (FFC) recommendations and its subsequent acceptance by the Government of India. The FFC increased the tax devolution to states from the divisible pool and adopted a new formula for the inter-se distribution of the shareable proceeds between states (GOI 2014). Simultaneously, the Union government reduced the Plan outlay to states from the Union budget in order to accommodate this increased tax devolution (GOI 2015, Reddy 2015). The reduction in Plan outlay was operationalized
by doing away with grants that earlier used to flow from the erstwhile Planning Commission, and an altered sharing pattern of expenditure for the Centrally Sponsored Schemes (CSS), with the states now required to contribute a larger share in these CSSs, than before. These significant changes were expected to create a disruption in the quantum and composition of state finances and consequently, state spending patterns (Rao 2015, Chakraborty and Gupta, 2016)

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