(a) How do the current Finance Commission's recommendations align with the Government's Fiscal Consolidation goals? Elucidate…

Fiscal consolidation and the 15th Finance Commission The 15th Finance Commission’s recommendations reinforce the Government’s fiscal consolidation agenda by making state finances predictable, measurable and outcome-linked. Its core vertical devolution of 41 per cent of net GST proceeds to states gives states a stable revenue base, reducing dependence on ad hoc central assistance and encouraging them to own expenditure discipline. The Commission’s revenue deficit grants are tied to states’ reduction of revenue deficits, which supports the FRBM objective of lowering the debt-to-GSDP ratio and curbing interest burden. The grants also reduce borrowing and interest outlays. Performance-linked incentives for power sector reforms and disaster management align fiscal transfers with efficiency: states that improve power distribution, reduce losses or build disaster resilience receive additional grants, making consolidation not merely austerity but capacity-building. This aligns with the Centre’s FRBM targets, including the 4 per cent fiscal deficit target for the Union and the 15th FC’s recommendation that states reduce fiscal deficit to 3 per cent of GSDP by 2025-26. Yet a tension remains. Article 280 requires the Commission to recommend principles for grants-in-aid, and it can recommend both conditional and unconditional transfers; cooperative federalism favours flexibility, while fiscal consolidation favours conditionality. The pandemic-era invocation of FRBM escape clauses accommodated higher deficits, but shows that consolidation must be credible and time-bound.

Public sector before liberalisation Before 1991, the public sector was given a leading role because the State was seen as the principal agent of industrialisation. The Mahalanobis strategy, adopted in the Second Five Year Plan, prioritised heavy capital goods—steel, machinery, power and fertilisers—because these sectors were considered the engine of long-term growth and were too capital-intensive, risky and long-gestation for private enterprise in a capital-scarce economy. Import substitution required the State to build domestic capacity where private investment was weak, while the Industrial Policy Resolution of 1956 reserved key industries for the public sector to control the commanding heights of the economy. Market failure arguments also mattered: heavy industry generated externalities, required coordination across sectors, and private profit motives were feared to deepen regional and income inequality. In a low-income economy with thin capital markets, the State could mobilise savings, direct credit, and absorb social costs that private firms would avoid. Planning was thus a political-economy choice: the State would allocate scarce resources, ensure employment, and prevent concentration of economic power.

RBI and financial inclusion The RBI has promoted financial inclusion through a regulatory and institutional architecture that extends banking to unbanked and underbanked populations. It formalised the Business Correspondent model, enabling banks to use local agents for account opening, deposits and micro-credit. The Self-Help Group-Bank Linkage Programme, launched by NABARD in 1992, was supported by RBI through guidelines that made group lending a channel for women’s self-employment. The PMJDY, a Government initiative, was strengthened by RBI regulations on zero-balance accounts, simplified KYC and account portability, helping it reach more than 50 crore accounts. Differentiated licensing of payment banks and small finance banks expanded competition in low-income segments, while the regulatory sandbox allowed testing of digital financial products. RBI’s payments framework supported the UPI developed and operated by NPCI, which RBI regulates, and the JAM trinity, a Government initiative, by ensuring interoperability and safety in digital payments. Financial literacy initiatives, including bank-led outreach and Financial Literacy Week, aim to convert accounts into safe usage. This makes inclusion not merely account creation but access to credit, payments and insurance.

Together, these shifts show India’s evolving state-market balance: the State no longer directly owns the commanding heights, but it uses fiscal rules, federal transfers and regulatory design to correct market failures, deepen inclusion and sustain consolidation.