States and the challenge before the Finance Commission
There needs to be a progressive resource allocation methodology for performing States such as Tamil Nadu
Government of Tamil Nadu recently hosted the Sixteenth Finance Commission
which was chaired by Arvind Panagariya. With its distinguished experts from various fields.
Commission is uniquely positioned to address the critical fiscal challenges facing India and rectifying the skewness in the relationship between the States and the Union...
Opportunities from global changes
friendshoring” and “reshoring
The Sixteenth Finance Commission’s work coincides with significant shifts in global economic trends.
Concepts such as “friendshoring” and “reshoring” are reshaping international trade and investment patterns.
How to take profit ?
a balance between equitable redistribution and incentivising growth in high-performing States such as Tamil Nadu.
Since 1951, when the first Finance Commission was formed, each Finance Commission has adapted its own approach towards the fiscal challenges of its time.
- When a government's expenditures exceed its revenue, this is called a fiscal deficit. This can be caused by high government spending or low revenue collection.
- When a government is unable to cover its deficit, this is called a fiscal crisis. Fiscal crises can have financial, economic, technical, political, and social dimensions.
- Some challenges to implementing fiscal policy include:
- Time lags
- Inaccurate information
- Uncertainty about the economic future
- Crowding-out
- Public spending side effects
- Time lags
Every time commission try for
Every Commission has sought to achieve an equitable redistribution of resources by increasing the share of States
- under vertical devolution
- giving funds to less-developed States through horizontal devolution.
But there have been clear gaps between their declared objectives and outcomes
therein lies our case for a new and fair system of distribution of resources.
For instance, while the Fifteenth Finance Commission awarded the vertical share of the divisible pool to the States as 41%,
Realty is ?
the effective devolution to States in the first four years of the award period amounted to only 33.16% of the Union’s gross tax revenue.
Reason is cess and surcharge by Central government
The unprecedented levying of cess and surcharges by the Union is the fundamental reason for this effective decline in devolution.
Hike States’ share, incentivise performers
एक हाथ से आ रहा है दूसरे हाथ से जा रहा
The financial strain on the States has been particularly severe due to increases in funding for centrally sponsored schemes on the one side and inadequate devolution on the other side.
Demand is for 50 %
Hence, a fair and equitable share for States would be 50% devolution of the gross central taxes, allowing States greater fiscal autonomy in funding and implementing locally relevant schemes.
redistribution policy से कितना फ़ायदा हुआ है अभी तक
On horizontal devolution, it is evident that the redistribution policy followed for the first four and a half decades in our country has yielded limited results in driving real growth.
इसका क्या हल निकलेगा
fundamental question would be this:
दो प्रश्न जो यहाँ उठ रहे ?
- शुड the focus be on a smaller national pie with a larger share for less-developed States
- or a larger national pie with equitable distribution that provides greater absolute resources for all?
The answer is difficult
Needed more balanced approach would ensure a larger national economic pie,
allowing for reasonable shares for less-developed States
and adequate resources for progressive States to continue their upward trajectory.
This would clearly necessitate a progressive resource allocation methodology for the performing States so as to allow them to fulfil their potential to be India’s growth engines.
Unique challenges in progressive States
progressive States such as Tamil Nadu की समस्याएं
1 they also face unique challenges in demography and urbanisation.
2 With a median age higher than the national average,
3 State’s capacity to generate consumption-based tax revenue is declining
4 even as the costs of supporting an aging population are rising.
middle-income trap”
It is imperative to ensure that such States do not fall into the “middle-income trap”, where growth stagnates and they “grow old before becoming rich”.
Next, challenges due to urbanisation in fast-growing States
A State like Tamil Nadu is witnessing the fastest rate of urbanisation in the country,
due to which it will have a 57.30% urban population in 2031, against the expected national average of 37.90%.
The resources for fulfilling the infrastructure needs of urbanisation.
WAY FORWARD
We should keep in mind that the mandate of the Commission goes beyond fiscal arithmetic. It is about envisioning a future where every State contributes to and benefits from the nation’s progress.
Whether it is fostering manufacturing, addressing urbanisation challenges, or ensuring climate resilience, the Commission’s decisions will impact millions of lives and determine the trajectory of the country’s destiny, to take its place among the world’s leading economies.
Source the hindu
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