Centre-State Financial Relations: A Delicate Balance

Question : Critically analyze the recommendations of the 15th Finance Commission regarding the sharing of central taxes and grants to states, examining the criteria used for horizontal devolution and its implications for states, particularly those experiencing declining shares.

Centre-State Power Sharing

• The Indian Constitution outlines financial powers and responsibilities of the Centre and States.
• Seventh Schedule (Article 246) divides legislative powers between Union List (Central subjects), State List (State subjects), and Concurrent List (both can make laws).

Revenue Sharing Mechanism

• Article 270 establishes a system for sharing net tax revenue collected by the Union government.
• Shareable taxes include income tax, corporation tax, Central GST, etc.
• Finance Commission (Article 280):
  • Set up every five years to recommend:
    • Sharing of central taxes with states
    • Distribution of central grants to states
    • Measures to improve state finances
  • 15th Finance Commission (FC) recommendations:
    • 41% of divisible pool (central tax revenue) shared with states
    • Horizontal devolution (distribution among states) based on:
      • Income distance (reducing disparity)
      • Population (2011 Census)
      • Forest cover
      • Demographic performance (population control efforts)
      • Tax effort (efficiency in tax collection)

State Concerns

• Declining share of central tax transfers for some states.
• Union government keeping a larger share of tax proceeds.
• Delays in devolving net proceeds to states as mandated by FCs.
• 15th FC’s tax transfer formula:
  • Weightage to income distance criterion disadvantages growing states like Kerala.
  • This raises the debate between equity (reducing disparity) and efficiency (rewarding performance).

Way Forward

• States need to:
  • Negotiate with the 16th FC on:
    • Magnitude and criteria for tax transfers
    • Specific-purpose transfers for state-specific issues (demographics, migration, climate change)
    • Fiscal transfers based on gender budgeting advancements
  • Address horizontal devolution inequalities.
• The 16th FC’s stance on vertical devolution (Centre-to-State share) is crucial for fiscal federalism in India.

Conclusion

Ensuring a balance between equity and efficiency in Centre-State financial relations is vital for India’s federal structure. The 16th Finance Commission has a critical role to play in addressing state concerns and strengthening fiscal federalism.