THE CONTEXT: Just before the forthcoming Union Budget, the Chief Ministers of Bihar and Andhra Pradesh have demanded special financial packages for their States, raising questions about the fairness and implications of such allocations. This basis of Finance Commission allocations and the potential impacts of additional central aid on state economies needs introspection.
THE ISSUES:
- Demand for Special Financial Packages: The Chief Ministers of Bihar and Andhra Pradesh have requested aid for their states. This request is noteworthy as it may impact the government’s and other states’ responsibilities. The discussion revolves around whether states should be granted packages beyond what the Finance Commission has already allocated.
- Criteria and Fairness of Finance Commission Allocations: The Finance Commission considers factors, such as income levels, population size, geographical area, forest coverage, environmental aspects, and demographic trends when deciding how to distribute funds to states. Some debate exists regarding the fairness of these criteria and their effectiveness in meeting the difficulties that states, like Bihar and Andhra Pradesh face.
- Impact of GST on Fiscal Federalism: The introduction of the Goods and Services Tax (GST) has significantly impacted state fiscal autonomy. The centralization of tax collection under GST has led to concerns about the loss of the state’s ability to generate revenue independently, exacerbating competition among states for central funds.
- Political Influence on Central Aid Distribution: There is a concern that political considerations influence the allocation of central funds to states. States that are politically aligned with the Centre or have significant political weight tend to receive more funds, raising questions about central aid distribution’s fairness and objectivity.
- Need for Balanced Regional Development: Poorer states like Bihar have lower per capita development spending and significant fiscal capacity problems. Addressing issues like governance, fund leakage, and the need for higher capital investment in underdeveloped regions is crucial.
THE WAY FORWARD:
- Reform the GST Structure: Allowing states to set specific tax rates within a defined range to address their fiscal needs. Simplifying the GST structure by collecting tax at the last point of sale rather than at each intermediate stage to reduce corruption and leakage.
- Enhance Fiscal Federalism: Increasing states’ share in the divisible tax pool beyond the current 41% recommended by the Finance Commission. Revisiting the criteria for vertical and horizontal devolution to ensure a more equitable distribution of resources among states.
- Design Specific Purpose Transfers: Implement a system of specific purpose transfers that are based on clear, objective criteria related to the specific needs and development goals of states. Administered through transparent mechanisms to ensure accountability and minimize political influence.
- Promote Balanced Regional Development: Channel more resources towards capital investment in poorer regions by Increasing funding for infrastructure projects in backward states like Bihar and Andhra Pradesh. Ensuring central schemes prioritize regions with lower per capita development spending to promote balanced regional development.
- Decentralized Governance: Promote greater decentralization by empowering local governments with more financial and administrative autonomy to address regional issues effectively. Revisit the Seventh Schedule of the Indian Constitution to allow more taxation powers at the state and local levels, encouraging states to develop their revenue sources and reduce dependency on central transfers.
THE CONCLUSION:
The debate over special financial packages for States like Bihar and Andhra Pradesh highlights India’s fiscal federalism complexities. While additional funds could boost development, the challenge lies in ensuring equitable and efficient distribution without compromising fiscal prudence.
UPSC PAST YEAR QUESTIONS:
Q.1 Explain the significance of the 101st Constitutional Amendment Act. To what extent does it reflect the accommodative spirit of federalism? 2023
Q.2 How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position? 2021
Q.3 How is the Finance Commission of India constituted? What do you about the terms of reference of the recently constituted Finance Commission? Discuss. 2018
MAINS PRACTICE QUESTION:
Q.1 Discuss the implications of granting special financial packages to states outside the Finance Commission allocations. Analyze the potential benefits and drawbacks of such discretionary transfers.
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