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The Sixteenth Finance Commission chaired by Arvind Panagariya is tasked with addressing the fiscal challenges and resolving the imbalance between States and the Union.

About Finance Commission

The Finance Commissions are constitutional bodies appointed by the President of India under Article 280 of the Indian Constitution. Their role is to define the financial relations between Union and state governments.

The Commission works under various terms of reference that define its scope of work. These terms define the Commission members' qualifications, appointments, disqualifications, eligibility, powers, and terms.

What challenges does the Finance Commission face in achieving equitable devolution of resources?

Significant gaps exist between the intended outcomes and actual results. For example, the Fifteenth Finance Commission's recommendation of 41% devolution resulted in only 33.16% due to the Union's dependence on cesses and surcharges, which are not shared with states.

Vertical Devolution

It refers to the distribution of central tax revenues between the Union and the states. Vertical devolution should be increased because states need more autonomy to implement developmental programs. However, dependence on non-divisible revenue sources, such as cesses and surcharges, has reduced actual devolution to the states.

Horizontal Devolution

It addresses the distribution of resources among states, taking into account factors such as population, area, and development indicators. The challenge is that previous policies prioritized equalizing resources over incentivizing performance, resulting in limited real growth in many states.

How should the Finance Commission approach horizontal devolution?

The Commission should take a balanced approach by focusing on both redistributing and expanding the national economic growth to allow for equitable distribution while incentivizing high-performing states to maintain their growth path and assisting less-developed countries in meeting baseline development targets.

Challenges faced by Progressive and Southern States

The population growth rate is lower in southern states compared to northern states, and aging populations reduce consumption, reducing revenue from taxes such as SGST.

An aging population has resulted in increased demand for healthcare, pensions, and social welfare programs.

Rapid urbanisation requires significant infrastructure investments.

Urbanisation contributes to environmental issues.

The increasing number of migrants into urban areas puts pressure on housing, healthcare, and education.

Progressive states may feel penalized for their success, as redistribution policies frequently prioritize less-developed states. In the 15th Finance Commission, Tamil Nadu's share was 4.189%, while Uttar Pradesh's was 17.931%.

Need for Comprehensive fiscal policies for progressive States

Progressive states like Tamil Nadu face unique challenges, such as demographic shifts, urbanisation, and environmental concerns. The Finance Commission should recognise these challenges and take a more comprehensive approach for resource allocation to ensure that progressive states receive sufficient support for their growth initiatives and they continue to serve as models for inclusive development for other states.

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Source:

The Hindu