Syllabus: GS-II,
Subject: Polity,
Topic: Federalism,
Issue: Finance Commission devolution.
Context: The 16th Finance Commission’s meetings with the states.
Key Highlights:
Importance of the 16th Finance commission:
Influencing the economy: The decisions of the 16th Finance commission will shape the fiscal path of the nation for the next five years. It will also influence the economic trajectory of the nation.
Leveraging global opportunities: Concepts such as “friendshoring” and “reshoring” are reshaping international trade and investment patterns. The 16th Finance commission should look to leverage them to India’s advantage.
Historical role: The Finance commissions throughout the history have sough to achieve an equitable redistribution of resources. Both the vertical devolution to the states and the horizontal devolution to the less-developed states has gone up consistently.
Persisting gaps:
- Effective devolution: Though the 15th Finance commission awarded 41% devolution, the effective devolution amounted only to 33%.
- Declining share: The increasing levy of cess and surcharges by the union is a major reason for the decline.
States need finances:
- Higher responsibility: States are near to the people and bear substantial developmental expenditures. Their share should be further increased.
- Counterpart funding: The share of states towards centrally sponsored schemes has also been going up, but the devolution from the union has been inadequate.
Challenges in progressive states:
- Higher median age: With higher median age, these states capacity to generate higher tax revenue is declining. But the costs of supporting ageing population goings up.
- Middle income trap: States are in possible middle-income trap, where the growth stagnates and they grow old before becoming rich.
- Urbanisation challenge: Growing urbanisation in progressive states calls for fulfilling the infrastructure needs to ensure long-term sustainability of growth.
Way ahead:
- Increase the devolution: A fair and equitable share of 50% would allow states greater fiscal autonomy in funding centrally sponsored schemes.
- Balanced approach: The union divisible pool should be increased which allows for reasonable shares for less-developed states and adequate resources for progressive states.
The 16th Finance commission should foster manufacturing, address urbanisation challenges, ensure climate resilience and push India’s growth ahead.