Concerns About Bias in Resource Allocation to the state

Source: The post concerns about bias in resource allocation to the state has been created, based on the article “Is the Centre being iniquitous in State transfers?” published in “The Hindu” on 2nd August 2024

UPSC Syllabus Topic: GS Paper2- Polity-issues and challenges pertaining to the federal structure

Context: The article discusses the concerns of opposition Chief Ministers about alleged bias in resource allocation by the Centre. It covers the issues of discretionary grants, the role and powers of the NITI Aayog, tax resource distribution, cesses, and borrowing limits for states.

For detailed information on Issue with Financial Transfers to States read this article here

Why Are the Opposition’s Concerns About Bias in Resource Allocation Valid?

1. Recent budgets have focused on schemes for Bihar and Andhra Pradesh, raising concerns about political favoritism.
2. Discretionary grants lack clear criteria, leading to perceived arbitrariness in allocations.
3. Cesses and surcharges collected by the central government, totaling ₹36 lakh crore between 2015-16 and 2024-25, have not been shared with states.
4. The NITI Aayog, replacing the Planning Commission, lacks financial powers, reducing its effectiveness in addressing regional inequalities.
5. Kerala has faced reduced revenue deficit grants and borrowing limits despite investing heavily in social sectors, highlighting unfair treatment in resource distribution.

For detailed information on Concern with NITI Aayog read this article here

What should be done?

1. Ensure Transparency in Discretionary Grants: Establish clear criteria for discretionary grants to avoid arbitrariness. Recent budgets have shown favoritism towards states like Bihar and Andhra Pradesh, reflecting political motivations.
2. Strengthen NITI Aayog’s Role: Empower NITI Aayog to provide capital grants through a consultative process with states, ensuring flexibility without the rigidity of centrally sponsored schemes (CSS).
3. Revise Tax Devolution: Address fiscal inequalities by increasing the devolution share in the divisible pool to 50%. Use grants judiciously to meet specific state needs and balance post-devolution differences.
4. Limit Cesses and Surcharges: Reduce reliance on cesses and surcharges, which have accumulated ₹36 lakh crore from 2015-16 to 2024-25, with none shared with states.
5. Support Social Sector Investments: Continue revenue deficit grants for states like Kerala, which invest heavily in social sectors. Kerala faces borrowing constraints despite its fiscal prudence due to significant social investments.

Question for practice:

Discuss the concerns raised by opposition Chief Ministers regarding the alleged bias in resource allocation by the Centre and suggest possible measures to address these issues.