| Introduction: Contextual Introduction Body: Highlight challenges faced by States and reforms suggested for efficient resource allocation Conclusion: Way forward |
The Sixteenth Finance Commission, chaired by Arvind Panagariya, faces the complex task of addressing the fiscal challenges that define the relationship between the Union and the States.
Key Challenges Faced by States
- Vertical Fiscal Imbalance: While the Fifteenth Finance Commission recommended a 41% share of the divisible pool for States, the effective devolution has been much lower, at only 33.16%, primarily due to the Union’s reliance on cesses and surcharges. This reduced fiscal autonomy hampers the ability of States to implement locally relevant schemes.
- Horizontal Fiscal Inequities: Redistribution policies followed over decades have had limited success in fostering real growth in less-developed States. The current methodology often penalizes performing States like Tamil Nadu by redirecting resources away from them to underperforming States.
- Centrally Sponsored Schemes (CSS): Increased counterpart funding for CSS adds financial strain on States, reducing their capacity to focus on state-specific developmental priorities.
- Unique Challenges for Progressive States: Progressive States like Tamil Nadu, with a higher median age, face declining consumption-based tax revenues while bearing rising costs for supporting aging populations. Tamil Nadu, expected to have 57.30% urban population by 2031, requires substantial infrastructure investment to address urbanization challenges.
Opportunities for Reform by the Sixteenth Finance Commission
- Hike in Vertical Devolution: Increase the States’ share of gross central taxes to 50% to enhance their fiscal autonomy. Reduce dependence on cesses and surcharges by including them in the divisible pool.
- Progressive Horizontal Resource Allocation: Adopt a progressive allocation methodology that incentivizes high-performing States to serve as growth engines while providing adequate resources to less-developed States.
- Address Demographic and Urbanization Challenges: Allocate specific grants for States dealing with aging populations to avoid the middle-income trap. Earmark funds for infrastructure development in rapidly urbanizing States like Tamil Nadu to ensure sustainable growth.
- Link Resource Allocation to Performance: Recognize States’ contributions to national growth by incentivizing manufacturing, climate resilience, and urban governance. Reward fiscal discipline, innovation, and development outcomes as part of the devolution framework.
Conclusion
The Sixteenth Finance Commission must embrace a vision that ensures progressive resource allocation, addresses unique state-level challenges, and facilitates India’s transition into a globally competitive economy.
