[Answered] Evaluate the impact of the shrinking divisible pool and the rise in cesses and surcharges on the fiscal autonomy of states in India. Suggest measures to ensure a more equitable sharing of financial resources between the Union and the states.

Introduction: Contextual Introduction

Body: Highlight the impact of the shrinking pool of taxes and measures to deal with it.

Conclusion: Way forward

The recent unrest demonstrated by the governments of Kerala and Karnataka, along with the support garnered from several other state administrations, has shed light on several troubling issues within India’s fiscal federalism practices.

Impact of Shrinking Divisible Pool & Rising Cesses

  • Diminished State Revenue: States are less able to pay for their own social welfare initiatives, development initiatives, and critical services.
  • Increasing Dependency on Central Government: States’ capacity to enact their laws and make independent decisions may be hampered by their growing reliance on the federal government for financial support.
  • Erosion of Cooperative Federalism: The idea promotes cooperation between the federal government and the states. States may find it more difficult to effectively contribute to national development if they have limited resources.

Measures for equitable sharing

  • Examining Cesses and Surcharges: To make sure these levies are accomplishing their intended goals, a regular evaluation of these levies is necessary. The revenue from cesses that are no longer required should be returned to the divisible pool.
  • Increasing share for States: The states’ share of the divisible pool could be increased by the Finance Commission, which makes recommendations regarding the distribution of central tax revenue to the states. The needs of the states and the federal government could both be taken into consideration as this was done gradually.
  • Performance-Based Incentives: Depending on how well states perform in areas like fiscal responsibility, social development indicators, and the execution of centrally sponsored programs, the Centre may grant them more resources. This may promote more effective state resource management and governance.
  • Increasing the Strength of Inter-governmental Organisations: Organisations such as the Inter-State Council can be given more authority to help the federal government and the states communicate and coordinate more effectively on financial issues. This can assist in settling conflicts and identifying solutions that both parties can accept.

Conclusion

In summary, the 16th Finance Commission must prioritize fair resource sharing and address concerns about excessive cesses and surcharges. It should rectify historical imbalances in vertical devolution by compensating states and ensuring transparency in budget reporting. The Union government should legislate strict limits on cesses and surcharges. Resolving issues of horizontal devolution is important, but the Commission’s stance on vertical devolution is crucial for the future of fiscal federalism in India.

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