Issue with fiscal transfers in India

Source: The post Issue with fiscal transfers in India has been created, based on the article “Making a better Indian Union” published in “Business standard” on 10th May 2024.

UPSC Syllabus Topic: GS Paper 2-Issues and Challenges Pertaining to the Federal Structure

Context: The article discusses how some wealthier southern Indian states feel unfairly treated because their taxes are redistributed to poorer northern states. However, wealthier states still gain economic benefits through the union, despite growing disparities between richer and poorer regions.

What is the issue with fiscal transfers in India?

Southern States’ Perspective: The “South Tax Movement” asserts that southern states are penalized for better economic management. Karnataka receives 15 paisa per rupee of tax paid, and Tamil Nadu gets 29 paisa.

Northern States’ Benefits: Meanwhile, Uttar Pradesh receives ₹2.73 per rupee, and Bihar receives ₹7.06, reflecting a higher fiscal benefit than southern states.

Not Just North-South: Other wealthy states like Maharashtra, Gujarat, Haryana, and Delhi also contribute more than they receive back. Eastern states like Assam, Odisha, and West Bengal are among those benefiting more.

For details information on issue with fiscal transfers in India read Article 1, Article 2

What can we learn from the European Union?

Richer Nations Contribute More: In the European Union (EU), richer northern nations like Germany, the Netherlands, and Denmark believe they over-contribute compared to less developed countries in Southern and Eastern Europe.

Benefits of a Captive Market: Despite these contributions, richer EU nations gain access to a captive market to sell their products, boosting their economic opportunities.

Currency Advantage: The Bertelsmann Stiftung Foundation found that Germany experienced 0.5% annual growth due to the euro. If Germany still used the stronger D-Mark, its exports would be less competitive globally.

Migration Benefits: Free migration within the EU increased overall income by €100-230 billion over a decade. Migrants from poorer countries find higher-paying jobs, while richer nations fill labor shortages.

What future challenges lie ahead?

Parliamentary Seat Allocation: India’s parliamentary seats have not been adjusted since 1991. With northern states growing faster, Bihar and Uttar Pradesh could gain over 30 seats after 2026, leading to potential North-South conflicts.

Representation Imbalance: The southern states, along with Odisha and West Bengal, stand to lose seats, risking further North-South divides.

Fiscal Allocation: The 16th Finance Commission will decide on fiscal distribution. Addressing health, education, and infrastructure gaps in poorer states is vital for balanced growth across India by 2047.

Question for practice:

Discuss the disparities in fiscal transfers within India and draw comparisons to the European Union’s approach to wealth redistribution and economic integration.