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Source– The post is based on the article “Measure topography to ensure the equitable delivery of goods and services to all” published in The Indian Express on 13th October 2022.
Syllabus: GS2- Federalism
Relevance– Central and state finances
News- The article explains the creation of the Finance Commission. It also explains the need for improvement in methodology for fund transfers to states by the Finance Commission.
What is the history behind the Finance Commission?
Government of India Act, 1935 had provision for grants in aid to provinces in need of assistance.
Niemeyer Report (1936), Krishnamachari Enquiry Committee Report (1949) and Sarkar Committee Report (1948) also suggested creation of such a body.
What is the logic behind creation of the Finance Commission?
The basic idea behind its creation is equity between states.
State has to provide a basket of goods and services. The states have differential sources of revenue. Cost of delivering these things also varies across states.
The cost of delivering social and physical infrastructure also varies across states.
Why topographical area rather than geographical area needs to be considered for devolution of funds to states?
Calculating the costs is not easy. The Finance Commission has more challenging tasks vertical as well as horizontal distribution of resources.
There are broadly three approaches used by the Finance Commission to measure fiscal capacity- (a) expenditure equalisation based on costs of public services; (b) revenue equalisation measured by the ability of the state to raise revenue from one or more sources; and (c) macro-indicators that estimate fiscal capacity.
The cost of expenditure incurred by states is mostly measured through geographical area and population. Larger the area, the larger the expenditure.
But geographical area alone is not sufficient to calculate the expenditure requirement. Topography also matters. The cost of infrastructure creation is not the same across plains and hilly areas.
Cost calculation should be based on topographical area. Improvement in technology has made it possible to calculate it.
