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Source: This article rationale behind states demand for additional support has been created based on the article ‘Should States get special packages outside Finance Commission allocations?’ published in the Hindu on 12th July 2024.
UPSC Syllabus Topic: GS Paper 2- Governance – issues related to federal structure
News: The article discusses the issue whether states should receive special financial packages outside the allocations determined by the Finance Commission. The issue came under discussion after recent demands by the Chief Ministers of Bihar and Andhra Pradesh for additional funds to address their states’ unique fiscal challenges.
Why States are looking for additional Support?
Andhra Pradesh: Suffered a major fiscal shock after bifurcation; partially offset by Finance Commission’s revenue deficit grants but still requires support.
Bihar: Faces severe fiscal capacity issues with per capita development spending at less than 60% of the all-States average.
Higher allocations from the Centre can stimulate State growth, provided there is effective governance.
Issues such as fund leakage and low credit-deposit ratios in poorer states can negate the benefits of additional funds.
GST has reduced fiscal autonomy by centralizing tax collection, impacting states’ ability to generate revenue.
How finance commission allocates funds?
The Finance Commission allocates 41% of the divisible tax pool to States.
Allocation criteria include income, population, area, forests and ecology, and demographic performance.
Beyond the statutory devolution by the Finance Commission, center provides discretionary transfers.
What are issues of discretionary transfers?
1) Large-scale discretionary transfers could undermine fiscal prudence and create imbalances.
2) Furthermore, Discretionary transfers are influenced by political considerations. Around 30% of Central funds are discretionary, often influenced by political consideration
3) Changes in the criteria provided by Finance Commission can significantly alter the distribution of funds.
What should be done?
1) Need for flexibility within the GST structure to allow States some autonomy without compromising fiscal harmonization.
2) Government should look for balanced and fair fiscal policy that addresses regional disparities without compromising fiscal prudence.
3) Greater decentralization and autonomy for States could mitigate political influence.
4) Government should emphasis on sourcing resources for higher capital investment in poorer regions for balanced regional development.
