Finance Commission and State Share in Divisible Tax Pool
Several states have recommended that the 16th Finance Commission (FC) increase their share in the divisible tax pool, with some advocating for an increase to 50% from the current 41%. This request is rooted in the perception of unfair reduction in the divisible tax pool due to increased cesses and surcharges by the central government, which are not shared with the states.
Background
- The 14th FC increased states' share to 42%, while the 15th FC retained it at 41% after Jammu & Kashmir's transition to a Union territory.
- The divisible tax pool has decreased to 78.9% of the Centre’s gross tax revenues by 2021-22, from 88.6% in 2011-12, according to RBI data.
- States have received only about 32% of the gross tax revenues over the past six years.
Key Concerns
The financial dynamics between the Centre and states present several challenges:
- Fiscal Challenges: Increasing state transfers may strain the Centre's fiscal capabilities as states already contribute around 60% of general government expenditure.
- Rationalization of Transfers: Increasing untied transfers could enhance fiscal autonomy for states, but requires a reevaluation of centrally-sponsored schemes.
- Spending Quality: Many states exhibit worsening revenue balances, with borrowing often directed towards non-productive expenditures.
- Cash-Transfer Schemes: Income transfer schemes announced by 14 states account for 0.6% of GDP, potentially diverting resources from productive uses.
Equitable Distribution and Decentralization
- Inequality Concerns: Bihar's public spending is significantly lower than higher-income states, raising questions about equitable service delivery.
- Third-Tier Devolution: India's third tier of government has a lower spending share compared to nations like China and South Africa, partly due to constitutional factors. Most states are reluctant to devolve resources to this tier.
These considerations are crucial for the Finance Commission to address in their recommendations, aiming for balanced fiscal federalism and effective resource allocation across the nation.
