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Central Transfers and the Issue of shares of some States

Why is it in the news?

  • Many states, particularly in southern India, have voiced concerns about a continuous decline in their share of resources from the Centre over successive Finance Commission periods.
  • In this context, there are many issues the Sixteenth Finance Commission has to deal with.

 

Analysis of State Shares (Table 1):

  • Southern states have experienced a steady decline in their share, from 19.785% to 15.800%.
  • Northern and eastern states also faced reductions, while hilly, central, and western states, including Maharashtra, were identified as “gainer states.”

Role of Income Distance Criterion (Table 2):

  • The income distance criterion, accorded the highest weight among distribution criteria, has been a major factor in the decline of shares for southern states.
  • Despite a reduction in its weight from 50% to 45% by the Fifteenth Finance Commission, its impact on southern states’ shares remains substantial.

 

 

Population Criterion (Table 2):

  • Changes in population criteria, including the shift from 1971 to 2011 data, and the introduction of the demographic change criterion, have had a marginal impact.
  • Tamil Nadu experienced a marginally positive impact on its share due to these changes.

 

Measures to be taken to ensure a fair distribution (Table 3):

  • Complete abandonment of the income distance criterion is deemed impractical, considering its significance for economic and social justice.
  • The Sixteenth Finance Commission may consider reducing the weight of the income distance criterion by 5% to 10% points.
  • An upper limit on cesses and surcharges (limited to 10% of the Centre’s gross tax revenues) could ensure a fair distribution.
  • The size of the divisible pool must not be compromised, as witnessed by the reduction in states’ share following increased cesses and surcharges post the Fourteenth Finance Commission’s recommendation to raise states’ share to 42%.

 

Conclusion:

  • Addressing the declining shares of certain states requires a balanced approach, recognizing the importance of the income distance criterion while making adjustments to ensure fairness.
  • The Sixteenth Finance Commission has the opportunity to fine-tune criteria weights and revenue-sharing mechanisms to better align with evolving economic dynamics and state needs.

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