Indian Economy (State and local body finance) by Gaurav Bansal

Model Answer

Question #1. Critically analyze the impact of GST introduction on center-state finances. Also comment on GST council? 10 marks (150 words)

Approach:

1. Introduction: Brief overview of GST introduction and its significance for center-state finances.
2. Arguments and Facts: Highlight the impact of GST on revenue distribution between the center and states, discussing benefits and challenges with relevant data.
3. GST Council: Explanation of the role and composition of the GST Council in decision-making related to GST.
4. Conclusion: Summary of the impact of GST on center-state finances and the role of the GST Council in managing GST-related issues.

Introduction: The Goods and Services Tax (GST) was introduced in India on July 1, 2017, aiming to streamline the indirect tax structure and foster economic growth. It replaced multiple indirect taxes levied by the center and states, unifying the tax regime across the country.

Arguments and Facts: The introduction of GST had a significant impact on center-state finances. It led to a more equitable distribution of tax revenue between the center and states, enhancing fiscal autonomy for states. For instance, in the financial year 2020-21, the central government collected ?1.32 lakh crore as GST compensation cess, out of which ?1.1 lakh crore was disbursed to states to compensate for revenue losses.

However, initial implementation challenges and revenue uncertainties affected state finances, necessitating compensation mechanisms. During the initial years of GST implementation, states faced revenue shortfalls due to the transition from the previous tax regime. For instance, in FY 2017-18, states experienced an average revenue shortfall of 16% from GST. To address this, the GST Compensation Act was enacted to provide compensation to states for any revenue loss for a transition period of five years.

GST Council: The GST Council is a constitutional body responsible for making recommendations on GST-related issues, including tax rates, exemptions, and revenue distribution. It comprises the Union Finance Minister, the Finance Ministers of all states, and is chaired by the Union Finance Minister.

Conclusion: Overall, the introduction of GST transformed India's indirect tax system, affecting center-state finances positively. The GST Council plays a crucial role in ensuring cooperative federalism and addressing challenges related to GST implementation, contributing to effective tax administration and revenue management.

Question #2. Why some of the local bodies in western India perform much better than rest of India? Analyse how local body finances can improve? 15 marks (250 words)

Approach:

1. Introduction: Brief overview of the performance disparity among local bodies in Western India compared to the rest of the country.
2. Arguments and Facts: Analyze factors contributing to the better performance of local bodies in Western India and suggest ways to improve local body finances,
3. Improvement Strategies: Discuss potential measures such as fiscal decentralization, capacity building, and enhancing revenue sources, supported by relevant data.
4. Conclusion: Summarize the importance of strengthening local body finances for effective governance and equitable development.

Introduction: While some local bodies in Western India exhibit better performance, others across the country struggle with governance and financial management issues, leading to disparities in service delivery and development outcomes.

Arguments and Facts: Local bodies in Western India often benefit from higher revenue generation due to factors like robust industrialization, better infrastructure, and effective tax collection mechanisms.

According to data, municipalities like Ahmedabad and Indore have successfully implemented transformative urban development projects like the Sabarmati Riverfront and the Bus Rapid Transit System (BRTS), respectively.

These projects have not only enhanced the cities' infrastructure but also generated revenue through tourism and increased property values. However, local bodies elsewhere face challenges such as inadequate revenue sources, limited administrative capacity, and dependency on central grants.

Improvement Strategies: To improve local body finances nationwide, measures like fiscal decentralization, empowering local institutions, and enhancing revenue sources are crucial. Strengthening property tax collection, exploring innovative financing mechanisms, and investing in capacity building initiatives can enhance financial sustainability.

For instance, the Sabarmati Riverfront project in Ahmedabad has not only revitalized the riverfront area but also generated revenue through commercial development and tourism. Similarly, the Indore BRTS project has improved urban mobility and attracted investment in the city's infrastructure. Moreover, promoting transparency, accountability, and citizen engagement can foster better governance and resource utilization.

Conclusion: Efforts to improve local body finances are essential for achieving inclusive and sustainable development across India. By implementing reforms to enhance revenue generation and governance capabilities, local bodies can effectively address local needs and contribute to overall socio-economic progress