5th May 2025 (11 Topics)
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As states want more, 16th FC will have to walk a tightrope on equity and efficiency
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Context
Several states, in their submissions to the 16th Finance Commission, have demanded an increased share in the divisible tax pool, citing reduced actual transfers due to rising cesses and surcharges. This demand raises critical questions around fiscal federalism, equitable distribution, and efficient public service delivery, especially as states now contribute to 60% of general government spending.
Centre-State Fiscal Dynamics
- Reduced Effective Transfers: Despite a 41% share in the divisible pool, states receive only ~32% of gross tax revenues due to rise in non-divisible cesses/surcharges, which grew from 11.4% (2011–12) to 21.1% (2021–22).
- Centre's Fiscal Constraints: With Centre’s rising obligations and borrowing to fund transfers, increasing overall transfers without expenditure rationalisation may strain Union fiscal health.
- Need for Transfer Composition Reforms: Rather than only increasing the size, rebalancing tied vs untied funds could improve fiscal autonomy and incentivise better governance outcomes.
Challenges with Untied Transfers
- Quality of State Expenditure: Rising revenue deficits in states like Punjab and Karnataka indicate borrowing is often used for unproductive, non-merit expenditures rather than capital investment.
- Cash Transfer Schemes Proliferation: 14 states now implement quasi-universal income support, amounting to 0.6% of GDP, often funded through expenditure switching or borrowing, raising sustainability concerns.
- Potential Misallocation Risks: Without accountability, more untied funds may fuel populist subsidies (e.g., free power/water) rather than productive infrastructure or human capital development.
Equity and Decentralisation Implications
- Inter-State Disparities: Large variations in public spending (e.g., Bihar vs richer states) question whether untied funds will promote horizontal equity or further resource misuse.
- Third-Tier Fiscal Devolution: India lags behind global peers (e.g., China, South Africa) in empowering local bodies; enhanced state-level fiscal space may or may not translate into greater decentralisation.
- Public Service Convergence: Rebalancing transfers could improve comparable service delivery standards, but must be paired with performance-linked incentives and accountability metrics.
Practice Question
Q. In the context of the 16th Finance Commission, critically evaluate the implications of increasing untied fiscal transfers to states. How can India reconcile the goals of fiscal autonomy, equity in service delivery, and expenditure accountability?More Articles
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