The last Finance Commission had said that States should be given 41% of the divisible tax pool.
Within that 41%, what does each State get?
For that, there is a formula which is based on income, population, the area, forests and ecology, demographic performance, etc.
As per the 15th Finance Commission, Uttar Pradesh and Bihar in 2020-21 got the largest amount of funds and Karnataka and Kerala saw the largest decrease in the share of funds.
So, in other words, the criteria that the Finance Commission use can change the amount of funds going to different States.
Apart from the Finance Commission devolution, which is statutory, how the remaining amount is spent is determined by the Centre, and that is where political determination comes in; States which are closer to the Centre get more funds.
As far as transfers by the Finance Commission are concerned, the scope for discretion is very limited.
Other Central transfers are also determined by certain principles of distribution across States
When there is a specific demand by a specific State for higher transfer of resources for a specific purpose, constitutionally there is no bar on giving more money to that State.
But generally, it is not done on a large scale because if that becomes the order of the day, fiscal prudence becomes a casualty
So, the possibility of large-scale discretionary transfers is limited
The public and private sector together determine the development of a State.
But with all other things remaining the same, higher allocations from the Centre to a State would boost the growth of that State.
The major problem is the issue of governance — how well is the State governed and how well are the resources that are received by the State spent on development.
Poorer States tend to have a greater amount of leakage of funds
In revenue sharing, the part which is not within the purview of the Finance Commission has increased and that is also why we see an increase in centrally sponsored schemes.
So, there is a larger political economy question which needs to be discussed.
Considering resource flow to the richer regions of the country, it is much, much higher than the resource flow to the poorer regions of the country
This cannot be explained by governance differences alone.
If there is a problem of resources, where a State is spending only 50% of the all-States average as public expenditure, this can’t just be explained by differences in governance and quality of expenditure
On GST
GST has resulted in significant loss of fiscal autonomy for the States because the States used to get two-thirds of their revenue from VAT
States also cannot set the tax rate, which is a key component of fiscal autonomy
So, there needs to be some flexibility somewhere within the GST structure so that the States don’t feel that they are not able to tax to provide public services
We should discuss what kind of GST flexibility can bring an element of fiscal autonomy without compromising on the fiscal harmonisation across States
Across the country, greater centralisation that has come in with GST is perhaps not good.
What has happened with GST is that it has benefited the organised sector at the expense of the unorganised sector.
Even though the unorganised sector has been kept out of GST, the organised sector is the one that has been rising and that is why you see that GST collections have been rising post-pandemic.
This decline in the unorganised sector, which is concentrated in the backward States, means that backward States will under-perform.
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