Complexities
Post-liberalization, the Union Budget's role in resource allocation to States has reduced, shifting from public sector schemes to market-based methods
Schemes announced for Bihar and Andhra Pradesh in recent Budgets have minimal fiscal impact, often serving more symbolic than substantive roles.
Transfers from the Centre include tax devolution, loans, Finance Commission grants, and discretionary grants, each affecting State finances differently.
Discretionary grants are arbitrary, lacking standard criteria, which undermines cooperative federalism and can create disparities among States
Allocations often align with political considerations rather than need, leading to perceptions of bias and favoritism.
NITI Aayog's Role
NITI Aayog, replacing the Planning Commission, mainly creates indices and rankings.
It lacks the enforcement power and financial authority of the Planning Commission.
The Planning Commission, though not constitutional, helped address regional disparities and provided a platform for discussions and resource allocation.
NITI Aayog's impact is limited as decision-making on transfers has moved to the Ministry of Finance, reducing its role in resource allocation.
Issues of Central and State governments regarding resource allocation
Debates continue over whether tax devolution should reflect a State’s tax contribution or aim for equitable service levels, influencing resource distribution fairness.
States should present specific needs for grants to address their unique fiscal challenges, allowing for more targeted support
A single formula may not suit all States; increasing the share of resources in the divisible pool is suggested for fairer distribution
Increased use of cesses and surcharges, not shared with States, undermines fairness.
These should be limited and used for specific, temporary purposes
Cesses and surcharges should be temporary and specifically allocated, but many persist beyond their intended use, affecting fairness.
Proposals suggest increasing States' share in resource devolution from 41% to 50% to better meet their needs and counterbalance the Centre’s collection
States face strict Budget constraints to ensure macroeconomic stability, but unrestricted borrowing could destabilize the economy
States like Kerala, with historical fiscal disadvantages, should continue to receive revenue deficit grants to offset financial shortfalls.
Balancing borrowing powers between the Centre and States is crucial to maintaining macroeconomic stability and preventing fiscal instability
COMMENTS