Funds flow to States satisfactory : Daily Current Affairs

Date: 27/04/2023

Relevance: GS-2: Issues and challenges pertaining to the federal structure

Key Phrases: Centre-State resource transfers, Finance Commission, Rate of growth of Central taxes, discretionary transfers, capital expenditure, non-tax transfers, reliance on cess and surcharges.

Why in News?

  • The Centre-State resource transfers have always been a subject of considerable debate, and it has been argued that the Centre has encroached into the domain of the States.
  • However, the data suggest that transfers to the States have by and large has been fair.

Finance Commission of India

  • The Finance Commission of India is a constitutional body established under Article 280 of the Indian Constitution.
  • Its main responsibility is to make recommendations to the President of India on matters related to the distribution of tax revenues between the Central and State governments.
  • The Commission is appointed every five years by the President of India and consists of a chairman and four other members.
  • The recommendations made by the Finance Commission are of an advisory nature only and therefore, not binding upon the government. It is up to the Government to implement its recommendations on granting money to the states.

Unpacking the trends

  • Central tax transfers:
    • The overall share of the States in Central taxes has fallen short of the Finance Commission's recommendation during the 13th, 14th, and 15th Finance Commission award periods.
  • Actual transfers compared to recommendations:
    • The 14th Finance Commission had recommended that 42% of net taxes be transferred to the States, but this share was reduced to 41% by the 15th Finance Commission due to Jammu & Kashmir becoming a Union Territory.
    • The actual transfers peaked at 36.7% in 2018-19, but during the pandemic period of 2020-21, it reached its lowest level of 27.4%.
  • Rate of growth of Central taxes:
    • The average rate of growth of Central taxes has been 13.4%, which is higher than the rate of growth of gross tax receipts at 12.5%.
  • Overall transfers:
    • Overall transfers, including discretionary transfers, have generally been buoyant but have shown some moderation from the peak in the last two years.
    • Overall transfers as a percentage of gross revenue receipts of the Centre increased from 38.6% in 2013-14 to 53.8% in 2021-22, but it is expected to fall below 50% in FY23 RE and FY24 (BE).
  • Non-tax transfers and discretionary funding:
    • The average growth rate of transfers has been significantly higher than the gross revenue receipts, with non-tax transfers showing particular buoyancy with an average growth of 15.7%.
    • The discretionary funding of the Centre has increased due to a decline in its committed expenditure, covering establishment expenditure, interest, statutory grants, and GST compensation to States.

Capex push:

  • To accelerate the States’ investment in infrastructure and incentivise capital expenditure, the Centre launched a scheme of 50-year interest-free loans to States in 2022-23 and 2023-24.
  • While most of the loan will be at the discretion of the States, a part of it will be contingent on States increasing their actual capital expenditure.
  • There has been an increase in the capex of the States. As per the estimates of the Reserve Bank of India, as against the 30-year average of States’ capital outlays at 1.9 per cent of GDP, it has reached 2.7 per cent of GDP in 2021-22 (RE).
  • Empirical evidence points to higher multipliers of State capex relative to that of the Centre.

Resource Flow to States:

  • The States’ Share in Tax Revenues:
    • The States’ share in tax revenues has remained below the level recommended by the Finance Commissions due to the Central government’s reliance on cess and surcharges, which are non-shareable.
  • Overall Flow of Resources:
    • Despite the States’ share in tax revenues being below the recommended level, the overall flow of resources from Centre to State has shown buoyancy greater than one.
    • This indicates that the flow of resources has increased at rates higher than the Central revenues.
  • Central Schemes and Resource Allocation:
    • The issue of centrally sponsored schemes pre-empting State resources and affecting their allocative priorities is difficult to resolve.
    • However, transfers relative to the revenue of the Centre have not been moderated.
  • Inter-State Transfers and Adverse Effects:
    • Although overall transfers have buoyancy exceeding one, inter-State transfers show that some States have been adversely affected.
    • Some States such as Tripura, Meghalaya, Nagaland, Mizoram, Sikkim (all North-Eastern States), Himachal Pradesh, Gujarat and Karnataka have received transfers below the average CAGR of 13.3% of transfers, covering both statutory and discretionary during 2012-13 to 2022-23(BE).
    • Uttar Pradesh, one of the backward States, has managed to reach the average level.

Conclusion:

  • The States, as a whole, have not been short-changed in transfers from the Centre.
  • While the share from the divisible pool has suffered, it has been made up through other means.
  • The Centre, despite resorting to cess and surcharge to avoid these being included in mandatory tax transfers as entitlements, has been conscious of the resource needs of the States.
  • However, some better-off States such as Karnataka and Gujarat and special category States of the Northeast have relatively been adversely affected in the mechanism of resource flow.

Source: The Hindu BL

Mains Question:

Q. Discuss the trends in Centre-State resource transfers and their impact on different States in India.