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Researchers at the Centre for Development Studies, Thiruvananthapuram, have suggested alternative criteria for horizontal devolution from the divisible pool of Central taxes and for disbursement of grants.
Authors R Mohan, N Ramalingam and D Shyjan list the new criteria as population and gap of per capita own tax revenue of a State from the average of highest three States worked on a normative basis.
GSDP NO MEASURE
The detailed methodology appears in a co-authored paper titled ‘Horizontal devolution of resources to States in India - Suggestions before the Fourteenth Finance Commission.’
This would replace the per capita Gross State Domestic Product (GSDP)-based tool, especially given the efficacy of GSDP as the right measure of a State’s fiscal capacity.
The authors argue that the devolution criteria must be inversely proportional to fiscal capacity and directly proportional to fiscal needs of a State.
‘Fiscal need’ in turn is the responsibility of the State to provide a certain minimum level of public goods and social services to citizens within its jurisdiction.
“When fiscal capacity or ability to raise own revenues is less, the ability to meet fiscal needs will also be lower,” the authors maintain.
Category of States based on per capita GSDP at current prices (average of 2008-09, 2009-10 and 2010-11)
CENTRAL DRAG
Central schemes such as MNREGS, SSA and NRHM have increased States’ spending in health and education sectors through matching contributions.
This has meant that theeir own-revenue GSDP ratio has almost remained stagnant.
They are also under fiscal pressure to maintain deficit targets to claim debt relief packages recommended by the Finance Commissions.
This leads to compression of expenditure despite its composition having undergone a change in favour of development expenditure.
“Central schemes with rigid allocation criteria have not only cut into their fiscal space through requirement of matching contributions but also impeded operational flexibility needed according to State-specific conditions.”
ROUTING GRANTS
Grants under these should be progressively phased out, the authors reiterate.
They may be devolved through Finance Commission recommendations by fixing broad priorities, leaving operational flexibility to States and local-self governments.
The paper recommends that the devolution criteria should augment the fiscal capacity so that a certain level of fiscal needs is met across States.
The authors also recall that the States’ fiscal position has deteriorated considerably after being forced to accept loans from multilateral institutions with riders of user charges and sticking to deficit targets.
Their actual share in the divisible pool has been less than recommended levels due to raised share of surcharges in Central taxes which are not part of divisible pool.
The Finance Commissions since the 11th have started imposing conditions for grant disbursement and debt relief also.
Under the circumstances, the ceiling of overall devolution to the States may be raised from 37.5 per cent to 55 per cent to give enough space for Finance Commissions to recommend sector-specific grants, the authors argue.
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