Hindu Editorial Analysis : 2-April-2024
Public debt management has gained significant attention in the context of Centre-State financial relations, particularly following the establishment of the Sixteenth Union Finance Commission. One prominent case involves Kerala, which has filed a suit in the Supreme Court against the Centre’s decision regarding the net borrowing ceiling for States. This situation raises important discussions about the need for “asymmetric fiscal rules” concerning deficits and debts in India.
Centre-State Financial Relations
The Indian Constitution is structured like a federation, outlining the financial powers and responsibilities of both the Centre and the States. Key features include:
- Union and State Lists: These lists, defined in the Seventh Schedule under Article 246, detail subjects over which the Union and States have exclusive law-making authority.
- Concurrent List: Some subjects allow both the Centre and States to make laws.
Article 270 of the Constitution lays out how the net tax proceeds collected by the Union government are distributed between the Centre and the States. Shared taxes include:
- Corporation tax
- Personal income tax
- Central Goods and Services Tax (GST)
- Integrated Goods and Services Tax (IGST)
Basis for Allocation
According to the recommendations of the Fifteenth Finance Commission (15th FC), States receive 41% from the divisible pool of taxes. The distribution among States, known as horizontal devolution, considers several criteria:
- Income Distance: States with lower per capita income receive a higher share to promote equity.
- Population: Based on the 2011 Census.
- Forest and Ecology: Shares are allocated based on each State’s dense forest cover.
- Demographic Performance: Rewards States for controlling their population.
- Tax Effort: Recognizes States with efficient tax collection.
Concerns of State Governments
Over time, some States have seen a decline in their share of tax transfers from the Union Finance Commission. Concerns include:
- The Union government retaining a larger share of tax proceeds, thereby limiting what is shared with the States.
- A failure to devolve net proceeds to States as mandated by Finance Commissions.
The Fifteenth Finance Commission’s tax transfer formula uses various weightages, which can negatively impact States like Kerala. This scenario ignites a debate about equity versus efficiency in intergovernmental fiscal transfers.
Why In News
Public debt management is gaining wider attention in Centre-State financial relations, particularly in light of the recently constituted Sixteenth Union Finance Commission, which aims to address the financial challenges and inequities faced by different States in India.
MCQs about Public Debt Management and Centre-State Financial Relations in India
- What is the primary concern of Kerala regarding the Centre’s decision on net borrowing?
A. Increased taxes on the State
B. Limitations on State borrowing capacity
C. Decrease in population
D. Poor tax collection efficiency
- According to the Fifteenth Finance Commission, what percentage of the divisible tax pool is allocated to States?
A. 30%
B. 41%
C. 50%
D. 25%
- Which of the following criteria is NOT used for horizontal devolution among States as per the Fifteenth Finance Commission?
A. Income distance
B. Area
C. Forest and ecology
D. Climate change
- What is a key issue raised by the diminishing share of Union Finance Commission tax transfers for some States?
A. Increase in State income
B. Central government’s retention of tax proceeds
C. Improved efficiency in tax collection
D. Growth in population
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