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

  1. 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
    Correct Answer: B. Limitations on State borrowing capacity
    Explanation: Kerala filed a suit against the Centre’s decision regarding the net borrowing ceiling for States, highlighting its concern over limitations on borrowing capacity.
  2. 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%
    Correct Answer: B. 41%
    Explanation: The Fifteenth Finance Commission recommended that States receive 41% of the divisible pool of taxes collected by the Centre.
  3. 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
    Correct Answer: D. Climate change
    Explanation: The criteria for horizontal devolution include income distance, area, forest and ecology, but climate change is not one of the specified criteria.
  4. 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
    Correct Answer: B. Central government’s retention of tax proceeds
    Explanation: The essay discusses how the Union government has sought to retain a larger share of tax proceeds, affecting the financial transfers to States and raising concerns among State governments.

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