Finance Commission – Issues related to devolution of resources

Finance Commission’s Approach to Equitable Delivery of Goods and Services

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NA

Mains level : Equitable delivery

finance commission

Context

  • 15th Finance commission on horizontal devolution agreed that the Census 2011 population data better represents the present need of States, to be fair to, as well as reward, the States which have done better on the demographic front, Finance commission has assigned a 12.5 per cent weight to the demographic performance criterion. Population, area, forest and ecology, demographic performance, tax efforts, income and distance are the criteria for horizontal distribution of funds.

Why equitable delivery is necessary in the country?

  • To fulfil the need of basket of Goods: There is a basket of goods and services that should be delivered by the State. It is best not to call them public goods, since “public goods” have a specific meaning for economists and this basket has items that are typically collective private goods.
  • To achieve Aantodaya approach (last person): Curlew Island is in the Andaman and Nicobar Islands. Until the 2011 Census, it had a population of two. Pulomilo Island, also in Andaman and Nicobar, had a population of 20 in 2011. At the time of elections, we read of astounding attempts made, so that voters in remote locations can vote. No one should be disenfranchised because of remoteness of location. By the same token, a resident, regardless of location, must be entitled to that basket.
  • To achieve poverty alleviation: The quality of public services affects economic growth via its impact on poverty alleviation, human capital formation and corruption.

finance commission

What are the Problems with Equitable delivery targets?

  • High cost of delivery: States can have differential sources of revenue. Alternatively, the cost of delivering that basket may vary across geographical zones.
  • Problems associated with migration: Over time, villages of course get depopulated. They are reclassified, get absorbed into larger agglomerations, or disappear because of migration.

finance commission

How equitable delivery can be achieved?

  • State need to take honest responsibility: The State cannot abdicate its responsibility of providing the basket.
  • Economic compulsion: Migration is a voluntary decision, often driven by the pull (and push) of economic forces. That voluntary decision cannot be replaced by fiat.
  • Dividing the pool between the governments: The Union Finance Commission has a vertical task, dividing the divisible pool between the Union government and states.
  • Adjusting to the criteria set by FC: It also has a horizontal task, dividing State share between different states. Accordingly, from the 1st to the 15th, Finance commission have adopted different formulae, with an attempt to also create incentives, by attaching weights to fiscal efficiency and even demographic performance.
  • This leaves variables like population, geographical area, income distance, infrastructure distance and forest cover:
  • expenditure equalisation based on needs/costs of public services;
  • Revenue equalisation measured by the ability of the state to raise revenue from one or more sources; and
  • Macro indicators covering broader economic or non-economic indicators that approximate fiscal capacity, where data constraints make it difficult to apply the other approaches.
  • Addressing Geographic area and population: Needs/costs are sought to be measured through geographical area and population. All Finance Commissions have used area as another criterion in the devolution formula on the ground of need — the larger the area, greater is the expenditure requirement for providing comparable services.

Conclusion

  • Equitable access to public goods and services in low income and inequal (economic inequality) country like India is cumbersome task. Finance commission is trying their best for equitable allocation of resources.

Mains Question

Q. How Equity is different from equality?  What is the finance commission’s criteria for horizontal allocation of resources among the states ?

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