Intergenerational equity as tax devolution criterion
Introduction
Political and Economic Significance: The distribution of Union tax revenue among States in India is a crucial issue discussed periodically, driven by political considerations and economic principles.
Role of Finance Commission (FC): The FC revisits and determines the horizontal distribution formula every five years, emphasizing equity over efficiency in allocating resources among States.
Intergenerational Fiscal Equity
Concept Definition: Intergenerational equity ensures that each generation pays for its public services without burdening future generations through excessive borrowing.
Current Scenario: High-income States tend to finance a larger share of their expenditure through own tax revenue, whereas low-income States heavily rely on Union financial transfers. This disparity leads to varying levels of fiscal management and debt.
Intragenerational Equity
Objective: Intragenerational equity aims to provide equitable public services per tax payment across all States, regardless of their economic status.
Indicators Used: The FC uses indicators such as per capita income, population, and area to distribute Union financial transfers, reflecting states'' differing needs and fiscal capacities.
Conflicting Equities Addressed by FC
Equity Variables: Current distribution formulas prioritize per capita income, population, and area, which sometimes fail to accurately capture states'' fiscal situations.
Need for Revision: There is a call to include more fiscal variables to incentivize fiscal discipline and efficiency among States, thereby ensuring better utilization of Union financial transfers.
Fiscal Challenges and Recommendations
Fiscal Responsibilities: Every state has a Fiscal Responsibility Act to limit deficits and manage public debt. However, reduced Union financial transfers sometimes force states to breach these legal limits.
FC''s Role: The FC should assign greater weight to fiscal indicators and incentivize tax efforts and expenditure efficiency through increased Union financial transfers.
Outcome: This approach would promote intergenerational fiscal equity and sustainable debt management across states.
Conclusion
Balancing Equity and Efficiency: The FC''s role in balancing intragenerational and intergenerational equity is crucial for equitable development across states.
Recommendations: By revising the distribution formula to include more fiscal indicators and incentivize fiscal discipline, the FC can effectively address conflicting equity issues and promote balanced development.
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