ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Twelfth Finance Commission and States' Debt Burden

Both the Tenth and the Eleventh Finance Commissions formulated certain schemes for debt relief to the states which, however, were not sufficient to deal with the magnitude of the problem. It is necessary that this issue be addressed more seriously while drafting the terms of reference of the Twelfth Finance Commission.

Twelfth Finance Commission

Considerations of making the recommendations of the Twelfth Finance Commission more effective require the new commission to (1) remove the artificial restrictions imposed on the finance commissions' scope of operations; (2) keep in view overall macroeconomic stability; (3) streamline management of government debt; (4) provide for appropriate incentives for inducing fiscal responsibility; (5) take a broader and integrated view of tax assignments; and (6) provide operational guidelines for the state level finance commissions.

Centre-State Transfer of Resources

The strategy of freezing the population factor to 1971 levels in deciding Finance Commission awards has been successful in denying states with higher rates of growth of population the benefit of a larger proportion of resources. The penalised states, however, include most of the least developed regions of India. Moreover, this policy dilutes the importance of the population as an indicator of the needs of a state; it also lacks an explicit mechanism to encourage states to curb high rates of growth of population.

State Finances in India: Issues and Challenges

Sharp deterioration in state finances during the last decade - as evidenced by sharp increases in revenue, fiscal and primary deficits, increases in their indebtedness and contingent liabilities, and decline in capital and maintenance expenditures - has been a matter of serious concern to policy-makers. Low buoyancy of central transfers and spillover of central pay revisions have had the most adverse impact on state finances. However, the states' own fiscal performance has also seen sharp deterioration. On the transfer system, the scheme proposed by the ministry of finance attempts to link a portion of transfers to fiscal reforms. There are serious design issues in the scheme. It is not certain whether the scheme will be effective either. The paper details the areas of reform the states should focus on to impart efficiency and improve revenue productivity and prioritisation and compression of unproductive expenditures.

Calcutta Diary

Substitution of sales taxation by value added tax, it is being claimed, will reduce distortions in the economy caused by multiple rates of taxation of inputs and help the establishment of an integrated national market. What a pipe-dream. A seemingly fractured market which nonetheless promotes faster and more balanced development is to be preferred any day to an arrangement where the national market is technically integrated and yet overwhelmingly unfriendly to growth. Who will tell that though to the docile chief ministers and state finance ministers who have volunteered to sign their own death warrants?
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