Study suggests steps to reduce vertical imbalance in resource sharing between Centre and States

Enhancing base and size of Finance Commission grants-in-aid among measures suggested.

There is a strong case for increasing the base and size of Finance Commission grants-in-aid to States in the 16th Finance Commission so as to reduce vertical imbalances in resource sharing between the Centre and the States and guaranteeing more fiscal space to the latter, according to a new study.

“Finance Commission Grants-in-aid to the States: Need for increasing the base and size of Finance Commission grants,” a study by Sumalatha B.S. and Anitha Kumary L. of the Thiruvananthapuram-based Gulati Institute of Finance and Taxation (GIFT), an autonomous institution under the Kerala Finance Department, suggests that grants-in-aid allocations should be from the gross revenue of the Union government for enhancing their size and base and the volume of non-discretionary transfers to States.

The GIFT study buttresses this suggestion pointing to the declining share of the divisible pool in the gross revenue of the Union government.

From a more Kerala perspective, the study says that the size of Finance Commission grants-in-aid should be hiked from 7.6% to at least 12% of the divisible pool, given the current low base and size. Furthermore, they should be hiked by 50% from the 15th Finance Commission share of grants-in-aid and fixed as a percentage of the fiscal transfers to the states.

“This argument is relevant from our analysis that the total Finance Commission transfers to Kerala from 10th to the 15th Commissions showed a decline from 2.92% in 10th Finance Commission to 2.4% during 15th, even with a high amount of revenue deficit grant received during the 15th Finance Commission period,” the authors noted.

The study gains relevance against the backdrop of the upcoming Kerala visit of the 16th Finance Commission headed by Arvind Panagariya in December for consultations.

If indeed the 16th Finance Commission were to raise the base and size of the grants to 12% of the divisible pool, Kerala stands to gain an additional ₹50,719 crore during the 16th Finance Commission period, the authors said, basing their calculations on the projected divisible pool and gross revenue during the 16th Finance Commission period.

While conditional grants from the Centre under Centrally-Sponsored Schemes (CSS) have gone up, not much benefit could accrue from them either given their non-State-specific, “one size fits all” nature. In this scenario, Finance Commission grants offer “the better option” for reducing vertical imbalances in resource sharing as they come from the Consolidated Fund of India, the study said.

In the matter of the revenue deficit grant (RDG), the study calls for a lenient approach from the 16th Finance Commission. In Kerala’s case, RDG constitutes 68% of the total grants-in-aid. The increase seen in grants-in-aid to Kerala under the 14th and 15th Commissions are mainly due to the receipt of RDG, the study observes. “Kerala’s rank in grants-in-aid was 6 including the RDG. If we exclude RDG, Kerala’s rank becomes 16,” it noted.

“Divisible pool” is the portion of gross tax revenues which gets distributed between the Union and the States. The pool comprises all taxes, but excludes surcharges and cesses. Finance Commission grants form part of the transfers to states from the Consolidated Fund. Its share has been increasing over time, but still accounted for slightly less than 20% of the transfers during the 15th Finance Commission.

Further, the GIFT study underscores the need for State-specific grants for addressing specific needs. In Kerala’s case, such requirements include dealing with second-generation issues such as palliative care, elderly care, skilling and employability, innovation and start-up expansion, and environment-related issues.

Published - November 14, 2024 07:15 pm IST