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News: Critics argue that the 15th Finance Commission formula is skewed in favour of some states, resulting in wide inter-state variations.
→ The Centre collects taxes from states and distributes it among them based on the Finance Commission's (XVFC) formula.
→ The XVFC formula is based on each state's needs (population, area and forest and ecology), equity (percapita income difference), and performance (own tax revenue and lower fertility rate).
→ Needs are given 40% weightage, equity 45%, and performance 15%.
→ The XVFC introduced the fertility rate component to reward states that have reduced fertility levels, but this has a lower weightage than equity and needs.
→ The XVFC formula is skewed in favour of some States, resulting in wide inter-State variations. For example, for every one rupee that Tamil Nadu gives the Centre, it gets back 29 paise while (UP gets ₹2.73 and Bihar gets back ₹7.06)
→ Critics argue that this formula favours some northern states, as the population is given higher weightage. (Rewarding those who have not been able to achieve population control)
→ While the developed States that have lowered their TFR below replacement rate benefit from the drop in TFR, the component’s weight is considerably less.
→ The objective of the transfer of funds is to enable a State to provide comparable levels of services.
→ The basic rationale is horizontal equity.
→ However, others contend that the formula should not adversely impact a state's efficiency and progress.
The new fiscal federal architecture must be developed via forums like the GST Council, Inter-state Council, and NITI Aayog to accommodate the specific needs and aspirations of states as the dynamics of fiscal federalism change in India.
Address : 506, 3rd EYE THREE (III), Opp. Induben Khakhrawala, Girish Cold Drink Cross Road, CG Road, Navrangpura, Ahmedabad, 380009.
Mobile : 8469231587 / 9586028957
Telephone : 079-40098991
E-mail: dics.upsc@gmail.com
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