Equity issues have dominated such discussions as they should be. The effort has been to identify variables which reflect the equity concerns. In designing a suitable scheme of fiscal transfers, three considerations seem relevant: Need Cost disability Fiscal Efficiency Need refer to expenditures required to be made but not met by own resources; cost disabilities refer to such characteristics of a state that necessitate more than average per capita cost in service provision due to factors that are largely beyond its control, like large areas with low density of population, hilly terrains, poor infrastructure, proneness to floods and droughts; and fiscal efficiency encompasses parameters like maintaining revenue account balance, robust revenue effort, economies of expenditure linked to efficient provision of services and the quality of governance. Equity considerations must, in effect, aim for ensuring the provision of selected services at minimum acceptable standards across the country. It is seen that on average, the states spend only half of the average per person expenditure of high-income states in social services. Such equalisation of services may demand some form of conditional grants requiring monitoring of the use of funds to achieve the desired objectives. At the same time, in the use of resources should be ensured ‘efficiency’ and promoted. States that perform more efficiently in the delivery of services or raise more revenues relative to their tax bases should not be penalised. The task of formulating a sound transfer system has to establish a fine balance between equity and efficiency, a system where fiscal disadvantage is taken care of but fiscal imprudence is effectively discouraged. In such a system, states that are fiscally disadvantaged but prudent stand to gain, and states that have the resources but do not use them well stand to lose. Needless to say, fiscal responsibility must be shared by both the Centre and the states. With the two channels of tax-devolution and grants, it should be possible for the Finance Commission to achieve the goals of equity and efficiency through a proper mix. A sound fiscal system is a necessary concomitant of sustained growth with the equity. Resource transfers have to be an integral part of such a system facilitating efficient use of resource, accelerated growth and balanced regional development.
Equity issues have dominated such discussions as they should be. The effort has been to identify variables which reflect the equity concerns. In designing a suitable scheme of fiscal transfers, three considerations seem relevant: Need Cost disability Fiscal Efficiency Need refer to expenditures required to be made but not met by own resources; cost disabilities refer to such characteristics of a state that necessitate more than average per capita cost in service provision due to factors that are largely beyond its control, like large areas with low density of population, hilly terrains, poor infrastructure, proneness to floods and droughts; and fiscal efficiency encompasses parameters like maintaining revenue account balance, robust revenue effort, economies of expenditure linked to efficient provision of services and the quality of governance. Equity considerations must, in effect, aim for ensuring the provision of selected services at minimum acceptable standards across the country. It is seen that on average, the states spend only half of the average per person expenditure of high-income states in social services. Such equalisation of services may demand some form of conditional grants requiring monitoring of the use of funds to achieve the desired objectives. At the same time, ‘efficiency’ in the use of resources should be ensured and promoted. States that perform more efficiently in the delivery of services or raise more revenues relative to their tax bases should not be penalised. The task of formulating a sound transfer system has to establish a fine balance between equity and efficiency, a system where fiscal disadvantage is taken care of but fiscal imprudence is effectively discouraged. In such a system, states that are fiscally disadvantaged but prudent stand to gain, and states that have the resources but do not use them well stand to lose. Needless to say, fiscal responsibility must be shared by both the Centre and the states. With the two channels of tax-devolution and grants, it should be possible for the Finance Commission to achieve the goals of equity and efficiency through a proper mix. A sound fiscal system is a necessary concomitant of sustained growth with the equity. Resource transfers have to be an integral part of such a system facilitating efficient use of resource, accelerated growth and balanced regional development.
c-chapter-ii.docx