Reforming India's fiscal transfer system: resolving vertical and horizontal imbalances
By: Rangarajan, C.
Contributor(s): Srivastava, D.K.
Material type:
ArticlePublisher: 2008Description: p.47-60.Subject(s): Public finance - India | Public finance
In:
Economic and Political WeeklySummary: Two central problems in a fiscal transfer system relate to resolving vertical and horizontal imbalances. This paper looks at the methodological background of fiscal transfers followed by recent Finance Commissions, particularly the Twelfth Finance Commission. It is noted that in India, there is long-term stability in the share of states after transfers in the combined centre and state revenues. This stability depends on linking the share of states in the transfers, particularly tax devolution, with the difference in the buoyancies of central and state taxes. In the context of horizontal imbalance, it is argued that some of the recent finance commissions have implicitly followed an axiomatic approach to tax devolution and brought in some normative elements in determining grants. In spite of large differences in fiscal capacities, a high degree of equalisation has been achieved. It is shown that for TFC recommended transfers, nearly 88 per cent of the needed equalisation was achieved while devoting 50 per cent of transfers to resolving vertical imbalance. A methodology is also developed to determine the weights of the vertical and equalising components of transfers through devolution. - Reproduced.
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Articles
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Indian Institute of Public Administration | Volume no: 43, Issue no: 23 | Available | AR78933 |
Two central problems in a fiscal transfer system relate to resolving vertical and horizontal imbalances. This paper looks at the methodological background of fiscal transfers followed by recent Finance Commissions, particularly the Twelfth Finance Commission. It is noted that in India, there is long-term stability in the share of states after transfers in the combined centre and state revenues. This stability depends on linking the share of states in the transfers, particularly tax devolution, with the difference in the buoyancies of central and state taxes. In the context of horizontal imbalance, it is argued that some of the recent finance commissions have implicitly followed an axiomatic approach to tax devolution and brought in some normative elements in determining grants. In spite of large differences in fiscal capacities, a high degree of equalisation has been achieved. It is shown that for TFC recommended transfers, nearly 88 per cent of the needed equalisation was achieved while devoting 50 per cent of transfers to resolving vertical imbalance. A methodology is also developed to determine the weights of the vertical and equalising components of transfers through devolution. - Reproduced.
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