Retelling The Hindu Data Point Story (Friction over formula)

[venkatrajam]

Retell the story Friction over revenue sharing formula: Why some States get more money from Centre that appeared in The Hindu on 16 Mar 2023. Using the same data, tell a story (either for or against the formula, or even a new angle not presented in the article) with charts that aid your narrative.

Submit your work as a comment (one comment per student) with images pasted inside the comment. Add annotations to help with understanding your analysis & design process. Edit comment to add or modify your submission.

[vipinwings]

Chart 1 data indicates the origin of the contribution, to get a clearer scenario, it needs to prepare a labor force participation chart across the states. If a Rajasthan person working in other state, his or her participation should be included in his state not on the basis of contribution place. Here we are giving importance only place not labor force.

India build big infrastructure in the coastal states to facilitate export that can be a reason to high contribution from these states. The high contribution states have ports in which central government invested heavily, the non-coastal states have been given an advantage of this non-investment.

In the formula, the weightage of population should be less not more than 20 % to check the population growth and facilitate population control. It needs some other indicators like health and education performance to facilitate the quality of life.

[Apoorv-san]

Chart 2 states that the revenue share for the states of Kerala, TN, and Karnataka is on a steady decline during the past six finance commission. Furthermore, taking the 2011 census as the population indicator as opposed to 17.5% weightage given to 1971 census data in the 14th Finance Commission (along with 10% to the 2011 census), the 15th Finance Commission has taken a major chunk of revenue from the above-mentioned three states. Since the southern states have better-managed population control, they lose out with the use of 2011 census as the baseline.

To balance this, the Commission introduced the demographic performance as a criterion. But interestingly, UP gets more share at 12.318% as opposed to 9.998% of TN. As per chart 3, TN has lower fertility rate than UP, still UP still gets the larger share of the pie. The questions should be asked on the methodology used in the 15th Finance Commission report.

Also, the with the 10% weightage given to forests and ecology, states with relatively less forest cover lose out since they can't grow a forest overnight. The last two Finance Commissions have removed the fiscal discipline parameter, which might be connected to the TN FM’s point of lack of accountability for the revenues allotted. In the 11th, 12, and the 13th Finance Commissions 7.5%, 7.5%, and 17.5% was allocated to fiscal discipline. This side of the argument shows that southern states are losing on resources while contributing more to the centre’s revenue pile.

On the other hand, an argument can be made that the ultimate responsibility of any government is towards the citizen. If Bihar or UP governments are not performing well, why should a citizen from these states suffer. Maybe these states need more resources rather than less resources to perform better. Also, there are historical and structural reasons for the inequality between the states, so equity should be the primary criteria in dividing resources. Plus, most of the migrant workers are from states like UP and Bihar, they also contribute to the GDP of southern states.

[Note: Numbers as per 15th Finance Commission Report]

[Kabeer-Sa]

Aren't we convenient?

[bashohuman]

As per the argument of previous Finance Commission member, the rationale is horizontal equity and the the total tax accruing to a state need not necessarily be due to state's own efforts. He is indicating that southern states contribution to the total central kitty has a tax component contributed by central govt. projects and incentives provided over decades which led to the development of major service sector industries like IT and pharma as well as sea ports in coastal areas helping in the development of export and import industries. Southern states didn't squander the gains, built upon that and managed to develop relatively prosperous economies leading to higher tax revenues.

The correction can be done by finding out the percentage of tax contributed by the central govt. projects and the same can be removed from the total revenues given by states. But after this correction, states should get much higher proportion of their own taxes compared to the current percentages between 30% to 60%.

Also, the inclusion of forest and ecology in the formula is problematic since growth of forest and ecology is a natural process and there is no confirmation of definite positive results borne out financial resources poured into its development by man-made efforts. There are effects of climate change as well. Its a very complex and dynamic process. Therefore, allocating close to 10% similar to 12.5% for demographics is not a fare allocation. This either needs to be reduced or removed altogether. This also doesn't take into account the states which are dependent on agriculture as the mainstay of their economy. Linking devolution of funds for the development of forests is unfair when food security and economy is of primary concern at this stage of development . This needs revision.

Lastly, devolution of funds need to be linked to the performance on basic development indicators for northern states in order to address the criticism of 'throwing money down the drain'.

[ArunIITB22]

Arun_899 Design assignment.pdf

[UdipDas]

One possible fresh angle to consider is the impact of revenue sharing on the development and economic growth of the states. While the current revenue sharing formula takes into account various factors such as population and tax collection, it may not necessarily incentivise states to focus on economic development and growth. For instance, some states that receive a larger share of revenue may not have a strong economic base or may not be investing enough in economic development initiatives. On the other hand, some states that receive a smaller share of revenue may be more focused on developing their economy and creating jobs.
To support the argument that revenue sharing should be adjusted to incentivised by states to focus more on economic growth and development. States with a lower per capita income and a lower revenue share could be given additional support and resources to help them grow their economy, while states with a higher per capita income and a higher revenue share could be encouraged to invest in innovation and growth.

[kjais11]

I thought there were a few gaps in the story. So using them, we may construct a new one.
The article does not address the issue of corruption and mismanagement of funds that can occur once the funds are allocated to the states. While the revenue sharing formula may provide a fair distribution of funds, the article does not discuss how effective the utilization of these funds is in addressing the developmental challenges faced by the various states.
It could benefit from a more detailed analysis of how the revenue sharing formula impacts different social classes within the states. While the article mentions that certain states have large populations but relatively low fiscal capacities, it does not delve deeper into how this impacts different social classes within these states.
It does not provide any recommendations or suggestions for how the revenue sharing formula could be improved. While the article mentions the challenges and discrepancies that exist in the current formula, it does not provide any solutions for how these challenges could be addressed.
It also does not discuss the broader economic and political context in which the revenue sharing formula operates. A more in-depth analysis of the economic and political factors that shape resource allocation in India could provide a more nuanced understanding of the challenges and discrepancies that exist in the current system.