Horizontal Devolution of Resources to States in India suggestions Before the Fourteenth Finance Commission

Abstract

The paper discusses the general backdrop of the Constitutional and political aspects of the Indian federal structure and the terms of reference of Finance Commissions since the eleventh which go beyond the traditional issues of devolution, before proceeding to analyse the major issues involved in devolution of taxes and grants from Union to the States in India. The Finance Commissions, since Eleventh have been assigned the task of incentivising implementation of fiscal reforms at the State level. Presently, the Finance Commissions face the increasing challenge of recommending criteria for horizontal devolution meeting the demand of low income States without being substantially adverse to the middle income States. Though the States have made a common demand for an increased share in divisible pool of Central taxes, there are sharp differences about criteria for horizontal devolution among them. The focus of the paper is to suggest an alternate methodology for horizontal devolution from divisible pool of Central taxes and disbursement of grants. Tax devolution criteria suggested are population and gap of per capita own tax revenue of a State from the average of highest three States worked on a normative basis. Methodology for normatively estimating expenditure requirements of States are also attempted in this paper. It is suggested that for grant disbursement, the Finance Commissions need to become the prime agency.