Disparities in Intra-State Fund Transfers

Syllabus: GS2/Governance, Fiscal Federalism

Context

• Given the rising levels of inequality and disparity among the States, it is important the 16th Finance Commission gives intra-State disparities as much importance as inter-State disparities.

Understanding Regional Disparities in Finance Commission Devolutions

• The Finance Commission in India plays a crucial role in distributing financial resources between the central government and the states. Its recommendations impact state finances, development, and governance. 
• One critical aspect it grapples with is the balance between equity and efficiency.

Intra-State Disparities

• While inter-state disparities have received significant attention, disparities within states — often referred to as intra-state disparities—are equally important. These disparities can manifest in various ways, such as differences in income, infrastructure, and access to public services.
• It extends to institutional capacities, healthcare facilities, education, and more. As a result, a development-disparity paradigm emerges, leaving certain regions lagging behind.
• Uneven Landscape: Within a state, there’s often a stark asymmetry between the capital city and its peripheral districts. For example, Bangalore for Karnataka and Mumbai in Maharashtra etc.
  • The capital tends to hog the lion’s share of government expenditure, while the other districts remain comparatively neglected.
• These intra-state disparities can have far-reaching consequences for development, social harmony, and overall well-being.
• Addressing them becomes politically crucial, especially given the rise of neoliberalism and the institutionalisation of fiscal discipline.

Consequences

• Neglected districts breed resentment. When people feel left behind, their grievances find expression — sometimes in the form of violence. 
• Districts lying along India’s red corridor, spanning states like Bihar, Jharkhand, Chhattisgarh, and Odisha are affected by Left-wing extremism (LWE).
• These districts constitute the bottom rung of our developmental pyramid. Their sense of neglect, whether real or perceived, has fueled Maoist insurgency.

Neglected Districts

• An earlier study by the 12th Finance Commission highlighted shocking disparities in government expenditure across five Hindi-belt states and West Bengal. 
• For instance, the per capita health expenditure in Arwal district was a mere ₹14, while in Patna district, it stood at ₹927. Similar disparities existed across other states as well. 
• Unfortunately, without effective equalisation measures, these disparities persist.

Finance Commission – It is a Constitutionally mandated body that is at the centre of Fiscal Federalism. It is constituted by the President of India under Article 280 of the Constitution. – The Constitution requires a Finance Commission (FC) to be set up every five years, and the 1st Finance Commission was constituted vide Presidential Order under the chairmanship of Shri K.C. Neogy on 6th April 1952. – The 15th Finance Commission’s mandate was extended by a year till 2025-26, breaking the cycle.  15th Finance Commission – It was constituted in 2017 under the chairmanship of N K Singh against the backdrop of the abolition of the Planning Commission (as also of the distinction between Plan and non-Plan expenditure) and the introduction of the Goods and Services Tax (GST), which has fundamentally redefined federal fiscal relations. – The Terms of Reference (ToR) of the current Commission have some distinctive features, including recommending monitorable performance criteria for important national flagship programmes and examining the possibility of setting up permanent non-lapsable funding for India’s defence needs. 16th Finance Commission – It was constituted by the Government of India, with the approval of the President of India, in pursuance to Article 280(1) of the Constitution, under the Chairmanship of Dr. Arvind Panagariya. – It focuses on devolution of the consolidated fund to states and local bodies. – Its recommendations will cover a period of five years starting from April 1, 2026. – Grants-in-Aid Principles: Define principles governing grants-in-aid of State revenues from the Consolidated Fund of India. – Specify sums to be granted to States under Article 275, excluding purposes specified in provisos to clause (1) of that article. – Augmentation of State Consolidated Fund: Recommend measures to enhance the Consolidated Fund of a State. 1. It aims to supplement resources for Panchayats and Municipalities within the State, based on recommendations from the respective State Finance Commissions.

Role of Finance Commission

• It plays a crucial role in resource allocation. Traditionally, the FC has followed principles of equity, equalisation, and efficiency. 
• When determining the inter-se share of individual states, equalisation—aiming to address inter-state disparities — has been a dominant factor. 
• The income distance criterion, which considers how far a state’s per capita income lags behind the highest-per-capita income state, guides these transfers. But this approach doesn’t account for intra-state disparities.

Equity vs. Efficiency

• The tension between equity (fairness) and efficiency (resource optimisation) lies at the heart of Finance Commission deliberations. 
• Successive Finance Commissions need to trade-off both equity and efficiency in a system that prioritises resource management efficiency over social justice.

Norm-Based Equalisation

• Over the years, the concept of ‘equalisation’ has gained prominence. The objective is to equalise basic services across states at an average level. 
• The 12th Finance Commission, for instance, aimed to achieve both equity and efficiency within a framework of fiscal consolidation. 
• However, critics argue that norm-based approaches sometimes fail to address regional disparities effectively.

Rural and Urban Local Bodies

• In the three-tier system of governance in India, the weakest link has always been the last tier of the Rural and Urban Local Bodies. 
• There are about 250,000 and 5,000 Rural and Urban Local Bodies respectively in India, which are institutions of political participation and governance at the grassroots level.
• The 73rd and 74th Constitutional Amendments legitimise their authority and mandated the constitution of the State Finance Commission (SFC) by every State to recommend devolution of State resources to the local bodies, just as the Union Finance Commision recommends devolution of Central resources to the States.
  • However, these local bodies are beset with many structural weaknesses due to lack of capacity, skill and resources.
• Most States have now constituted their SFCs, but in the absence of relevant data on income and other backwardness parameters, there is no equalisation criteria in the transfers recommended by them.

Way Forward: A Call for Intra-State Equity

• Given the rising levels of inequality and disparity, it’s high time that intra-state disparities receive as much attention as their inter-state counterparts.
  • The 16th Finance Commission should consider mechanisms to address these gaps within states. 
• It needs to consider allocating resources not just based on income distance but also with an eye toward levelling the playing field within states.
• Understanding and addressing both inter-state and intra-state disparities are essential for effective finance commission devolutions. 
• Balancing equity and efficiency remains a delicate task—one that requires thoughtful policy design and a keen awareness of regional nuances.

Daily Mains Practice Question [Q] How does the increasing disparity in intra-state fund transfers in India impact regional development and social equity? Analyse the role of the Finance Commision of India to address this issue?

Source: BL