Aligning fund devolution with changing growth imperatives

With diverse growth imperatives, it is clear that a one-size-fits-all approach for devolving funds is inadequate. The finance commission must recognise and address the differentiated growth needs of various states

The finance commission, an autonomous constitutional body, is tasked with distributing tax proceeds and devolving funds from the central divisible pool to states. It also determines special allocations, including funds for disaster management. The overarching objectives of this devolution are to promote balanced regional development, ensure adequate resources for states to provide public services and infrastructure, and address disparities in revenue-generating capacities among states. As India continues to grow and evolve, the finance commission needs to align its devolution strategies with the changing growth imperatives of the states.

The overarching objectives of this devolution are to promote balanced regional development, ensure adequate resources for states to provide public services and infrastructure, and address disparities in revenue-generating capacities among states.

Recognising need for differentiated growth

Historically, the finance commissions have adhered to conventional methods of fund devolution based on the population and area of various states, with only minor adjustments. On an average, around 40% of total central taxes are transferred to states. However, allocations for special projects and innovative financial management have remained minimal and structural issues in state revenue generation have not been adequately addressed, except for occasional revenue deficit grants to some states like Punjab. GST and cess/fees imposed by the central government are not part of the central divisible pool, even though states’ authority to mobilise additional revenues has been significantly restricted in the post-GST regime.

With diverse growth imperatives, it is clear that a one-size-fits-all approach for devolving funds is inadequate. The finance commission must recognise and address the differentiated growth needs of various states. This means shifting the devolution formula to reflect the unique socio-economic contexts, development stages and growth potential of each state. Each state may be growth indexed.

Necessity of revised devolution formula

States’ development has varied over the years, with some growing faster due to natural, material and human resource endowments, local efficiencies, and socio-political factors. States can be categorised as developed, less developed and underdeveloped based on per capita income, Human Development Index (HDI), literacy rate, poverty rate, and infrastructure development. The growth imperatives of these states also differ significantly in the face of fast-changing technologies, data science and irreversible globalisation, liberalisation, and privatisation and of course due to geographic locations and populations.

Define state-specific objectives

India’s economic order and growth priorities have remained consistent since 1992, despite varying political ideologies and government compositions. However, the need for a clear national growth framework (NGF) has become more pronounced. The NGF should encompass comprehensive goals and strategies to promote economic development, social progress and environmental sustainability. It should include policies, programmes and initiatives aimed at achieving inclusive growth and improving the quality of life for all citizens while also participating in global efforts for a more equitable world economic order. This framework needs to be more emphatic, with differentiated policies, programmes and financial allocations to achieve quicker, better and more inclusive growth across states.

The government policies must reflect the varying growth requirements of different states. This approach aligns with the principles of globalisation and global value chains (GVCs), where developed countries invest in resource-rich developing nations for mutual benefit. Similarly, India’s growth strategy should leverage the unique strengths and needs of its states, fostering a synergistic and interdependent union.

Within the national growth framework, state-specific objectives should be defined and pursued through tailored policies and programmes differently for developed, less developed and underdeveloped states. These initiatives should recognise and promote inter-state complementarities and interdependence. National laws may be necessary to mandate the acceptance of inter-state development imperatives to ensure cohesive and effective governance and prevent political vagaries in economic development.

Implement differentiated growth strategies for states

Implementing differentiated growth strategies would involve identification of the unique strengths and challenges of each state. For instance, Kerala, with its high literacy rates and strong health indicators, could focus on developing a knowledge-based economy and tourism. In contrast, Jharkhand, rich in minerals but lagging in human development indices, might prioritise industrial development along with significant investments in education and health infrastructure.

Moreover, states like Tamil Nadu, with their advanced manufacturing sectors, could be encouraged to move up the value chain into high-tech industries, while agricultural states like Punjab, Haryana, and Uttar Pradesh could benefit from modernisation and diversification of farming practices, combined with the development of agro-based industries.

These context-specific policies should be underpinned by a robust mechanism for inter-state cooperation and learning. A framework for monitoring and evaluating the impact of these policies at the state level should be established to ensure they are achieving the desired outcomes and to make necessary adjustments.

Addressing potential challenges

The implementation of a differentiated devolution formula will be quite challenging. States may resist categorisation and the perception of unequal treatment. There may also be logistical challenges in accurately assessing and categorising states based on their development needs. To address these concerns, the finance commission should engage in extensive consultations with state governments, civil society, and experts to develop a transparent, fair, and data-driven categorization and implementation process. This collaborative approach will help build consensus and ensure the successful implementation of the revised devolution formula.

Recognising and responding to the diverse growth imperatives within a national framework that accommodates state-specific strategies and encourages inter-state cooperation, the finance commission can achieve its objectives for a more balanced, inclusive and sustainable development of the country. Adjusting the devolution formula and aligning its strategies to reflect the differentiated growth needs of states will help accelerate the growth and ensure all states contribute to and benefit from India’s growth, enhancing the overall economic landscape for the betterment of every citizen.

sureshkumarnangia@gmail.com (The writer is a retired Punjab-cadre IAS officer. Views expressed are personal.)