The Finance Commission must revisit the devolution criteria to fund states

The commission’s recommendations are advisory, often making it the reason for disagreements and financial mismanagement.

 

The Finance Commission (FC) is one such institution that is established under Article 280 of the Constitution — every fifth year or earlier — to ensure that economic justice is imparted in the country.

India, a union of states, provides a constitutional guarantee that “We the People” are the dominant sovereigns and governments are the “elected” sovereigns. The principle of Justice, social, economic and political, embellishes the Preamble which is the heart and soul of our Constitution. Constituent assembly has neatly woven this principle into various parts of the Constitution and made provisions for the establishment of institutions or bodies that periodically redefine and elaborate on how Justice must be imparted. This is done to ensure that the changing needs of the society are attended to as it evolves.

The Finance Commission (FC) is one such institution that is established under Article 280 of the Constitution — every fifth year or earlier — to ensure that economic justice is imparted in the country. The Union government after constituting it, provides it with “Terms of Reference” which includes the matters under consideration of the Commission. The Commission holds talks and deliberations with representatives of states, industry and groups to “recommend” measures to be taken to address their concerns.

The biggest challenge is that its recommendations are merely advisory, not binding on the central government. This often is the reason for disagreements and financial mismanagement. The 16th FC established under the chairmanship of Arvind Panagariya is currently holding its dialogues and deliberations. Terms of reference of the commission are to address issues relating to the sharing of funds between centre and state (including vertical and horizontal devolution), grants in aid and improving the health of consolidated Funds of State to ensure better allocation of funds to Panchayats and Municipalities.\

For this purpose, it visited Rajasthan on August 1 and 2. After being disappointed by the 15th FC, Rajasthan has high expectations this time especially when there is a so-called double-engine government. Analysing challenges faced by the state based on the principles laid by the earlier commission for devolution justifies Rajasthan’s demand for an increase in its share of the pie.

Vanishing in the verticals

The net tax proceeds collected by the union government are divided into divisible and non-divisible pools of income. All tax proceeds form part of a divisible pool from which money is shared between the Centre and the state. Proceeds from all cess, surcharges and net collection charges levied by the Union government, form the non-divisible pool which goes to the centre. The data indicates an alarming pattern in which the state’s share of central taxes has steadily declined by the Centre’s use of cesses and surcharges.

Between the fiscal years 2011- 12 and 2024-25, cesses and surcharges have grown at a compound annual growth rate of 16.7%. in 2024-25, proceeds from cess and surcharge were estimated to be around 23% of Gross tax receipts. In 2023-24 the total of state’s share remains at 32% of the divisible pool which is lower by 9% than the 41% share recommended for states by 15th FCs. Questions have been raised on this approach of the central government which sucks resources from the states but does not allow it to have its fair share.

When Equity quits

The first principle for the horizontal distribution of resources is “equity” with the highest weightage of 45%, which involves per capita income difference. The lower the inverse of per-capita income, the higher the share of the state. Rajasthan has a per capita income estimated at ₹1,67,964, much lower than the national average of ₹2.12 lakhs. Thus, for the sake of equity amongst the states, a larger devolution to Rajasthan is needed.

The second principle “needs” with 40% weightage involves population, area, forest and ecology. The current population of the state is estimated to be around 82 million. It is the sixth most populous state in India. However, with around 10% of the total area of India, Rajasthan is also the largest state. Because of this, the population density of the state which is already lower than the national average, at 200, drops further below in the border districts of Sri Ganganagar, Bikaner, Jaisalmer and Barmer. This increases the cost of delivery, often exceeding the state average by 30-40%. These districts coincidently being the largest area-wise, are underdeveloped because of being highly sensitive and arid zones and do not attract industrial or business development opportunities.

Special packages must be awarded for the development of these areas. The forest and ecology of Rajasthan is unique not only in India but in the world. It is home to the great Indian bustard, desert fox, Indian gazelle, pangolin, saras cranes, mouse deer, four-horned antelope, gangetic dolphins, gharial, and Red-headed vultures, etc many of which are threatened species. Two of the most famous Ramsar sites, Keoladeo National Park and Sambhar Lake are situated in this state. In a recent, Great Indian Bustard judgment, the Supreme Court has again emphasised the need to balance development and environment.

However, to make these judgments effective, infrastructural development is required, which is impossible with the financial crunch the state is experiencing. The Finance Commission must pay special attention to this. Lately, states are being awarded a special share based on the “performance” parameter with 15% weightage involves their own tax revenue and a lower fertility rate.

These indicators demonstrate the efficiency of state policies to improve on various fronts, which are causing financial drains. Rajasthan’s tax revenue has been constantly increasing every year over its actuals of the previous year at a rate varying between 23% (2021-22) to 13% (2024-25). The state's ratio of tax to GDP is also seeing an increase from around 5.9% in 2019-20 estimate to around 7% in 2024-25. This shows Rajasthan’s commitment to increasing its sources of income and reducing dependency on devolution from the Centre. This effort must be recognised and rewarded.

Considering the reduction in fertility rate, which is indicative of the state’s efforts to control population explosion, a change is observed yet again. Considering the data presented by NFHS 1 (1992-93) the fertility rate was 3.87 which came down to 1.99 in NFHS-5 (2019-20). These efforts are significant, considering the low literacy rates. Concerns are being raised that with this dip in fertility rate and increasing life expectancy, social security measures to meet the needs of the ageing population must be adopted. As Rajasthan is the sixth most populous state, this will be a bigger challenge for the state. Energy sector reforms have been one of the performance criteria referred to as 15th FC.

Rajasthan has taken revolutionary steps towards the production of green energy, and at 18.7 GW, is leading Indian states in solar energy production.

Rajasthan has the biggest solar power park in Bhadla, Jodhpur. However, it also needs financial assistance to meet the challenges in the solar power sector such as solar waste generation, managing debts and building appropriate environment-friendly storage and distribution infrastructure. Such encouragement will help Rajasthan become a global leader by utilising its full 142 GW solar energy potential.

In Rajasthan, agriculture is dependent on irrigation while the state itself faces an acute scarcity of water with 61% of its population dependent on farming. Though it has the largest in area, it has hardly 1% of the country's water resources. Irrigation coverage in the state is abysmally low, with less than 40% of arable land under assured irrigation as compared to the national average of 48.8%. Groundwater, the major source of irrigation, is getting depleted at a fast pace, with more than 90% of the state's blocks of groundwater assessed as critical, semi-critical, or overexploited. Rainfall in Rajasthan is quite erratic and averages only 531 mm per annum, which exacerbates the crisis in irrigation.

Time to focus

The southern states have demanded an increase in their share in the divisible pool. They argue that due to population reduction, they suffer both, loss of political representation in the Centre along with income loss. However, much support is still needed for other states to impart equal opportunities of development. Rajasthan has been previously ignored by being awarded only 6% share in comparison to other states like Uttar Pradesh 17.93%, Bihar 10.05% and Madhya Pradesh 7.85% by the 15th Commission. As a result, the state's fiscal constraints are evident in its growing debt of ₹1,60,671 crores and a fiscal deficit of 4.3%. This year, a further reduction in Grants in aid by 8% will worsen the crisis.

Earlier, Rajasthan benefitted under programs such as Desert Area Development Programs and Border Area Development Program, which are now discontinued, handicapping state finances. A few measures the 15th FC recommended to establish the Modernisation Fund for Defence and Internal Security (MFDIS) would have been beneficial for Rajasthan by providing for the development of its border areas. However, no efforts have been taken in this regard.

The FC must exercise its power by revisiting the devolution criteria. Institutions are made stronger with the stronger will of the Government to make them work. The recommendations of the finance commission must not be reduced to mere promises of justice and good conscience. The government must adopt it into policy and decision-making. Only then can we ensure uniform growth in all states of Bharat.

Divya Maderna is former Congress MLA from Rajasthan and AICC secretary, co-in-charge, J&K and Ladakh