List of Contents
- What is horizontal devolution of taxes?
- What is the reasoning provided in favour of more allocation of resources to poorer states?
- Are the arguments in favour of more resources allocation to poorer states still valid?
- What are the reasons for the poor economic condition of northern states?
- What is the end result of polarisation politics?
Source– The post is based on the article “Fraternity, prosperity and polarisation” published in “The Hindu” on 16th March 2023.
Syllabus: GS3- Indian economy
Relevance– Issues related to public finances
News– Recently, Tamil Nadu Finance Minister Palanivel Thiaga Rajan questioned the higher allocation to poorer states like UP and Bihar
What is horizontal devolution of taxes?
Finance Commissions recommend both the vertical devolution and the horizontal devolution of taxes.
Horizontal devolution is the share that each state gets. It is decided by a formula. The largest weight in this formula is given to what is called the “income distance” parameter.
It is essentially the inverse of the per capita income of a state. Thus, the lower the per capita income, the more the state gets.
This parameter has had between 48 and 60% weight in all Finance Commission recommendations since 1991.
The horizontal devolution is, therefore, massively redistributive. No state has objected to it.
What is the reasoning provided in favour of more allocation of resources to poorer states?
The most taxes on income and consumption could not apportion to the places where they were collected. A film made in Mumbai could be taxed in Karnataka. A multinational declaring profits in Bombay would be earning its income from sales across India.
Are the arguments in favour of more resources allocation to poorer states still valid?
These arguments are still relevant, but the situation is changing. Today Uttar Pradesh is poorer than Nepal, and Tamil Nadu almost as rich as Indonesia in terms of per capita income.
This means that the consumption and income tax bases are much larger in some states. If inequality between regions increases, it is more difficult to convince people that the tax base should be viewed as a singular entity.
The inequalities between rich and poor states are manifest in almost every economic dimension. Incomes, assets and discretionary purchasing power are higher in the richer states.
The overwhelming majority of foreign investment comes to the richer states. They have better healthcare, higher levels of literacy and better public services than the poorer states.
What are the reasons for the poor economic condition of northern states?
There exists a political faultline in northern states. The northern states have for long seen a politics of polarisation, unlike in the southern states.
Caste and majoritarian religious mobilization are the political agenda in northern states. This has been the central discourse used to contest and win elections.
Economic welfare, prosperity are not the issues of the elections. There is no pressure to achieve these objectives.
Muslim baiting, calling fellow citizens anti-national, using coercive power to jail, punish and suppress dissenting voices is used to justify polarisation.
What is the end result of polarisation politics?
No one has a monopoly on polarisation and divisive politics. When these things are promoted, they acquire politically competitive overtones. The entire political settlement impacts due to this.
The questioning of Article 1 of the Constitution, the perception of imposition of Hindi on southern states, the insistence on a singular national discourse and monoculture will all foster conflict and further polarisation in different dimensions.
Polarisation extracts a terrible price. Economic stagnation is only the initial result. The fraternity that is at the core of India’s successful existence will be impacted.