Grow up, states: CMs should know central resource transfer won’t go up. They must fix their own finances

Synopsis: States have no option but to be fiscally aatmanirbhar.

Introduction

Recently, TN released a white paper that talked about the state fiscal condition is not good and the state is in deep debt. This document blamed the Central government and previous state government policies for the present condition.

How has Fiscal federalism changed over time?

States are at a disadvantage as they face challenges in raising revenue to match their expenditure needs. The entire scheme of centre transfer to states is premised on correcting that imbalance. Importantly, the resource transfer to states, and in the matter of autonomy of their use, has over time shifted substantially in the favor of states.

Eg In the original constitution: States only got a share of two central taxes i.e Personal Income Tax and Union excise duties. Later, this was changed through the constitution amendment in 2000 where states got a share in total taxes collected by the centre.

With the abolition of the Planning Commission, the state’s autonomy has increased. Earlier, the Centre decides how much money to transfer to the states and for what purpose. Now States get that money as part of statutory transfers with full discretion over where they want to spend it.

What is the issue between Centre and States?

Centrally Sponsored Schemes (CSS): States see CSS as an assault on their autonomy. The state wishes to have full autonomy on finances and how it is used, as they know the local needs better.

GST: It is a central initiative. It is argued that the State compromised its power under it. But it is to be noted that Centre also did the same.

Cess and Surcharge: Center is increasingly resorting to these instead of raising the taxes. This is advantageous to the centre as this amount is not shared with the States.

What should be the way forward for the states?

The reality is that States will not get much financial help from the centre in future. So they have to set their finances right if they are to achieve the goal of fiscal autonomy.

Source: This post is based on the article “Grow up, states: CMs should know central resource transfer won’t go up. They must fix their own finances” published in Times of India on 7th September 2021.

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