Horizontal Fiscal Imbalance in India

Horizontal Fiscal Imbalance in India

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Horizontal fiscal imbalance is a pertinent issue in a diverse country like India, where regional disparities exist in terms of economic development, resource endowments, and population dynamics. To sort out the horizontal fiscal imbalance in India, it is crucial to focus on strengthening state-level revenue-generation capacities, promoting investments in infrastructure and industrial development in lagging regions. Collaboration between the central and state governments, along with effective utilization of resources, will be instrumental in reducing horizontal imbalance and fostering inclusive growth.

Horizontal imbalance estimation involves analyzing the revenue-generating capacities and expenditure needs of different states in India. Various factors contribute to this imbalance, such as variations in economic growth rates, industrial development, agriculture productivity, and demographic patterns across states. To measure horizontal fiscal imbalance, indicators like the per capita income, revenue generation capacity, and fiscal deficits of different states are considered. Additionally, the distribution of centrally collected taxes, grants, and devolution of funds to states are crucial determinants of horizontal fiscal imbalance estimation.

Horizontal imbalance variation in India has shown up significantly over time. Certain states, like Maharashtra, Karnataka, and Tamil Nadu, have demonstrated higher revenue-generation capacities and economic growth, leading to a lower fiscal imbalance. On the other hand, states in the north-eastern region, Bihar, and some central Indian states have faced higher levels of imbalance due to lower per capita income, limited revenue sources, and development challenges. Factors contributing to this variation include geographical location, natural resource endowments, infrastructure development, and governance efficiency. State-level policies and investment patterns also influence the extent of horizontal fiscal imbalance.

The Finance Commission, a constitutional body in India, plays a crucial role in addressing horizontal fiscal imbalance. It is responsible for recommending the distribution of tax revenue between the central government and states and among the states themselves. The Commission determines the vertical and horizontal devolution of funds, including grants-in-aid and revenue-sharing mechanisms, to ensure financial stability and equitable growth across regions. The Finance Commission uses various criteria to distribute resources, considering factors such as population, income distance, fiscal capacity, and developmental needs of the states. The weightage assigned to Finance Commission horizontal imbalance distribution estimation is taken into account during the resource allocation process. The Commission's recommendations aim to promote balanced regional development, incentivize fiscal discipline, and provide financial support to states with lower revenue-generation capacities.