Overview of Horizontal Imbalance

Overview of Horizontal Imbalance

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Horizontal fiscal imbalance (HFI) refers to a situation in which different sub-national governments have different abilities to raise funds from their tax bases and to provide services. This creates differences in 'net fiscal benefits', which are a combination of levels of taxation and public services. Horizontal imbalance can arise for several reasons, including differences in the natural resource endowments of different regions, differences in the economic activity of different regions, and differences in the tax effort of different governments.

The horizontal Imbalance in India is due to several factors. India is a country of over 1.3 billion people with a wide range of economic and social conditions. There is also an uneven distribution of natural resources. Some states in India are rich in natural resources, while others are not. There are also different levels of economic development across states. Some states are more developed than others, which leads to differences in tax revenue and public spending. Thus, HFI remains a significant challenge in India.

Horizontal imbalance monitoring can be done in many ways. One way is to look at the coefficient of variation (CV) of own revenue as a percentage of total expenditure. The CV is a measure of how much variation there is in a set of data and its high value indicates a lot of variation. Another way to monitor HFI is to look at the distribution of fiscal capacity across different regions. Fiscal capacity is a measure of the ability of a government to raise revenue. A high fiscal capacity indicates that a government has a lot of revenue-raising potential. The government can also use surveys and interviews to get feedback from citizens about their experiences with public services. This feedback can be used to identify areas where HFI is a problem and to develop policies.

Due to HFI, there can be many types of horizontal imbalance effects. It can lead to disparities in the quality of public services. This can lead to some regions having better public services than others. It can also create a "race to the bottom" in terms of tax rates and public services which can lead governments to compete with each other to attract businesses and residents. There can also be difficulties in coordinating economic policies. This can make it difficult for the government to take effective action.