Answer Synopsis 08/01/2021

Question : The devolution of funds to the states have seen a downfall. In this very outset discuss the reasons for the decreased allocation in funds along with its aftereffects? (10 marks, 150 words)

Synopsis

State government funds has been a constant support to the various development programmes which was directly helpful to the people but this have seen a downfall due to various reasons.

Reasons for the decreased allocation of funds to states

  • The ability of the States to expand revenue has been constrained since the Goods and Services Tax (GST) regime was adopted.
  • The Centre’s resource mobilisation space vis-a-vis that of the States is now far greater.
  • While both face a very challenging fiscal environment, the Centre, instead of finding mutually beneficial solutions, has repeatedly opted to undermine the current and future fiscal capacities of the States.
  • It has systematically cut the share of States in taxes raised by the Union government (devolutions), it has reduced the pool of funds to be shared with the States by shifting from taxes to cesses and surcharges, and it is needlessly thrusting measly options to overcome the GST shortfall.
  • Shrinking the divisible pool: In the form of cesses and surcharges:
    1. Various cesses and surcharges levied by the Union government are retained fully by it. They do not go into the divisible pool. This allows the Centre to raise revenues, yet not share them with the States.
    2. Hence, the Union government imposes or increases cesses and surcharges instead of taxes wherever possible and, in some cases, even replaces taxes with cesses and surcharges.
    3. When taxes are replaced with cesses and surcharges, as has been done repeatedly by this government in the case of petrol and diesel, the consumer pays the same price.
    4. But the Union government keeps more of that revenue and reduces the size of the divisible pool. As a result, the States lose out on their share. Between 2014-15 and 2019-20, cesses and surcharges soared from 9.3% to 15% of the gross tax revenue of the Union government.
  • This systematic rise ensures that the revenue that is fully retained by the Union government increases at the cost of the revenue that is shared with the States.
  • In 2019-20 alone, the Union government expected ₹3,69,111 crore from cesses and surcharges. This will not be shared with the States. This government has exploited this route to reduce the size of the divisible pool

After effects of decreased downfall in allocation of funds

  • Reduced development Scheme: State governments drive a majority of the country’s development programmes.
  • Increased dependency on Centre: Greater numbers of people depend on these programmes for their livelihood, development, welfare and security.
  • Region Specific issues need state governments: Varied economic growth and income levels across States confirm the primacy of State governments in the economic sphere as well.
  • States need resources to deliver these responsibilities and aspirations. Unfortunately, the financial capacity of the States is structurally being weakened.

Conclusion

States are at the forefront of development and generation of opportunities and growth. Strong States lead to a stronger India. The systematic weakening of States serves neither federalism nor national interest.

Leave a Reply

Subscribe to our Current Affair Materials

%d bloggers like this: