Editorial 1 : On financial devolution among States
Context
Recently various Opposition-ruled States especially from south India have claimed that they have not been receiving their fair share as per the present scheme of financial devolution.
Divisible pool of taxes
- Article 270 of the Constitution provides for the scheme of distribution of net tax proceeds collected by the Union government between the Centre and the States.
- The taxes that are shared between the Centre and the States include corporation tax, personal income tax, Central GST, the Centre’s share of the Integrated Goods and Services Tax (IGST) etc.
- This division is based on the recommendation of the Finance Commission (FC) that is constituted every five years as per the terms of Article 280.
- Apart from the share of taxes, States are also provided grants-in-aid as per the recommendation of the FC.
- The divisible pool, however, does not include cess and surcharge that are levied by the Centre.
Finance commission
- The FC is constituted every five years and is a body that is exclusively constituted by the Union Government.
- It consists of a chairman and four other members who are appointed by the President.
- The Finance Commission (Miscellaneous Provisions) Act, 1951, has specified the qualifications for chairman and other members of the commission.
- The Union government has notified the constitution of the 16th Finance Commission under the chairmanship of Dr. Arvind Panagariya for making its recommendations for the period of 2026-31.
Basis of allocation
- The share of States from the divisible pool (vertical devolution) stands at 41% as per the recommendation of the 15th FC.
- The distribution among the States (horizontal devolution) is based on various criteria.
- The Table below lists the criteria for horizontal devolution among the States from the 11th to 15th FC.
 |
The issues
- The Constitutional scheme has always favoured a strong centre in legislative, administrative and financial relations.
- However, federalism is a basic feature and it is important that States don’t feel short-changed when it comes to distribution of resources.
- While there are always political differences between the Union government and Opposition-ruled States that exacerbate the problem, there are genuine issues that need to be considered.
- Firstly, cess and surcharge collected by the Union government is estimated at around 23% of its gross tax receipts for 2024-25, which does not form part of the divisible pool and hence not shared with the States.
- Cess like the GST compensation cess is for the repayment of loans taken to compensate States for the shortfall in tax collection due to GST implementation for the period 2017-22.
- Secondly, the amount each State gets back for every rupee they contribute to Central taxes shows steep variation.
- Third, the percentage share in the divisible pool of taxes has been reducing for southern States over the last six FCs.
- This is attributable to the higher weightage being given for equity (income gap) and needs (population, area and forest) than efficiency (demographic performance and tax effort).
- Finally, grants-in-aid as per the recommendation of the FC varies among various States. As per the 15th FC, there are revenue deficit, sector-specific and State-specific grants given to various States as well as grants to local bodies that are given based on population and area of States.
Solutions
- There are three important reforms that may be considered for maintaining the balance between equity and federalism while sharing revenue.
- Firstly, the divisible pool can be enlarged by including some portion of cess and surcharge in it. The Centre should also gradually discontinue various cesses and surcharges it imposes by suitably rationalising the tax slabs.
- Secondly, the weightage for efficiency criteria in horizontal devolution should be increased. GST being a consumption-based destination tax that is equally divided between the Union and the State means that State GST accrual should be the same as the Central GST accrual from a State.
- Hence, relative GST contribution from States can be included as a criterion by providing suitable weightage in future FCs.
- Finally, similar to the GST council, a more formal arrangement for the participation of States in the constitution and the working of the FC should be considered.
Conclusion
It is also imperative that the States uphold principles of fiscal federalism by devolving adequate resources to local bodies for vibrant and accountable development.
Editorial 2 : Beyond shelter, dweller needs within the four walls
Context
With the growing significance of the building sector and its contribution to greenhouse gas emissions, it is important to address the environmental impact of construction.
About
- In the interim Budget 2024, Finance Minister Nirmala Sitharaman announced the construction of two crore additional houses over the next five years under the Pradhan Mantri Awas Yojana Gramin (PMAY-G) and the introduction of a new housing scheme for the middle class.
- This is a commendable step towards realising the goals of the ambitious ‘Housing for All’ initiative and builds on the success of the PMAY scheme, which has facilitated the construction of nearly three crore rural and 80 lakh urban affordable houses since 2015.
- The announcement also prompts us to critically think about the potential trade-offs with quality of life and environmental concerns as a result of the rapid expansion of the housing sector.
- This is evident in the case of affordable housing, where the emphasis is on mass production, prioritising speed, cost, and ease of construction over factors such as thermal comfort and the implementation of low-carbon infrastructure.
Modern technologies in affordable housing
- Within the framework of the PMAY mission, Light House Projects (LHPs) are underway as part of the Global Housing Technology Challenge (GHTC), spanning six sites across six States.
- These LHPs leverage modern technology and innovative processes so as to reduce construction time and build more resilient and affordable houses for the underprivileged.
- Additionally, there are ongoing efforts to utilise alternative construction technologies such as Mivan.
- This technology utilises advanced aluminium formwork, which is recyclable and reusable, to cast and construct various building elements.
- This approach surpasses traditional construction methods in terms of speed and quality and has a relatively lower environmental impact due to reduced wastage in the construction phase.
- Though construction technologies such as Mivan offer higher efficiency and reduce the overall duration and cost of the project, they present a conundrum.
- The extensive use of cement and steel without proper insulation results in increased heat gain from the building envelope, causing thermal distress.
- Consequently, occupants resort to increased use of cooling appliances such as air conditioners.
- This reliance on cooling appliances triggers a surge in electricity consumption, thereby contributing to elevated greenhouse gas (GHG) emissions.
- Further, the predominant use of lower efficiency appliances owing to lower purchase costs leads to higher electricity consumption and resultant greenhouse gas emissions.
- This underscores a critical paradox, wherein a technology deemed to offer a low-carbon alternative inadvertently contributes to elevated emissions during the operational stage.
Prioritising thermal comfort
- The escalating heat stress worldwide is anticipated to affect various population segments, leading to a substantial increase in the demand for cooling.
- Therefore, to make vulnerable communities resilient to heat stress, it is imperative that building houses go beyond provisioning basic amenities by integrating passive design strategies for thermal comfort.
- Such steps would help align the ‘Housing for All’ vision with broader environmental and climate goals.
- The pathway to achieving a harmonious balance among multiple goals lies in the obligatory implementation of guidelines embedded within building codes, as demonstrated by initiatives such as Eco Niwas Samhita.
- The Smart Ghar III project in Rajkot, an affordable housing initiative under the PMAY Untenable Slum Redevelopment project, serves as a prime example of achieving indoor thermal comfort through passive design implementation.
Challenges
- However, the challenge lies in their implementation because of the multi-stakeholder nature of the building value chain.
- This involves architects, engineers, contractors, material suppliers, and end-users, each with their own priorities, constraints and levels of awareness regarding sustainable practices.
- One major hurdle in promoting the adoption of passive designs is the lack of tangible benefits perceived by the end-users owing to a lack of awareness.
- While passive designs offer long-term benefits such as reduced energy bills and improved comfort, these advantages are not always immediately apparent to homeowners.
Conclusion
Considering the growing significance of the building sector and its contribution to GHG emissions, the need to address the environmental impact of construction activities is imperative. With an increasing number of building stocks on the horizon, it is important to analyse the trade-offs between embodied and operational emissions.