Topic 1 : North and south twain must meet
Introduction: The southern states of India have raised their concerns regarding the decline in their share in the tax devolution from the centre.
Everyone wants decentralisation, but only up to his level
- In 2015, the Kerala government constituted the fifth State Finance Commission.
- The commission’s report dealt with issues such as the devolution of taxes to local bodies.
- However, the state government delayed presenting the report in the legislative assembly by two years and most of its recommendations were rejected by the state government.
- The Maharashtra government also rejected the recommendations of the fourth state finance commission.
- There is a deep chasm between the functioning of the state finance commissions (FC) as envisioned and the reality on the ground.
- Studies have shown that state finance commissions are not set up in a timely manner, and their reports as well as the action taken reports are often marked by significant delays.
- This has meant that recommendations of commissions are in effect for only a fraction of the award period.
- This, as an RBI study also points out, implies little stability in the transfer of resources to the third tier of government.
- Centralising impulses are not just limited to the Union government.
- State governments have also constricted devolution of resources and functions to the third tier of government.
The truth behind north-south divide regarding tax devolution
- The share of the southern region (Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Kerala) in the divisible tax pool has declined from 21.1 per cent during 2000-05 (the award period of the 11th Finance Commission) to 15.8 per cent during 2021-26 (under the 15th Finance Commission).
- However, over the same period, northern states like Uttar Pradesh (including Uttarakhand) and Bihar (including Jharkhand) have also seen a fall in their share, though in lesser magnitude.
- Odisha, too, has seen a decline in its share.
- Among those who have gained are high income states like Gujarat and Maharashtra, low income states like Madhya Pradesh (including Chhattisgarh), Rajasthan and the Northeastern states, with the exception of Assam.
- This is not really a North-South divide as it is made out to be.
The northern states are more dependent on tax devolution
- The poorer northern states, however, are undeniably more dependent on transfers from the Centre.
- For instance, transfers from the Centre — share in central taxes and grants in aid — account for 75 per cent of Bihar’s and 53 per cent of Uttar Pradesh’s total revenue receipts.
- The comparable figures for Tamil Nadu and Karnataka are 31 per cent and 27 per cent respectively (2022-23 BE).
Concerns regarding vertical devolution between centre and states
- The issue is not only of the horizontal distribution (between states) of tax revenues, but also of the vertical distribution (between the Centre and the states).
- That’s because even as the states’ share in the divisible tax pool (tax collected by the Centre and shared with the states) has gone up from 29.5 per cent under the 11th FC to 41 per cent under the 15th FC, the divisible tax pool itself has shrunk.
- With the Union government relying more on cesses and surcharges to raise resources — revenue from these sources is not shared with the states — the divisible tax pool has shrunk from 88.6 per cent of Centre’s gross tax revenues in 2011-12 to 78.9 per cent in 2021-22 as per the RBI.
- As a result, states’ share has averaged just about 34 per cent of gross tax revenues.
- This sequestering of revenue through cesses and surcharges is, in part, a consequence of the Centre spending in areas that fall on the State and Concurrent lists through centrally-sponsored schemes or centre sector schemes.
- These leave it with little funds to spend on items in the Union list such as defence.
- Paradoxically, this has also meant aggregate transfers from the central government to the states through various channels such as devolution, finance commission grants and other transfers/grants are higher when compared to the pre-14th Finance Commission period.
The ways to address the financial concerns of the southern states
- When deciding on the horizontal distribution of taxes (between states), the 11th FC had assigned weights to parameters such as tax effort, fiscal discipline and infrastructure (to encourage less developed states to come up).
- The 14th FC did not give any weightage to these parameters, while the 15th FC assigned a weight to tax and fiscal efforts.
- While equity considerations (greater devolution to poorer states) are still likely to dominate the commission’s thinking — though the weight attached to this parameter has declined from 62.5 per cent under the 11th Finance Commission to 45 per cent under the 15th Finance Commission — perhaps a higher weightage could be assigned to parameters such as demographic performance, tax efforts and fiscal position, taking into consideration the state’s debt-deficit trajectory.
- Doing so would perhaps help impart a greater focus on improving performance on socio-economic parameters, and incentivise more prudent fiscal policies.
- It could also assuage, to an extent at least, the concerns of the southern states.
- However, it’s not just a fiscal problem. It’s also a political problem.
Conclusion: To address financial concerns of southern states, finance commission could give weightage to performance on demographic indicators, tax efforts and fiscal position.
Topic 2 : Ways of spending
Introduction: The National Sample Survey Office conducts large-scale surveys on household consumption expenditure in the country, typically once every five years. These surveys not only inform about changes in household consumption expenditure patterns, but they also form the basis of poverty and inequality estimation.
About NSSO’s household survey
- The National Sample Survey Office (NSSO) has been conducting household surveys on consumption/consumer expenditure at regular intervals as part of its rounds, normally of one-year duration.
- The data on household consumer expenditure were collected in every round up to the 28th (1973-74) from the first round (1950-51) of the National Sample Survey (NSS).
- After the 26th round of the survey, the then Governing Council of NSSO decided to conduct the surveys on consumer expenditure and employment-unemployment together on a large scale, once in every five years.
- Accordingly, quinquennial surveys were conducted and results were published in the 27th (1972-73), 32nd (1977-78), 38th (1983), 43rd (1987-88), 50th (1993- 94), 55th (1999-00), 61st (2004-05), 66th (2009-10) and 68th (2011-12) rounds of NSS, at roughly 5-year intervals.
- The survey of 2022-23 titled “Household Consumption Expenditure Survey” is the latest one on the subject.
Results of the latest survey
- The results of the 2017-18 survey were not released by the government on grounds of issues of data quality — its leaked reports had shown a decline in consumption expenditure.
- This had meant that till now the last survey data available was for 2011-12.
- It is thus welcome news that the government has released the broad results of the consumption survey carried out in 2022-23.
- The latest survey shows that, in rural areas, household consumption expenditure has risen from Rs 1,430 in 2011-12 to Rs 3,773 in 2022-23, and in urban areas from Rs 2,630 to Rs 6,459. At 2011-12 prices, this translates to an increase of 3.1 per cent per year in rural areas, and 2.7 per cent in urban areas.
- The disaggregated data throws up several interesting trends.
- As household incomes have continued to grow, expenditure on food has continued to fall.
- In rural areas, the share of food in the spending basket has declined from 52.9 per cent in 2011-12 to 46.4 per cent in 2022-23, while in urban areas it has fallen from 42.6 per cent to 39.2 per cent.
- The dip in the case of cereals has been even more dramatic — from 10.7 per cent to 4.9 per cent in rural areas, and from 6.6 per cent to 3.6 per cent in urban areas.
Household consumption expenditure patterns
- Households are now allocating a greater share for nutritional items such as eggs, fish and meat, milk and fruits, as well as on beverages, refreshments and processed foods.
- In fact, spending on beverages and processed food is now more than that on cereals and pulses combined.
- And milk and milk products are now the second highest item in the consumption basket.
- A greater share of spending is also now being directed towards education, health and conveyance and on consumer durables and services.
- As household incomes rise and expenditure on essential items falls, discretionary spending will rise further.
Significance of the survey data
- With the release of the detailed survey data, it will now be possible to arrive at an understanding of the trends in poverty and inequality in India over the past decade or so — a period marked by considerable changes in the economy.
- This survey data will also help in updating the consumer price index, which is a valuable input for monetary policy.
- For instance, the consumer price index currently assigns a weight of 12.35 per cent to cereals in rural areas.
- But cereals now account for only 4.89 per cent of the household consumption basket.
Conclusion: The release of this survey also marks an important step towards filling the data vacuum in the country. The next government should take this forward, initiate the much-delayed census exercise and take steps to strengthen the country’s statistical system.