Today's Editorial

Today's Editorial - 13 January 2024

Fiscal Maze: India, a vast tapestry of diversity, is grappling with a fiscal conundrum that demands careful navigation.

Introduction: India, a nation marked by rich diversity, grapples with a challenging fiscal situation that requires careful handling. As the recently appointed 16th Finance Commission, led by Arvind Panagariya, takes charge, it is confronted with a daunting task, amplified by an unnoticed fiscal crisis and the delicate nature of federalism. 

  • While the Commission's recommendations, serving as a guide for financial relations between the Centre and states, appear well-constructed on paper, the actual scenario presents a different picture. The Center's assertive stance, especially in limiting states' fiscal autonomy, emphasizes a growing trust gap between New Delhi and the states.

Status of fiscal wellbeing and future aspects:

  • Impact on States: There is the issue of trust deficit in action as states facing severe financial crises, like Kerala, express concern over reduced borrowing limits. The disparity between the Finance Commission's recommendations and practical fiscal maneuvers is evident. Despite proposals for a fiscal consolidation plan, economic decisions seem increasingly influenced by politics.
  • Imbalance and Political Influence: The Center's hesitancy to align fiscal transfers with economic or social criteria raises doubts about the Finance Commission's intended purpose. 
    • Examining tax devolution figures reveals a stark reality. During the pandemic year, states witnessed the lowest levels of tax devolution, forcing them to borrow extensively for healthcare and pandemic-related expenses.
  • Unequal Growth Patterns: Fiscal positions vary widely among states, with Bihar and Uttar Pradesh receiving substantial tax devolution shares based on their needs, while states like Haryana, Punjab, and Kerala see minimal growth despite contributing significantly to central government tax revenue. 
    • This data highlights an imbalanced growth pattern, raising concerns about the effectiveness of fiscal policies in promoting equitable development.
  • Debt Landscapes: Exploring debt landscapes, Mizoram grapples with the highest debt-to-GDP ratio, followed by Punjab and Nagaland. 
    • The 16th Finance Commission faces the challenge of formulating a fiscal consolidation strategy for high-debt states, necessitating a delicate balance between reducing indebtedness and addressing spending priorities.
  • Center's Dilemma: Lack of Foresight in Fiscal Approach is an area of concern. The broader narrative portrays a Center seemingly entangled in a fiscal dilemma. 
    • The existing approach to tax-based disbursements to states reflects a lack of foresight in supporting their welfare and growth requirements.
  • Toward a Sustainable Economic Future: Aligning Words with Actions will provide fruitful results. The erosion of the Center's fiscal capacity, regardless of the political parties in power, suggests a deeper issue of inefficiency in revenue collection. 
    • Balancing devolution and consolidation, the 16th Finance Commission confronts a formidable task in shaping a fiscal trajectory that aligns with the diverse needs of the nation. 
    • As India navigates its fiscal challenges, the true challenge lies in aligning words with actions, steering away from the specter of a silent fiscal crisis toward a sustainable economic future.

Conclusion:

As India navigates its fiscal maze, the real test lies in harmonizing rhetoric with action, steering away from the spectre of a silent fiscal crisis towards a sustainable economic future.

To combat climate challenges, the Finance Commission needs to step up

16th Finance commission’s future steps to combating climate change issue:

  • The Commission needs to metamorphose from a conventional fiscal arbitrator to an orchestrator of India's climate readiness. The country requires a fiscal blueprint that harmonises economic growth with environmental imperatives.
  • First, by making climate vulnerability and emission intensity of states a key parameter of the tax devolution formula, the Commission can nudge action towards achieving India’s NDCs under the Paris Pact. Much will depend on how the panel can evolve a formula to ensure incentive-based performance.
  • Second, the FC could look at the possibility of performance-based grants for different sectors: Sector-specific grants for key actions are critical towards achieving the objectives of India’s NDCs and SDG goals. Emissions reduction requires the decarbonisation of the energy and transport sectors, sustainable land and forest management, as well as nudging people to make lifestyle changes. Given the severity of the pollution challenge, clean energy should be amongst the FC’s priorities.
  • Innovations to tackle the seemingly intractable problem of crop burning will require funds. So will mangrove restoration, a key necessity given the weather vagary-induced floods in recent times. At the same time, increasing dry spells have led to forest fires in several states. Such incidences are not part of the forest’s regenerative cycle but a result of changing climate patterns. The FC has to find ways to become a part of the solution to this ecological challenge.
  • There is no dearth of studies that show the exact climate vulnerability of the different regions in India. Moreover, policymakers are equipped with pollution inventories at different levels. Remote sensing data helps assess the degradation of ecosystems and understand forest fires. 
    • The experts at 16th FC can therefore turn to science to ascertain both the vulnerability of states and how they are doing to mitigate them. 
    • This can help them design a performance-based system for fund apportioning.
 
 
 

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