GDP AND GVA

1. Context

2. Key Points

• The National Statistical Office, which has estimated GDP growth for 2023-24 at 7.3%, will release its estimates for Q3 at the end of this month.
• ICRA also expects the Gross Value Added (GVA) to ease to 6%, from 7.4% in Q2, with the expansion in agriculture GVA pegged at 0.5% and industrial GVA growth seen easing to 8.8%, from 13.2% in the preceding quarter.
• The deterioration in Q3 industrial growth is partly attributable to an adverse base effect and a deceleration in volumeexpansion, the rating firm said. Additionally, a mild 0.2% contraction in total spending by the Centre and 25 States last quarter, after an 18.3% rise in Q2 is expected to have impacted GVA growth in the period

3. GDP and GVA

• GDP and GVA are two main ways to ascertain the country's economic performance. Both are measures of national income.
• The GDP measures the monetary measure of all "final" goods and services that are bought by the final user produced in a country in a given period.
• The GDP does this by adding up the total expenditures in the economy; in other words, it looks at who spent how much. That is why GDP captures the total "demand" in the economy.

1. All the money Indians spent on their private consumption (that is, Private Final Consumption Expenditure or PFCE).
2. All the money the government spent on its current consumption, such as salaries (Government, Final Consumption Expenditure or GFCE).
3. All the money is spent towards investments to boost the economy's productive capacity. This includes business firms investing in factories or the governments building roads and bridges (Gross Fixed Capital Expenditure).
4. The net effect of exports (What foreigners spent on our goods) and imports (what Indians spent on foreign goods) (Net Exports or NE).

• The GVA calculates the same national income from the supply side. 
• It does so by adding up all the value added across different sectors. 

• By looking at GVA growth one can understand which sector of the economy is robust and which is struggling.

4.  How are the two related?

• When looking at quarterly it is best to look at GVA data because this is the observed data.
• The GDP is derived by looking at the GVA data.

• As such, if the taxes earned by the government are more than the subsidies it provides, the GDP will be higher than GVA.
• Typically, that is how it is. For the second quarter too, the GDP (at 38, 16, 578 crores) is much higher than the GVA (Which is at Rs 35, 05, 5999 crores).
• The GDP data is more useful when looking at annual economic growth and when one wants to compare a country's economic growth with its past or with another country.

5. GVA data

5.1 Manufacturing sector

• It is a contraction in the manufacturing sector.  In Q2, manufacturing GVA declined by 4.3 per cent. 
• This is significant because manufacturing carries a huge potential for job creation and can soak up excess labour from the agriculture sector.
• The contraction has meant that manufacturing GVA has grown by just 6.3 per cent over the three years since the Covid pandemic; look at the change between FY23 and FY20 in the Chart.
• However, it would be a mistake to believe that only Covid and its after-effects are responsible for the lacklustre manufacturing performance.
• The fact is, as borne by the data, manufacturing GVA grew by just 10.6 per cent between FY 17 and FY20.
• For perspective, it is important to remember that between FY14 and FY17, manufacturing GVA grew by 31.3 per cent. 
• In other words, Indian manufacturing has been struggling to add value for the past six years.
• This would explain why data from the Centre for Monitoring Indian Economy (CMIE) shows that jobs in the manufacturing sector halved between 2016 and 2020.

5.2 Trade and hotels

• Almost 15 per cent growth in services such as trade and hotels etc. 
• This is also a huge sector for job creation. But again, if one looks at the Q2FY23 level and compares it to the pre-Covid level (Q2 of FY20), the growth is barely over 2 per cent.
• That this sector grew by over 26 per cent in the three years between FY17 and FY20 when India was experiencing a serious economic declaration shows how badly it has been affected by the Covid disruption.

5.3 Mining and quarrying

• Another sector crucial for job creation, even though it is smaller in terms of overall contribution to India's GVA, is mining and quarrying it, too, has contracted by almost 3 per cent.
• Looking back over the past six years, it has contracted by 3.5 per cent between FY17 and FY20 and grown by just 2.5 per cent since then.

5.4  Agriculture 

• One positive story emerging from the GVA pertains to agriculture (along with forestry and fishing), which has done better than expected by growing at 4.6 per cent.
• Typically, this is a good growth rate for this sector and has happened despite some worries that the sowing of crops did not happen in time.
• Overall, while the GVA has grown by 5.6 per cent year-on-year, the growth is just 7.6 per cent when compared to the pre-Covid level set in FY20.

6. GDP data 

6.1 Private Consumption Expenditure

• GDP is the biggest engine of growth in private consumption expenditure.
• It typically contributes over 55 per cent of India's total GDP.
• This component is also crucial because if this is depressed, it robs the business of any incentive to make fresh investments; and expenditures towards investments are the second biggest contributors to the GDP, accounting for around 33per cent of the total.
• Data shows that private consumption has grown by a healthy 9.7 per cent over the past year.
• However, the growth is relatively modest just 11 per cent when compared over the last three years.
• That between FY 14 and FY17, this component grew by almost 28 per cent providing some perspective.

6.2 Investment expenditure

• The investment expenditures have grown by 10.4 per cent over FY21 and by almost 21 per cent between FY20 and FY23.
• This is the best growth over any three years going back to FY14.
• This suggests brighter prospects for the economy over the medium term.

6.3  Government final consumption expenditures

• The biggest surprise though from the GDP is the contraction in government final consumption expenditures.
• While these types of expenditures account for just about 10-11 per cent of the GDP, they can prop up an economy during tough times when people and businesses hold back spending.
• Oddly enough, data shows that not only did government consumption expenditure contract by 4.4. per cent in Q2 (Over the Q2 of 2021), but that it is almost 20 per cent below the pre-covid level.

6.4 Net Exports data

• The last component of the GDP equation is the Net Exports data.
• Typically, since India imports far more than it exports, the NX value is negative. 
• In Q2, this negative value swelled by 89 per cent. 
• Over the past three years, this drag on GDP has also increased in size by almost 150 per cent.

For Prelims and Mains

ARTICLE 142

1. Context

The Supreme Court of India invoked the extraordinary power conferred on the court under Article 142 of the Constitution in this case-What is that “Extraordinary Power” granted to Supreme Court under Article 142 of the Indian Constitution?

2. About Article 142 

• Article 142 provides a unique power to the Supreme Court, to do "complete justice" between the parties, where at times, the law or statute may not provide a remedy.
• In those situations, the Court can extend itself to put an end to a dispute in a manner that would fit the facts of the case.

3. Courts exercising this power

• While the powers under Article 142 are sweeping in nature, SC has defined its scope and extent through its judgments over time.
• In the Prem Chand Garg Case, the majority opinion demarcated the contours for the exercise of the Court's powers under Article 142 (1) by saying that an order to do complete justice between the parties "must not only be consistent with the fundamental rights guaranteed by the Constitution, but it cannot even be inconsistent with the substantive provisions of the relevant statutory laws," referring to laws made by Parliament.
• Therefore, we do not think it would be possible to hold that Article 142 (1) confers upon this Court powers which can contravene the provisions of Article 32 (right to constitutional remedies), it said.
• The Seven-judge bench in "Antulay" upheld the 1962 ruling in "Prem Chand Garg".
• Notably, in the Bhopal Gas Tragedy case (Union Carbide Corporation vs Union of India) the SC in 1991 ordered UCC to pay $470 million in compensation for the victims of the tragedy.
• In doing so, the Bench highlighted the wide scope of Article 142 (1), adding that it found it "necessary to set at rest certain misconceptions in the arguments touching the scope of the powers of this court under Article 142 (1) of the  Constitution.
• Deeming the power under Article 142 to be "at an entirely different level and of a different quality", the court clarified that "prohibitions on limitations on provisions contained in ordinary laws cannot, ipso-facto, act as prohibitions or limitations on the constitutional powers under Article 142".
• Adding that it would be "wholly incorrect" to say that powers under Article 142 are subject to express statutory prohibitions, the court reasoned that doing so would convey the idea that statutory provisions override a constitutional provision.

4. Criticism on Article 142

• The sweeping nature of these powers has invited the criticism that they are arbitrary and ambiguous.
• It is further argued that the court then has wide discretion and this allows the possibility of its arbitrary exercise or misuse due to the absence of a standard definition for the term "complete justice".
• Defining "Complete justice" is a subjective exercise that differs in its interpretation from case to case. Thus, the court has to place checks on itself.
• In 1998, the apex court in "Supreme Court Bar Association vs Union of India" held that the powers under Article 142 are supplementary and could not be used to supplant or override a substantive law and "build a new edifice where none existed earlier".
• The court said that the powers conferred by Article 142 are curative and cannot be construed as powers "Which authorise the court to ignore the substantive rights of a litigant while dealing with a cause pending before it".
• Adding that Article 142 cannot be used to build a new edifice, ignoring statutory provisions dealing with a subject the court also said that the provision cannot be used "to achieve something indirectly which cannot be achieved directly".
• More recently, in its 2006 ruling in "A. Jideranath vs Jubillee Hills Co-op House Building Society, the Supreme Court discussed the scope of the power here, holding that in its exercise no injustice should be caused to a person not party to the case.
• Another criticism of the powers under Article 142 is that unlike the legislature and the executive, the judiciary cannot be held accountable for its actions.
• The power has been criticised on grounds of the separation of powers doctrine, which says that the judiciary should not venture into areas of lawmaking and that it would invite the possibility of judicial overreach.
• However, the Drafting Committee of the Indian Constitution was mindful of the wide-reaching nature of the powers and reserved it only for exceptional situations, which the existing law would have failed to anticipate.
• Additionally, the apex court has imposed checks on its power under Article 142.
• In 2006, the SC ruling by a five-judge Bench in "State of Karnataka vs Umadevi" also clarified that "complete justice" under Article 142 means justice according to law and not sympathy while holding that it will "not grant a relief which would amount to perpetuating illegality encroaching into the legislative domain".

 

For Prelims: Article 142, Supreme Court, complete justice, Article 32, Bhopal Gas Tragedy case, Drafting Committee, Indian Constitution, separation of powers doctrine,  For Mains: 1. What is Article 142 of the Constitution? Discuss the Criticism of Article 142 and Explain how courts countered it. (250 Words)

 

 

Previous Year Questions   1. Doctrine of separation of power means (CTET  2022) A. one organ of the government should not undertake the function of the others. B. one organ of the government should not interfere with the function of another organ. Choose the correct option.  A. Only A is true. B. Only B is true. C. Both A and B are true. D. Both A and B are false.   Answer: C   2. With reference to the election of the President of India, consider the following statements: (UPSC 2018) 1. The value of the vote of each MLA varies from State to State. 2. The value of the vote of MPs of the Lok Sabha is more than the value of the vote of MPs of the Rajya Sabha. Which of the statements given above is/are correct? A.  1 only           B. 2 only            C.  Both 1 and 2         D. Neither 1 nor 2 Answer: A 3. Consider the following statements: (UPSC 2013) 1. The Chairman and the Deputy Chairman of the Rajya Sabha are not the members of that House. 2. While the nominated members of the two Houses of the Parliament have no voting right in the presidential election, they have the right to vote in the election of the Vice President. Which of the statements given above is/are correct? A.  1 only           B. 2 only            C.  Both 1 and 2         D. Neither 1 nor 2 Answer: B 4. A Parliamentary System of Government is one in which (UPSC 2020) A. all political parties in the Parliament are represented in the Government B. the Government is responsible to the Parliament and can be removed by it C. the Government is elected by the people and can be removed by them D. the Government is chosen by the Parliament but cannot be removed by it before completion of a fixed term Answer: B 5. There is a Parliamentary System of Government in India because the (2015) A. Lok Sabha is elected directly by the people B. Parliament can amend the Constitution C. Rajya Sabha cannot be dissolved D. Council of Ministers is responsible to the Lok Sabha Answer: D 6. With reference to the Constitution of India, prohibitions or limitations or provisions contained in ordinary laws cannot act as prohibitions or limitations on the constitutional powers under Article 142. It could mean which one of the following?  (UPSC  2019) A. The decisions taken by the Election Commission of India while discharging its duties cannot be challenged in any court of law. B. The Supreme Court of India is not constrained in the exercise of its powers by laws made by the Parliament. C. In the event of grave financial crisis in the country, the President of India can declare Financial Emergency without the counsel from the Cabinet. D. State Legislatures cannot make laws on certain matters without the concurrence of Union Legislature.   Answer: B   7. Which Article of the Constitution of India gives the Apex Court absolute power to pass any order or decree as they may deem fit to pursue complete justice? (SSC 2019) A. Article 121 B. Article 142 C. Article 127 D. Article 134   Answer: B   8. When did the Bhopal Gas tragedy happened? (MPPSC 2013) A. 3 Dec, 1984 B. 3 Nov, 1984 C. 3 Dec, 1985 D. 3 Nov, 1985   Answer: A   9. How is the National Green Tribunal (NGT) different from the Central Pollution Control Board (CPCB)? (UPSC 2018) 1. The NGT has been established by an Act whereas the CPCB has been created by an executive order of the Government. 2. The NGT provides environmental justice and helps reduce the burden of litigation in the higher courts whereas the CPCB promotes cleanliness of streams and wells, and aims to improve the quality of air in the country. Which of the statements given above is/are correct? A.  1 only           B. 2 only            C.  Both 1 and 2         D. Neither 1 nor 2 Answer: B

 

Source: The Indian Express

MARATHA RESERVATION

 

 

1. Context

In November 2018, when the government moved to grant 10 per cent reservation to the Marathas, it was granted on the recommendations of the Maharashtra Backward Class Commission headed by Justice (Retired) M G Gaikwad that had investigated the backwardness of the Maratha community. In 2021, a five-judge bench of the Supreme Court noted that the Gaikwad commission report had certain shortcomings and the conclusion arrived at by the commission was not borne out by the data and material before it. The Maharashtra government’s new Bill stated that it had made note of all Supreme Court observations

 

2. Who are Marathas?

• The Marathas are a group of castes comprising peasants and landowners among others constituting nearly 33 per cent of the state’s population
• While most Marathas are Marathi-speaking, not all Marathi-speaking people belong to the Maratha community
• This politically dominant community in state comprises nearly one-third of the population of the state
• Historically, they have been identified as a ‘warrior’ caste with large land holdings
• Since the formation of Maharashtra state in 1960, of its 20 chief ministers, 12 (including Eknath Shinde) have been from the Maratha community
• While division of land and agrarian problems over the years have led to a decline of prosperity among middle class and lower middle-class Marathas, the community still plays an important role in the rural economy

3. Demand for reservation

• Maratha reservation is a demand for reservation for the Maratha community in government jobs and educational institutions in Maharashtra, India.
• The Maratha community is a large and influential community in Maharashtra, and they have been at the forefront of the Indian independence movement and other social movements. However, they argue that they are still socially and economically backward, and that they need reservation to improve their condition
• In 2018, the Maharashtra government passed a law to provide 16% reservation to Marathas in government jobs and educational institutions.
• However, the law was challenged in the Supreme Court, and in 2021, the Supreme Court struck down the law on the grounds that it violated the 50% ceiling on reservation set by the court in its 1992 Indra Sawhney (Mandal) judgment
• The new Maharashtra government, which was formed in June 2023, has said that it is committed to providing reservation to Marathas. However, it is unclear how the government will achieve this goal without violating the Supreme Court's 50% ceiling on reservation
• Some people argue that Marathas do not need reservation because they are not socially and economically backward.
• They point to the fact that the Maratha community has produced many successful politicians, businessmen, and professionals. Others argue that Marathas do need reservation because they are still struggling to achieve equality with other communities.
• They point to the fact that Marathas are overrepresented in manual labor and underrepresented in white-collar jobs.

4. Courts on Maratha reservation

• The court heavily relied on the findings of the 11-member Maharashtra State Backward Class Commission (MSBCC) headed by Justice G M Gaikwad (retd). The commission surveyed nearly 45, 000 families from two villages from each of 355 talukas with more than 50 per cent Maratha population
• The HC expressed satisfaction over the data and observed that the commission had conclusively established the social, economic and educational backwardness of the Maratha community.
• It had also established inadequacy of representation of Maratha community in public employment in the state.
• In May 2021, a five-judge Constitution bench of the Supreme Court headed by Justice Ashok Bhushan struck down the provisions of Maharashtra law providing reservation to the Maratha community, which took the total quota in the state above the 50 per cent ceiling set by the court in its 1992 Indra Sawhney (Mandal) judgment.
• In November 2022, after the SC upheld the 10 per cent quota for the Economically Weaker Sections, the state government said that until the issue of Maratha reservation is resolved, economically weaker members of the community can benefit from the EWS quota

5. Way forward

Nearly five years later, Deputy Chief Minister Devendra Fadnavis, who holds the important home portfolio, is once again the target of his opponents riding the Maratha quota politics. When MVA was in power (2019 to 2022), BJP also explored reservation issues to consolidate its base among Marathas. It yielded results, with BJP emerging as the number one party in local bodies elections

 

Source: indianexpress

MILAN EXERCISE 2024

 

 

1. Context

 

Indian Navy is offering its submarine rescue capabilities to friendly countries, a key highlight of the ongoing multilateral naval exercise Milan-24 in Visakhapatnam that will further India’s defence diplomacy

2.What is MILAN Exercise?

 

MILAN is a biennial multilateral naval exercise hosted by the Indian Navy. It is the largest maritime exercise in the Indian Ocean Region, involving participation from navies of friendly foreign countries

The first edition of MILAN was held in 1995 and has since grown into a major international event. The latest edition, MILAN 2022, was held from 25 February to 4 March 2022 in Visakhapatnam, India. It was the largest edition of the exercise to date, with participation from 42 countries.

The exercise typically includes a harbour phase and a sea phase. The harbour phase involves professional exercises, seminars, social events, and sporting fixtures. The sea phase involves a series of complex maritime operations, including anti-submarine warfare, anti-air warfare, and surface warfare exercises

The exercise aims to:

• Strengthen international cooperation and mutual understanding amongst participating navies.
• Enhance interoperability and operational readiness in a multi-national environment.
• Showcase the Indian Navy's capabilities and commitment to maritime security in the region.

3.Why biennial Multilateral Naval Exercise (Milan) is important?

 

• The Indian Navy's large-scale multinational exercise, MILAN, is set to involve the participation of 51 countries, 11 heads of maritime agencies, and naval assets from 15 nations. Notably, new entrants like Canada, Spain, Germany, Italy, Iraq, and Yemen are part of the 51-country contingent.
• The exercise is taking place against the backdrop of emerging security challenges in the Gulf of Aden, marked by a series of drone and missile attacks on merchant ships in recent months.
• Given the Navy's recent anti-piracy operations in the Arabian Sea, the 12th edition of MILAN will witness operational units and delegations from the 51 participating countries. The sea exercise will involve 15 ships and one Maritime Patrol Aircraft from friendly foreign nations, including Bangladesh, Sri Lanka, Russia, the United States, Iran, Myanmar, Malaysia, and France. On the Indian Navy's side, nearly 20 ships, including the aircraft carriers Vikrant and Vikramaditya, along with approximately 50 aircraft, will actively participate in the exercise

4. MILAN and SAGAR initiative

MILAN and the SAGAR initiative (Security and Growth for All in the Region) are both significant components of India's maritime strategy, each contributing to the country's objectives in the maritime domain.

• MILAN Exercise:

  • Purpose: MILAN is a multilateral naval exercise hosted by the Indian Navy. Its primary aim is to promote cooperation and understanding among friendly navies, particularly those in the Indian Ocean region.
  • Participation: MILAN involves the participation of numerous countries, including both littoral and non-littoral states. It includes professional interactions, cultural exchanges, and naval drills to enhance maritime security and address common challenges.

• SAGAR Initiative:

  • Concept: The SAGAR initiative is a strategic vision outlined by India, emphasizing a holistic approach to maritime security and development in the Indian Ocean region.
  • Objectives: SAGAR aims to ensure a secure and stable maritime environment, promote sustainable development, facilitate trade and economic activities, and strengthen regional cooperation in the Indian Ocean.

Connecting the Dots:

• Maritime Security: Both MILAN and the SAGAR initiative contribute to the overarching goal of enhancing maritime security. MILAN achieves this through practical exercises, joint patrols, and cooperation among naval forces, while SAGAR focuses on a comprehensive strategy to address security challenges in the broader maritime domain.

• Regional Cooperation: MILAN fosters regional cooperation by bringing together a diverse group of nations for naval exercises. Similarly, the SAGAR initiative promotes collaboration among Indian Ocean littoral states for shared economic and security interests.

• Addressing Challenges: Both initiatives address emerging challenges in the maritime realm. MILAN, being a naval exercise, directly deals with operational challenges, while the SAGAR initiative takes a more strategic and diplomatic approach to address broader geopolitical and economic challenges in the region.

• Comprehensive Maritime Policy: Together, MILAN and the SAGAR initiative contribute to India's comprehensive maritime policy by combining operational readiness (as seen in MILAN) with a long-term vision for sustainable development and security (as outlined in the SAGAR initiative).

 5.Way forward

 

MILAN and the SAGAR initiative are interconnected elements of India's maritime strategy, with MILAN focusing on immediate naval cooperation and readiness, while the SAGAR initiative outlines a broader and more strategic vision for the security and growth of the entire Indian Ocean region

 

Source: Indianexpress

FINANCIAL DEVOLUTION OF STATES

 

 

 

1. 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. They have raised issues about their less than proportionate share of receipt in tax revenue when compared to their contribution towards tax collection.

 

2.What is divisible pool of taxes?

 

Article 270 of the Constitution outlines the arrangement for the allocation of net tax proceeds amassed by the Union government between the Centre and the States. Taxes subject to sharing between the two entities encompass corporation tax, personal income tax, Central GST, and the Centre's portion of the Integrated Goods and Services Tax (IGST), among others. This apportionment is determined based on the suggestions of the Finance Commission (FC), which is established every five years in accordance with the provisions of Article 280. In addition to the allocated tax share, States also receive grants-in-aid as recommended by the FC. It is important to note, however, that the divisible pool excludes cess and surcharge imposed by the Centre

 

3. How is the Finance Commission constituted?

 

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

The Finance Commission of India is constituted by the President of India every five years or at such intervals as deemed necessary. The formation of the Finance Commission is outlined in Article 280 of the Constitution of India.

 

The process involves the following key steps:

• The President issues a Presidential Order to constitute the Finance Commission.
• The Finance Commission typically consists of a Chairman and four other members, who are appointed by the President. The members are selected based on their expertise in various fields, including finance, economics, and public administration
• The qualifications and criteria for the appointment of the Chairman and members are specified in the Presidential Order. The Commission is expected to have a diverse set of skills and knowledge relevant to fiscal matters
• The President also specifies the terms of reference for the Finance Commission. These terms outline the scope and responsibilities of the Commission, including the principles governing the distribution of finances between the Union government and the states
• The Finance Commission is expected to function independently and make recommendations without external influence. This independence is crucial to ensure impartiality in the distribution of financial resources
• The primary task of the Finance Commission is to make recommendations regarding the sharing of central tax revenues between the Union and the states, as well as the principles governing grants-in-aid to states. The Commission examines various factors such as population, income levels, and special circumstances of states to make these recommendations
• Once the Finance Commission completes its deliberations, it submits a report to the President. This report is then laid before both houses of Parliament

4.What is the basis for allocation?

 

The 15th Finance Commission's recommendation allocates 41% of the divisible pool to States through vertical devolution. The horizontal devolution, determining distribution among States, relies on specific criteria outlined in Table 1, covering the 11th to 15th Finance Commissions.

Explaining the 15th Finance Commission's criteria:

• 'Income distance' measures a State's income relative to Haryana, the State with the highest per capita income. States with lower per capita income receive a higher share for equity.
• 'Population' is based on the 2011 Census, diverging from the 14th Finance Commission, which considered the 1971 Census.
• 'Forest and ecology' assesses each State's share of dense forest in the total dense forest across all States.
• 'Demographic performance' rewards States controlling population growth, with lower fertility ratios earning higher scores.
• 'Tax effort' acknowledges States with efficient tax collection, offering a criterion to reward higher tax collection efficiency

5. Challenges

 

• The constitutional framework has consistently favored a robust central authority in legislative, administrative, and financial matters. Nonetheless, while federalism is a fundamental aspect, it is imperative to ensure that States do not feel disadvantaged in resource distribution. Despite the political divergences between the Union government and opposition-led States, there are legitimate concerns that merit attention.
• Firstly, approximately 23% of the Union government's gross tax receipts for 2024-25 are attributed to cess and surcharge, which are not part of the divisible pool and, consequently, not shared with the States.
• To illustrate, the Union government's total tax revenue for the years 2022-23 (actual), 2023-24 (revised estimates), and 2024-25 (Budget estimates) is ₹30.5, ₹34.4, and ₹38.8 lakh crore, respectively.
• The State's share for the corresponding periods was/is ₹9.5, ₹11.0, and ₹12.2 lakh crore, constituting around 32% of the Center's total tax receipts, considerably less than the 41% recommended by the 15th Finance Commission.
• Cesses, such as the GST compensation cess, aim to repay loans taken to compensate States for tax collection shortfalls during the 2017-22 GST implementation period. Some of these funds also support centrally sponsored schemes benefiting the States. However, States lack control over these components.
• Secondly, the disparity in the amount each State receives for every rupee contributed to Central taxes is substantial. Chart 1 for the year 2021-22 illustrates that industrially developed States receive considerably less than a rupee for every contributed rupee, contrasting with States like Uttar Pradesh and Bihar.
• This variance is partly due to many corporations being headquartered in these State capitals, where they remit direct taxes. However, differences in GST collection among States also contribute to this variation.
• Thirdly, there has been a decreasing trend in the percentage share of southern States in the divisible pool of taxes over the last six Finance Commissions, as depicted in Chart 2. This trend is attributed to higher consideration given to equity (income gap) and needs (population, area, and forest) compared to efficiency (demographic performance and tax effort).
• Lastly, grants-in-aid recommended by the Finance Commission vary among States, encompassing revenue deficit, sector-specific, and State-specific grants, as well as grants to local bodies based on States' population and area

 

6. Way forward

 

It's important to highlight that States contribute approximately 40% of the revenue and bear around 60% of the expenditure. The Finance Commission (FC) and its recommendations aim to address this imbalance and propose a fair mechanism for revenue sharing. Ensuring a more equitable development across the country is a collective responsibility of all States. However, three key reforms can be considered to maintain a balance between equity and federalism in revenue sharing.

Firstly, there is the possibility of expanding the divisible pool by incorporating a portion of cess and surcharge. The Centre should gradually phase out various cesses and surcharges by rationalizing tax slabs. Secondly, it is suggested to increase the emphasis on efficiency criteria in horizontal devolution. Given that GST is a consumption-based destination tax, evenly split between the Union and the States, State GST accrual (including Integrated GST settlement on inter-state sales) should be equivalent to the Central GST accrual from a State. Therefore, incorporating the relative GST contribution from States as a criterion with appropriate weightage in future Finance Commissions is advisable. Finally, akin to the GST council, a more formal structure for the involvement of States in the constitution and functioning of the Finance Commission should be explored.

 

For Prelims: Finance Commission, Eligibility, Availability and Appointment of Finance Commissioner For Mains: Devolution of Taxes among States by Finance Commission

 

Previous Year Questions   1.With reference to the Finance Commission of India, which of the following statements is correct? (UPSC CSE 2011) A.It encourages the inflow of foreign capital for infrastructure development. B.It facilitates the proper distribution of finances among the Public Sector Undertaking. C.It ensures transparency in financial administration. D.None of the statements (a), (b) and (c) given above is correct in this context. Answer (D)

Source: The Hindu