{"id":130297,"date":"2024-09-06T19:30:19","date_gmt":"2024-09-06T14:00:19","guid":{"rendered":"https:\/\/pwonlyias.com\/stage\/?post_type=current-affairs&#038;p=130297"},"modified":"2025-02-13T15:59:16","modified_gmt":"2025-02-13T10:29:16","slug":"vertical-fiscal-imbalance","status":"publish","type":"current-affairs","link":"https:\/\/pwonlyias.com\/stage\/current-affairs\/vertical-fiscal-imbalance","title":{"rendered":"Vertical Fiscal Imbalance"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The role of the <a href=\"https:\/\/pwonlyias.com\/stage\/current-affairs\/16th-finance-commission-of-india\/\" target=\"_blank\" rel=\"noopener\">16th Finance Commission<\/a> should be to eliminate vertical fiscal imbalance in federal relations.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <\/span><b>16th Finance Commission of India<\/b><span style=\"font-weight: 400;\"> was constituted on December 31, 2023, with <\/span><b>Dr. Arvind Panagariya as its Chairman.<\/b><\/li>\n<\/ul>\n<h2><span style=\"font-size: 18pt;\"><b>About Vertical Fiscal Imbalance<\/b><\/span><\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-130278 alignright\" src=\"https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2024\/09\/63-66db0380d297c.webp\" alt=\"Vertical Fiscal Imbalance\" width=\"449\" height=\"350\" srcset=\"https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2024\/09\/63-66db0380d297c.webp 801w, https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2024\/09\/63-66db0380d297c-300x234.webp 300w, https:\/\/pwonlyias.com\/stage\/wp-content\/uploads\/2024\/09\/63-66db0380d297c-768x599.webp 768w\" sizes=\"(max-width: 449px) 100vw, 449px\" \/><\/p>\n<ul>\n<li><b>About:<\/b><span style=\"font-weight: 400;\"> Vertical fiscal imbalance refers to a situation in a <\/span><b>federal system<\/b><span style=\"font-weight: 400;\"> where t<\/span><b>here is a mismatch <\/b><span style=\"font-weight: 400;\">between the<\/span><b> revenue-raising powers<\/b><span style=\"font-weight: 400;\"> and <\/span><b>expenditure responsibilities<\/b><span style=\"font-weight: 400;\"> of <\/span><b>different levels of government.\u00a0<\/b><\/li>\n<li><b>Expenditure Data: As the 15th Finance Commission, <\/b><span style=\"font-weight: 400;\">states incur<\/span><b> 61% of the revenue expenditure but collect only 38% of the revenue receipts.<\/b>\n<ul>\n<li><b>Dependency: <\/b><span style=\"font-weight: 400;\">Ability of the States to incur expenditures <\/span><b>is dependent on transfers from the Union government.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Calculating VFI in India: VFI = ORR\/ORE<\/b>\n<ul>\n<li aria-level=\"2\"><b>ORR <\/b><span style=\"font-weight: 400;\">is the sum of the<\/span><b> Own Revenue Receipts and the tax devolution from the Union government for all States.\u00a0<\/b><\/li>\n<li><b>ORE is<\/b><span style=\"font-weight: 400;\"> the <\/span><b>Own Revenue Expenditure\u00a0 for all States.<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>If this ratio is less than 1<\/b><span style=\"font-weight: 400;\">: It implies that the sum of own revenue receipts and tax devolution of the States is inadequate to<\/span><b> meet the ORE of the States<\/b><\/li>\n<\/ul>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/www.pw.live\/batches\/upsc?utm_source=seo+upsc+batch&#038;utm_medium=seo+upsc&#038;utm_campaign=seo&#038;utm_id=upsc\" target=\"_blank\" rel=\"nofollow noopener\">Enroll now for UPSC Online Course<\/a><\/span><\/p>\n<h2><span style=\"font-size: 18pt;\"><b>Agenda For The 16th Finance Commission<\/b><\/span><\/h2>\n<table style=\"width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 20.1807%; text-align: center; border-style: solid; border-color: #000000;\">\n<h3><span style=\"font-size: 16pt;\"><b>Focus Areas<\/b><\/span><\/h3>\n<\/td>\n<td style=\"width: 79.9934%; text-align: center; border-style: solid; border-color: #000000;\">\n<h3><span style=\"font-size: 16pt;\"><b>Description<\/b><\/span><\/h3>\n<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 20.1807%; border-style: solid; border-color: #000000;\"><b>Finance Devolution For Cities<\/b><\/td>\n<td style=\"width: 79.9934%; border-style: solid; border-color: #000000;\">\n<ul>\n<li><b>Contribution of Indian Cities: <\/b><span style=\"font-weight: 400;\">Cities contribute around <\/span><b>66% of India\u2019s GDP and about 90% of total government revenues<\/b><span style=\"font-weight: 400;\"> and thus, are an important spatial zone for the overall development of India.\u00a0<\/span><\/li>\n<li><b>Concerns:<\/b><\/li>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Inadequate Infrastructure: <\/b><span style=\"font-weight: 400;\">India\u2019s economic scale is insufficient to meet rising needs.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">The <\/span><b>World Bank estimates that $840 billion is needed for basic urban infrastructur<\/b><span style=\"font-weight: 400;\">e in the next decade.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Inadequate Devolution:<\/b><span style=\"font-weight: 400;\"> Despite the efforts of five commissions since the<\/span><b> 11th Finance Commission,<\/b><span style=\"font-weight: 400;\"> financial devolution to cities <\/span><b>remains inadequate.\u00a0<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Impact on Development:<\/b> <b>Rapid urbanisation <\/b><span style=\"font-weight: 400;\">without appropriate fiscal action <\/span><b>has adverse effects on developme<\/b><span style=\"font-weight: 400;\">nt.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><span style=\"font-weight: 400;\">The fiscal health of <\/span><b>municipalities is poor,<\/b><span style=\"font-weight: 400;\"> affecting <\/span><b>both city productivity and quality of life.\u00a0<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 20.1807%; border-style: solid; border-color: #000000;\"><b>About the Taxation System<\/b><\/td>\n<td style=\"width: 79.9934%; border-style: solid; border-color: #000000;\">\n<ul>\n<li><b>Impact of Goods and Service Tax (GST):<\/b><span style=\"font-weight: 400;\"> It has reduced<\/span><b> ULBs\u2019 tax revenue (excluding property tax) from about 23% in 2012-1<\/b><span style=\"font-weight: 400;\">3 to <\/span><b>around 9% in 2017-18.\u00a0<\/b><\/li>\n<li><b>Intergovernmental transfers (IGTs) to Urban Local Bodies (ULBs):<\/b><span style=\"font-weight: 400;\"> In India, they are abou<\/span><b>t 0.5% of GDP<\/b><span style=\"font-weight: 400;\">, much lower than the<\/span><b> 2-5% typical of other developing nations.\u00a0<\/b>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li><b>Example: South Africa <\/b><span style=\"font-weight: 400;\">allocates<\/span><b> 2.6%<\/b><span style=\"font-weight: 400;\">, <\/span><b>Mexico 1.6%<\/b><span style=\"font-weight: 400;\">, the <\/span><b>Philippines 2.5%<\/b><span style=\"font-weight: 400;\">, and Brazil 5.1% of their GDPs to their cities.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">I<\/span><b>GTs from States to ULBs<\/b><span style=\"font-weight: 400;\"> are very low, with State Finance Commissions recommending only about <\/span><b>7% of States\u2019 own revenue in 2018-19.\u00a0<\/b><\/li>\n<\/ul>\n<\/li>\n<li><b>Concerns:\u00a0<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Persistency of Issues: <\/b><span style=\"font-weight: 400;\">Although IGTs make up about <\/span><b>40% of ULBs\u2019 total revenu<\/b><span style=\"font-weight: 400;\">e, issues persist regarding their predictability, <\/span><b>earmarking for vulnerable groups,<\/b><span style=\"font-weight: 400;\"> and <\/span><b>horizontal equity.\u00a0<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Parallel Agencies:<\/b><span style=\"font-weight: 400;\"> The <\/span><b>13th Finance Commission<\/b><span style=\"font-weight: 400;\"> observed that <\/span><b>\u201cparallel agencies and bodies are emasculating local governments both financially and operationally.\u201d\u00a0<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"3\"><b>Example:<\/b><span style=\"font-weight: 400;\"> Programs like the <\/span><b>Member of Parliament Local Area Development Scheme and the Member of Legislative Assembly Local Area Development Schem<\/b><span style=\"font-weight: 400;\">e exacerbate this issue, distorting the federal structure.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Need For: <\/b><span style=\"font-weight: 400;\">IGTs are crucial for ULBs, given their<\/span><b> financial state and the need for stable suppor<\/b><span style=\"font-weight: 400;\">t until their own revenues improve.\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Increasing the quantum of IGTs as a percentage of GDP is necessary.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 20.1807%; border-style: solid; border-color: #000000;\"><b>Census and Data<\/b><\/td>\n<td style=\"width: 79.9934%; border-style: solid; border-color: #000000;\">\n<ul>\n<li aria-level=\"1\"><b>Concern:\u00a0<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Reliance on Older Data: <\/b><span style=\"font-weight: 400;\">In the absence of the 2021 Census, reliance on <\/span><b>2011 data is inadequate<\/b><span style=\"font-weight: 400;\"> for <\/span><b>evidence-based fiscal devolution<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Need For: <\/b><span style=\"font-weight: 400;\">India\u2019s town figures must be captured by <\/span><b>the 16th FC,<\/b><span style=\"font-weight: 400;\"> including the significant migration to<\/span><b> Tier-2 and 3 cities.<\/b>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">India has <\/span><b>approximately 4,000 statutory towns<\/b><span style=\"font-weight: 400;\"> and an equal number of Census towns, with an e<\/span><b>stimated 23,000 villages, all of which are effectively<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>\u00a0<\/p>\n<p style=\"text-align: center;\"><span class=\"vc_button\"><a href=\"https:\/\/store.pw.live\/govt-entrance-exams\/upsc-books?utm_source=SEO&#038;utm_medium=PW+Live&#038;utm_campaign=UPSC+CSE+Books\" target=\"_blank\" rel=\"nofollow noopener\"><span style=\"font-weight: 400;\">Check Out UPSC CSE Books From PW Store<\/span><\/a><\/span><\/p>\n<table style=\"width: 99.8311%;\">\n<tbody>\n<tr>\n<td style=\"width: 137.762%; 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