BENGALURU: During a recently held discussion on the challenges before the 16th Finance Commission, several economists made recommendations on resource-sharing amongst states for five years, beginning from Financial Year 2026. Speaking about the challenges of the commission, D Narayana, former director, Gulati Institute of Finance Taxation (GIFT) -- a renowned economist, researcher and statistician -- in his paper, argued that forest cover is not a good proxy to award grants to the states, calling it a “poor measure”. He added that conservation costs or the cost of running a forest department by states which consider staff strength, and revenue expenditure are poorly related to the forest area and raise concerns in the devolution formula of the commission.
Meanwhile, Narendra Pani, Economist, National Institute of Advanced Studies, said there is an immediacy issue involved in assuming that migration will compensate for the differential allocation of funds allocated to states. “Some of the factors considered by the 15th Finance Commission are already hurting the southern states, including Karnataka. Migration data is based on normalised residents. But we see a phenomenon in India, where a large group of workers who are based in villages go to urban centres to work. This is on a substantial scale and is not accounted for in the census data. This is called short-term migration. The Covid-19 pandemic threw this problem in our face.”
Pani added that this becomes a critical issue for the finance commission. The workplace and residencies are different. “Not just the remittances, there is a difference in living conditions, they spend less here, sending more back home. This is affecting Karnataka’s GST, which is losing heavily on expenditure. Each time, the state grows with migrant labour, we will have a higher Gross State Domestic Product (GSDP), but the benefits are going to other states,” he mentioned.
He concluded that the economy is getting integrated in multiple ways. The initial approach of the commission was that state economies are autonomous. But today, a new approach in strategy of devolution is needed.
VK Natraj, former director, of Madras Institute of Development Studies, also echoed the same thought and said that so far the commission has not factored in the role of migration in the devolution formula and the asymmetry in the representation of different states needs solid attention. A unique solution he proposed is a uniform basic rate by the commission and allowing states to introduce an adjustable rate according to their needs -- offering some autonomy to states in their taxes. “In a sense, the Union will be incentivising states, and is worth pursuing,” he said.