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A Study of Federal Transfers and Fiscal Capacity of States in India Thesis

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A Study of Federal Transfers and Fiscal Capacity of States in India Thesis A STUDY OF FEDERAL TRANSFERS AND FISCAL CAPACITY OF STATES IN INDIA THESIS SUBMITTED FOR THE AWARD OF THE DEGREE OF Doctor of Philosophy IN ECONOMICS BY ABBAS HAIDER NAQVI UNDER THE SUPERVISION OF PROF. ASHOK MITTAL DEPARTMENT OF ECONOMICS ALIGARH MUSLIM UNIVERSITY ALIGARH (INDIA) 2017 : 0571 2700920 Phone : 1405, 푒푥푡푒푟푛푎푙 −1406 � 푖푛푡푒푟푛푎푙 퐶ℎ푎푖푟푚푎푛 ∶ DEPARTMENT OF ECONOMICS ALIGARH MUSLIM UNIVERSITY ALIGARH-202002 (INDIA) Ref No………………. Dated : …………………… CANDIDATE’S DECLARATION I, Abbas Haider Naqvi, Department of Economics certify that the work embodied in this Ph.D. thesis is my own bonafide work carried out by me under the supervision of Dr. Ashok Mittal at Aligarh Muslim University, Aligarh. The matter embodied in this Ph.D. thesis has not been submitted for the award of any other degree. I declare that I have faithfully acknowledged, given credit to and referred to the research workers wherever their works have been cited in the text and the body of the thesis. I further certify that I have not willfully lifted up some other's work, para, text, data, result, etc. reported in the journals, books, magazines, reports, dissertations, theses, etc., or available at web-sites and included them in this Ph.D. thesis and cited as my own work. Dated ......................................... Abbas Haider Naqvi Enrolment no.: GD2426 Faculty no.: ……………………………………………………………………………………. Certificate from the Supervisor This is to certify that the above statement made by the candidate is correct to the best of my knowledge. Dr. Ashok Mittal (Professor) Department of Economics Aligarh Muslim University, Aligarh (Signature of the Chairman of the Department with seal) : 0571 2700920 Phone : 1405, 푒푥푡푒푟푛푎푙 −1406 � 푖푛푡푒푟푛푎푙 퐶ℎ푎푖푟푚푎푛 ∶ DEPARTMENT OF ECONOMICS ALIGARH MUSLIM UNIVERSITY ALIGARH-202002 (INDIA) Ref No………………. Dated : …………………… COURSE/COMPREHENSIVE EXAMINATION/PRE-SUBMISSION SEMINAR COMPLETION CERTIFICATE This is to certify that Abbas Haider Naqvi, Department of Economics has satisfactorily completed the course work/comprehensive examination and pre- submission seminar requirement, which is part of his Ph.D programme. Prof. Nighat Ahmad (Chairman) Department of Economics Aligarh Muslim University, Aligarh COPYRIGHT TRANSFER CERTIFICATE Title of the Thesis : A Study Federal Transfers and Fiscal Capacity of States in India Candidate’s Name : Abbas Haider Naqvi Copyright Transfer The undersigned hereby assigns to the Aligarh Muslim University, Aligarh copyright that may exist in and for the above thesis submitted for the award of the Ph.D. degree. ABBAS HAIDER NAQVI ACKNOWLEDGEMENTS Towards the path of success of an individual, perseverance and motivation have always played a key role. At any level, it is often quite difficult to understand the wide spectrum of knowledge without proper guidance and advice. On the very outset of this work, I would like to express my deepest gratitude to my research supervisor, Professor Ashok Mittal for allotting me such a good topic on which I could come up with best of my work. I am grateful to him for extending me an unfettered support and concentrated my efforts in the right direction from the very start. His inspiring guidance and unfailing succor has truly helped me to project and organize the entire research work in a scientific and systematic manner. I shall remain highly obliged to him for lifetime. I am thankful to Professor Nighat Ahmad, Chairman, Department of Economics, Aligarh Muslim University, who imparted her valuable support throughout the tenure of my work. I would also like to thank department library incharge Mr. Buniyad Ali Khan for furnishing me with the books and available information that has helped me compiling the work in an authentic way and Mr. Aqeel Ahmad (Section In-charge), for his cooperation and support as and when required. No words of appreciation will ever be enough for my wonderful friends and colleagues who supported me with their advice, suggestions and comments. I am grateful in particular to Dr. Imran Ali, Dr. Azeem, Dr. Shahid Rasool, Dr. Arifa Saleem, Dr. Qamar Alam, Nasir, Shahid, Arsalan, Arfaz, Wasi, Haris, Aamir, Tabish, Jafar, Sohail, Sohrab, Musab, Midhat, Javeria, Vishal, Aiman, Yateesh, Abdullah etc. The beginning has been so enjoyable with them that I keep guessing the beauty beyond the horizon. It is my pleasure to thank them all. This thesis is a tribute to my late grandparents who I am sure would have been the happiest if they had been here. iii I express my gratitude to my family members who were pillars to my strength especially for undying hopes and courage. Above all, I extend a heartful of thanks to The Almighty for making this endeavor a great success. ABBAS HAIDER NAQVI iv ABSTRACT India being a federal country, the State governments have an exclusive Constitutional right over sources of public revenues. The financial dependence of the States on the Union Government has been on the increase in recent years. Therefore, federal transfers, as instrument of fiscal adjustment assume lot of importance in almost all the federations. In India fiscal resources have been transferred to the States through the successive Finance Commissions and the various Central Ministries. Though the objective of the fiscal transfers channeled through different channels is same, different criteria have been followed by different agencies, while transferring the resources to the States. The fiscal transfers should aim at reducing the existing inter-State disparities of fiscal capacity and levels of essential administrative and social services. But these objectives have not been achieved by the union transfers in India. The States complain against the Centre many a time that they have been deprives of their genuine opportunity of exercising their financial powers. Moreover, they strongly believe that the existing Constitutional arrangement of financial powers do not match with that of the responsibilities entrusted to them. The States feel that they have become indebted largely because of the expensive an expansive functions to be performed in the interest of public welfare and the pursuit of development plans. On the other hand the Centre accuses that the States have been depending on it unduly for fiscal resources. The Central government attributes that the resources crunch of the States is due to laxity of tax effort, enormous and unabated growth of non-plan development expenditure etc. Mutual blaming and attribution and by the Centre and the States in public have become a regular feature in the Indian federation. This situation as such explains the inadequacies in the exiting Centre-State fiscal arrangements demanding a fresh look at the problem of fiscal imbalances. An attempt is made to examine some of the issues of fiscal federalism which have become irritants in fiscal relations between Centre and the States in India. The objective of this research is to study the impact and scenario of federal transfers in decentralized system, especially in the context of Finance Commission. An attempt has also been made to compute the fiscal capacity and tax efforts of 16 major Indian States, viz. Besides, the thesis also covers: 1 1. Understanding of the two vital concepts of tax effort and tax capacity and the alternative quantitative techniques that can be employed to capture them. 2. Operational aspects of fiscal federalism in India. 3. Efficacy of various channels of union transfers and analysis of operations of Planning Commission and various Finance Commissions. The present study is organized into six chapters. The first chapter is introductory in nature which gives an idea about conceptual framework and issues of federal transfers by Finance Commission, constitutional provisions, principles and criteria of fiscal transfers, issues related to Finance Commission and Planning Commission and spells out the significance and scope, objectives of the study, methodology adopted and data sources as well as limitations of the study. Fiscal federalism helps governmental organization to realize cost efficiency by economies of scale in providing public services which correspond most closely to the preference of the people. From the point of view of the economy, it creates a unified common market which promotes greater economic activity. In this context it will be useful to undertake comparative study of the issues and problems of fiscal federalism in India. The problem arises from the extent of decentralization and its relation to the level of development, heterogeneity of the population, harmonization of their preference pattern, allocation of functions and financial sources to different levels of government, arbitration of vertical and horizontal imbalances and the institutional mechanism to conduct inter-governmental relations. In the literature on federal finance, more than vertical fiscal imbalances (VFI), it is the horizontal fiscal imbalances (HFI) that has received lot of attention. Horizontal fiscal imbalances arise due to the differences in the fiscal capacities and due to varied expenditure needs. Any scheme of federal fiscal transfers pursuing the objective of equalization should recognize the underlying differences in the capacity of the States to raise funds from their tax resources for financing their expenditure and investment programs. The Indian Constitution is basically federal, but with striking unitary features. The framers of the Constitution had to depart from a purely federal concept, owing to the political circumstances of the times when 'unity and integrity'
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