FC chairman acknowledges state's fiscal needs
Source: Chronicle News Service

Imphal, November 08 2024: The 16th Finance Commission chairman Arvind Panagariya assured that the fiscal challenges faced by Manipur and other north eastern states would be given special consideration in its final recommendations to the Central government.

Panagariya, also the former vice-chairman of NITI Aayog, made the announcement in a media briefing at Hotel Classic Grande, Ching-meirong, on Friday.

Along with members Ajay Narayan Jha, Annie George Mathew, Manoj Panda, Soumya Kanti Ghosh (part-time member) and Ritvik Ranjanam Pandey (secretary), commission led by Panagariya arrived here on Thursday.

The Commission is currently reviewing proposals from all states, including Manipur's request for an increase in share of central revenue to 50 per cent.

The state also proposed raising the income distance weight, which favours economically weaker states, as well as potential adjustments in disaster relief criteria to reflect Manipur's recent natural calamities.

Panagariya provided an overview of the state's eco nomic challenges, focusing on fiscal deficits, debt levels, and outstanding liabilities as a proportion of the Gross State Domestic Product (GSDP).

He explained that the Commission's primary mandate is to recommend the distribution of tax revenues between the Central and state governments, known as vertical devolution.

Currently, under the 15th Finance Commission's recommendations, 41 per cent of the divisible pool is allocated to the states, while the Central government retains 59 per cent.

The government of Manipur has proposed increasing the share of central revenue allocated to states from 41 per cent to 50 per cent, which would mark a significant increase in the states' portion of the divisible pool.

In addition, the state has advocated for maintaining the population-based weightage at 15 per cent, in line with the 15th Finance Commission's approach, but suggested excluding the demographic change weightage based on the total fertility rate (TFR).

Manipur argued that the TFR criterion did not accurately reflect its demographic situation and needs.

Beyond tax revenue distribution, the Commission also evaluated grants from the Consolidated Fund of India, which cover areas such as local bodies (both rural and urban), disaster relief, state-specific grants, and sector-specific grants for fields like health and education.

Manipur's recommendations, if accepted, could enhance its capacity for local development.

One of the key criteria used by Finance Commissions to allocate funds is income distance, which takes into account disparity-in per capita income between wealthier and poorer states, centred on the concept that poorer states should receive a larger share of the divisible pool to provide essential services like education, healthcare, and infrastructure at levels comparable to wealthier states.

In the 15th Finance Commission, income distance was assigned a weight of 45 per cent, which Manipur proposed raising to 55 per cent.

Another criterion is the size of a state's area.

Larger states are typically allocated a larger share, and the 15th Finance Commission assigned a weight of 15 per cent to this factor.

Manipur has recommended reducing this weight to 10 per cent, contending that the opportunity cost of land for forest cover is higher in smaller states like Manipur,.

as a larger proportion of their land is used for purposes other than forests.

Forest cover is another criterion used by the Finance Commission, with a weight of 10 per cent in the 15th Commission.

Manipur suggested increasing this weight to 17 per cent and also proposed that forest cover be assessed relative to the state's total land area, rather than in absolute terms, to better reflect the costs imposed on smaller states.

The tax effort criterion, which measures how much revenue a state is able to raise, was assigned a weight of 2.5 per cent by the 15th Finance Commission.

Manipur has recommended increasing it to 3 per cent, in acknowledgement of state's efforts to raise own revenue despite financial constraints.

In addition to these recommendations, Panagariya addressed concerns regarding disaster relief as the state has faced challenges due to natural disasters, including floods and hailstorms, and the state has argued that the current disaster relief index used by the 15th Finance Commission does not adequately reflect the scale of these calamities.

Manipur has called for better consideration of its specific needs in disaster relief allocations.

Following the presentation, the Commission held follow-up discussions to collect more information on various aspects of Manipur's financial situation.

Commission members, alongside state government representatives, reviewed the proposals, as several cabinet members also briefly addressed the gathering.

The meeting concluded with Panagariya noting that Manipur was the 11th state visited out of 28.With 17 more states to cover, the Commission emphasised that it could not provide definitive answers at this stage.

A clearer picture of the recommendations would emerge only after all states have been visited and their proposals reviewed.

Panagariya acknowledged the diverse interests of the states, given the variation in economic development and per capita income across India.

The disparity between the wealthiest and poorest states is stark, with the income ratio between the two being as high as 1 to 6.As a result, states have varying needs and propose different criteria for resource allocation, he noted.

The Commission assured that it would consider interests of all states, and work toward a balanced distribution of tax revenues and grants, while keeping the overall interests of the country in mind.

Panagariya also reflected on increase in the devolution of funds to Manipur by successive Finance Commissions and also assured that it would continue to consider the needs of northeastern states, including Manipur, in its deliberations.

However, the final allocation would likely become clearer in the last six months of the Commission's work, after all states have been visited.

The chairman further explained that states generally do not propose specific rupee amounts for the devolution of funds.

Instead, they provide criteria on how funds should be allocated.

Both Manipur and Nagaland presented similar criteria, with slight differences in the proportions they recommended.

In response to questions about the state's revenue generation, Panagariya emphasised that the Finance Commission encourages states to increase their revenue, especially if their revenue efforts are not in line with their per capita income.

If a state with a similar economic profile is raising more revenue, the Commission expects the state to make efforts to do the same.

While acknowledging the constraints that states face in raising revenue, Panagariya stressed that per capita income is a good indicator of a state's capacity to generate funds.

However, the Commission also expects states to improve their fiscal discipline, particularly when they have large fiscal deficit or high levels of debt relative to their GSDP.

In such cases, the Commission urges states to not only increase revenue but also to use their funds more efficiently.

Regarding the budget borrowing system, the chairman said the Commission plans to assess the borrowing situation after completing visits to all states.

The final recommendations will likely be made in the last six months of the Commission's work when it has a more comprehensive understanding of the financial health of both the states and the central government.

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