The devolution of resources by the Finance Commission (FC) has always followed the principles of equity, equalisation and efficiency, and now also environment. In the horizontal devolution to determine the inter-se share of individual States, while efficiency has always taken a back-seat, equalisation dominated the transfers which attempts to address the inter-State disparities by using a criterion called income distance.
Under this, the share of a State is determined by how far its per capita income lags behind that of the highest per-capita income State, thus effectively transferring resources from the richer to the poorer States.
The 15th FC gave this criterion 45 per cent weightage. But vast disparities exist even within States, and there is no effective mechanism to address such intra-State disparities.
In most States, including the relatively advanced ones, there is huge asymmetry of infrastructure and institutional capacities between the capital and peripheral districts, with the result that the capital district absorbs bulk of the government expenditure, while the others remain grossly neglected.
A huge development-disparity paradigm develops as a result. Disparity always leads to resentment; in the absence of any equalisation effort, this often finds expression in violence when neglected people feel that there is no legitimate way to get their grievances addressed.
Among the most backwards districts in our country, the Home Ministry recognised 70 as being affected by left wing extremism (LWE) in 2022; their number was 106 in 2016.
Lying along the red corridor of India spanning Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, Odisha, Andhra Pradesh and Maharashtra, they constitute the bottom rung of our developmental pyramid, and their sense of neglect, perceived or real, was certainly a major cause of Maoist insurgency in them.
As part of an exercise undertaken by the 12th Finance Commission, an earlier study by the author on intra-State disparities in government expenditure covering five Hindi-belt States and West Bengal, revealed shocking disparities. To cite one example, the per capita expenditure in health in Arwal district was only ₹14 compared to ₹927 in Patna district.
Each State revealed similar disparities. In the absence of any effective equalisation measure since then, the disparity levels are unlikely to be much different even today. Arwal, incidentally, still remains affected by left wing insurgency.
The weakest link
In the three-tier system of governance in India, the weakest link has always been the last tier of the rural and urban local bodies (RLBs and ULBs). There are about 250,000 RLBs and 5,000 ULBs in India, which are institutions of political participation and governance at the grassroots level.
Even though the 73rd and 74th Constitutional Amendments legitimised their authority, they are beset with many structural weaknesses due to lack of capacity, skill and resources. The amendments also mandated the constitution of State Finance Commission (SFC) by every State to recommend devolution of State resources to the local bodies, just as the UFC recommends devolution of Central resources to the States.
Since States themselves face resource constraints, the UFC recommends measures to augment their resources. The 15th FC transferred ₹4.36 lakh crore to the local bodies from the Central resources, to be distributed among the States on the basis of their population and area (with 90 per cent and 10 per cent weightages, respectively), subject to certain other conditions like preparation of accounts by LBs and constitution of SFCs by the respective States.
Most States have now constituted their SFCs, but in the absence of relevant data on income and other backwardness parameters, there is no equalisation criteria in the transfers recommended by them.
Most SFCs consider only population and area as criteria for horizontal distribution, without any equalising factor like income distance, though some States have included criteria like remoteness, backwardness, or other vulnerabilities on which they could collect data, but weightages given to them are inadequate to address the existing inequalities.
This author’s analysis of a sample of SFC reports covering eight States — Assam, Manipur, Bihar, Tamil Nadu, Maharashtra, Kerala, Punjab and West Bengal — for award periods up to 2027 reveals that there is no uniformity in their devolution criteria or even in the constitution of their divisible pools, corroborating findings from an earlier 2018-study by the NIPFP.
The devolution formulas used by them also varied widely and even though population and area were common factors, the weightages given to them showed wide divergence — between 50 per cent and 90 per cent for population and 10 per cent and 25 per cent for area.
Given the rising levels of inequality and disparity among the States, it is of utmost importance that in determining their criteria for devolution of Central resources, the 16th Finance Commission gives intra-State disparities as much importance as inter-State disparities.
The writer, a former DG of CAG, is currently a Professor at Arun Jaitley National Institute of Financial Management