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Issues before the thirteenth finance commission

Author

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  • M. Govinda Rao

    () (National Institute of Public Finance and Policy)

  • Sen, Tapas Kumar

    () (National Institute of Public Finance and Policy)

  • Jena, Pratap R.

    () (National Institute of Public Finance and Policy)

Abstract

The Thirteenth Finance Commission faces challenging times. Despite improvement, the fiscal situation continues to be a matter of concern when off budget liabilities and other fiscal risks are considered. In the changing situation of increasing oil prices on the one hand and surge in capital flows on the other, calibrating the transfer system in tune with counter-cyclical fiscal policy stance is a formidable challenge. The paper argues that irrespective of the wording of the Terms of Reference (ToR), the Commission would do well to focus on its primary task of recommending transfers to serve the objective of equity and incentives. While it is required to take into account a number of considerations, the focus should be on the transfer system. As an impartial body, the Commission should make a fair assessment of the union as well as state governments, ignoring the asymmetries in the wording of the ToR. As regards the transfer system itself is concerned, the paper argues that although it may be difficult to make drastic changes in the relative shares of the states, the Commission should give up the gap filling approach. Instead, after recommending the tax devolution, the Commission should recommend grants to fully equalise expenditures on elementary education and basic healthcare. It is also possible to incentivise the transfer system for even those states that have a better record of providing education and healthcare to improve quality of these services. If necessary, the tax devolution percentage can be appropriately adjusted to ensure equalisation of social services. The paper is a revised and edited version of one that was presented in the seminar on Issues before the Thirteenth Finance Commission held at the National Institute of Public Finance and Policy (NIPFP) on May 23-24, 2008.

Suggested Citation

  • M. Govinda Rao & Sen, Tapas Kumar & Jena, Pratap R., 2008. "Issues before the thirteenth finance commission," Working Papers 08/55, National Institute of Public Finance and Policy.
  • Handle: RePEc:npf:wpaper:08/55
    Note: Working paper 55, 2008
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    References listed on IDEAS

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    1. Arvind Virmani, 2009. "Macro-economic management of the Indian economy: capital flows, interest rates, and inflation," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 2(2), pages 189-214.
    2. Singh, Nirvikar & Rao, Govinda, 2006. "Political Economy of Federalism in India," OUP Catalogue, Oxford University Press, number 9780195686937.
    3. Rao, M Govinda, 1997. "Invisible Transfers in Indian Federalism," Public Finance = Finances publiques, , vol. 52(3-4), pages 429-448.
    4. R. Kavita Rao, 2008. "Goods and Services Tax for India," Macroeconomics Working Papers 22976, East Asian Bureau of Economic Research.
    5. M. Govinda Rao & R. Kavita Rao, 2005. "Trends and Issues in Tax Policy and Reform in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 2(1), pages 55-122.
    6. R M Bird, 1986. "On measuring fiscal centralization and fiscal balance in federal states," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 4(4), pages 389-404, August.
    7. Rao, R. Kavita, 2008. "Goods and services tax for India," Working Papers 08/57, National Institute of Public Finance and Policy.
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    Cited by:

    1. Rajesh Chadha, 2009. "Moving to Goods and Services Tax in India : Impact on India’s Growth and International Trade," Trade Working Papers 23071, East Asian Bureau of Economic Research.
    2. Kalirajan, Kaliappa & Otsuka, Keijiro, 2012. "Fiscal Decentralization and Development Outcomes in India: An Exploratory Analysis," World Development, Elsevier, vol. 40(8), pages 1511-1521.
    3. Abhay Pethe & B.M.Misra & Rakhe.P.B, 2008. "STRENGTHENING DECENTRALIZATION - Augmenting the Consolidated Fund of the states by th Thirteenth Finacnce Commission: A NORMATIVE APPROACH," Department of Economics, University of Mumbai, Mumbai Working Papers 31, Department of Economics, University of Mumbai, Mumbai.
    4. Pratap Ranjan Jena, 2016. "Reform Initiatives in the Budgeting System in India," Public Budgeting & Finance, Wiley Blackwell, vol. 36(1), pages 106-124, February.

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