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Topper’s Copy
GS3
Economy
10 marks
The Sixteenth Finance Commission has introduced “Contribution to GDP” as a new criterion for horizontal devolution of taxes.
Explain the rationale behind this inclusion and discuss how the Commission attempted to balance efficiency with equity.
Student’s Answer
Evaluation by SuperKalam
Demand of the Question
- Rationale behind including "Contribution to GDP" criterion
- How the Commission balanced efficiency with equity
- Explanation of the balancing mechanism used
What you wrote:
The introduction of "Contribution to GDP" as a horizontal devolution criterion by the 16th Finance commission reflects the need to balance equity with efficiency in horizontal devolution. While earlier Finance Commissions largely prioritized redistribution, the growing scale & diversity of India's economy necessitated addressing the equity-efficiency trade-off in fiscal federalism.
The introduction of "Contribution to GDP" as a horizontal devolution criterion by the 16th Finance commission reflects the need to balance equity with efficiency in horizontal devolution. While earlier Finance Commissions largely prioritized redistribution, the growing scale & diversity of India's economy necessitated addressing the equity-efficiency trade-off in fiscal federalism.
Suggestions to improve:
- Could strengthen by mentioning the specific constitutional framework (e.g., Article 280 empowers Finance Commissions to determine devolution criteria based on changing economic realities).
What you wrote:
Earlier criteria (income distance, population) corrected regional imbalance.
But over-emphasis on equity can reduce incentives for growth.
Economically stronger states:
1) Generate more output
2) Expand national tax base
3) Fund welfare indirectly through central taxes.
Linking devolution to GDP contribution
1) Rewards growth & productivity
2) Encourages investment, infrastructure, reforms.
3) Supports competitive federalism.
It recognises contribution of growth-leading states. Prevents "penalising success".
Encourages states to:
a) Improve ease of doing business
b) Enhance fiscal capacity
c) focus on long term growth.
Earlier criteria (income distance, population) corrected regional imbalance.
But over-emphasis on equity can reduce incentives for growth.
Economically stronger states:
1) Generate more output
2) Expand national tax base
3) Fund welfare indirectly through central taxes.
Linking devolution to GDP contribution
1) Rewards growth & productivity
2) Encourages investment, infrastructure, reforms.
3) Supports competitive federalism.
It recognises contribution of growth-leading states. Prevents "penalising success".
Encourages states to:
a) Improve ease of doing business
b) Enhance fiscal capacity
c) focus on long term growth.
Suggestions to improve:
- Could elaborate on revenue generation disparity (e.g., Maharashtra and Tamil Nadu contribute over 35% of total tax revenue but received lower per capita transfers under previous criteria)
- Could mention how this addresses the fiscal externality problem where productive states generate benefits for the entire federation
What you wrote:
Redistributive criteria retained:
a) Income distance
b) Population / demographic factors
Poorer & fiscally weaker states continue to receive support.
Safeguard introduced:
a) Square-root moderation of GSDP.
b) Prevents large, rich states from cornering transfers.
c) Ensures allocations are not skewed.
Redistributive criteria retained:
a) Income distance
b) Population / demographic factors
Poorer & fiscally weaker states continue to receive support.
Safeguard introduced:
a) Square-root moderation of GSDP.
b) Prevents large, rich states from cornering transfers.
c) Ensures allocations are not skewed.
Suggestions to improve:
- Could explain the mathematical logic (e.g., square-root reduces the advantage of larger economies - if State A has 4 times the GDP of State B, it gets only 2 times the weightage)
- Could mention the specific weightage given to GDP contribution in the overall formula to show the balanced approach
What you wrote:
The criterion represents a balanced approach. It resolves equity-efficiency trade-off. It strengthens cooperative + competitive federalism.
The criterion represents a balanced approach. It resolves equity-efficiency trade-off. It strengthens cooperative + competitive federalism.
Suggestions to improve:
- Could conclude with forward-looking perspective (e.g., this criterion may encourage states to focus on sustainable growth models while ensuring constitutional commitment to reducing interstate disparities remains intact).
Your answer demonstrates solid understanding of the equity-efficiency trade-off and identifies key balancing mechanisms well. However, it could benefit from more specific details about the technical aspects and quantitative elements of the new criterion.
Demand of the Question
- Rationale behind including "Contribution to GDP" criterion
- How the Commission balanced efficiency with equity
- Explanation of the balancing mechanism used
What you wrote:
The introduction of "Contribution to GDP" as a horizontal devolution criterion by the 16th Finance commission reflects the need to balance equity with efficiency in horizontal devolution. While earlier Finance Commissions largely prioritized redistribution, the growing scale & diversity of India's economy necessitated addressing the equity-efficiency trade-off in fiscal federalism.
The introduction of "Contribution to GDP" as a horizontal devolution criterion by the 16th Finance commission reflects the need to balance equity with efficiency in horizontal devolution. While earlier Finance Commissions largely prioritized redistribution, the growing scale & diversity of India's economy necessitated addressing the equity-efficiency trade-off in fiscal federalism.
Suggestions to improve:
- Could strengthen by mentioning the specific constitutional framework (e.g., Article 280 empowers Finance Commissions to determine devolution criteria based on changing economic realities).
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