Proposal for Timely and Judicious Changes in Distribution of Funds among States and Union Territories

 Kindly review the draft letter to the Finance Commission requesting changes to the current allocation of finances to the States. Please suggest any improvements, if necessary

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To

The Hon’ble Chairperson,

Finance Commission of India,

New Delhi.

Subject: Proposal for Timely and Judicious Changes in Distribution of Funds among States and Union Territories

Respected Sir/Madam,

On behalf of People for Better Society (PEBS), I am writing to present a set of recommendations for consideration in the formulation of a revised and effective distribution framework under the 16th Finance Commission (FC). These suggestions stem from extensive discussions among our members on the evolving needs of our federal structure.

We commend the efforts of the Commission in engaging with various stakeholders, including State Governments, experts, and the general public, to ensure an equitable and transparent process. With due respect to the work already done, we humbly present the following points for your kind consideration:

1.     Modernized Distribution Criteria: The traditional methods of allocation need to evolve. Greater emphasis should be placed on factors such as afforestation, control of carbon emissions, adoption of good environmental practices, financial discipline, improved tax collection, and responsible expenditure management.

2.     Addressing Contemporary Challenges: The allocation formula must effectively incorporate shifts in population patterns, migration trends, and the impact of climate change.

3.     Promoting Fiscal Federalism: Excessive centralization of power and finances undermines the federal ethos. We propose that 50% of the revenue collected through taxes, cesses, and surcharges by the Centre be allocated directly to States.

4.     Flexible Grant Conditions: While providing grants, overly stringent conditions should be relaxed to enable developed States to utilize funds effectively without compromising on accountability.

5.     Equalization Fund Model: Rather than reducing allocations to developed States, the Finance Commission could adopt a model similar to Canada’s equalization grant to support underprivileged States without penalizing successful ones.

6.     Sector-Specific Grants: Grants for critical areas such as education, health, basic services, and infrastructure should be tailored to the specific needs of each State, based on comprehensive studies to identify gaps.

7.     Improving GST Distribution: A more equitable and timely distribution of GST revenue is crucial. States should either be allowed to levy additional taxes or receive a GST Permanency Fund to mitigate financial shocks. For example, Kerala faces unique challenges such as an aging population and significant outmigration, which affect revenue generation, while migrants from other States send earnings back home instead of contributing to the local economy.

8.     Empowering Local Self-Governments: A decentralized tax system is essential to ensure adequate financial support for Local Self-Government institutions.

9.     Reforming Central Schemes: Centralized schemes should either be minimized or implemented with flexibility, particularly in developed States.

10.  Encouraging Healthy Competition: Instead of allocating more funds to States that lag in basic indicators such as health and education, the FC should incentivize exemplary States by recognizing their achievements through performance-based grants.

11.  Transparency and Accountability: Fund utilization must be transparent and accessible through public digital platforms, fostering accountability in expenditure.

12.  Rewarding Fiscal Prudence: States demonstrating excellence in budgeting and expenditure discipline should be rewarded. Financial Responsibility and Budget Management (FRBM) principles should also apply to the Centre to promote financial decency and limit liabilities.

13.  Enhancing Efficiency and Fairness: Introducing a transparent framework for horizontal revenue sharing and restructuring the Finance Commission to function as a State-representative body, similar to the GST Council, would help address concerns of bias and foster greater trust.

The overarching objective of the Finance Commission should be to promote long-term sustainability, economic resilience, and responsible debt management while ensuring fair and efficient allocation of resources.

We sincerely hope you will consider these views while determining the distribution pattern for funds. Thank you for your attention and for providing an opportunity to contribute to this crucial national discourse.

Yours faithfully,

Sd/-

V.R. Ajith Kumar

(President, People for Better Society - PEBS)

EF-4/307, Vrindavan Gardens,

Pattom, Thiruvananthapuram-695004.

M-  9567011942