In the context of small states, their heavy reliance on the Union, or central government, is a crucial aspect that demands editorial analysis. Small states often grapple with limited resources, both in terms of finances and administrative capacity. As a result, they heavily depend on the central government for financial assistance, policy direction, and overall support. This dependency raises important questions about the autonomy and decision-making powers of these smaller entities within a federal structure. The extent to which small states can assert their unique identity, address local issues, and pursue region-specific development goals while being closely tethered to the Union remains a topic of considerable debate. Striking a balance between centralized governance and decentralized empowerment is imperative to ensure the effective functioning of small states within a larger political framework. Editorial scrutiny is necessary to evaluate the implications of this reliance on the Union and to advocate for policies that foster the autonomy and sustainable development of these smaller entities.
Tag: GS Paper – 3: Mobilisation of Resources; Government Budgeting.
Problems for small states; The revenue receipts for a State; Various vulnerabilities of states; Mitigating the vulnerabilities.
Small States must prioritise raising their own revenue to reduce their vulnerabilities in the future.
Background: Problems for small states
- Data analysis is centred around larger States.
- There needs to be more discussion on the fiscal position of small States (i.e. States with a population of less than 1 crore).
Reliance on Union:
- Most of these small states have distinctive characteristics that limit revenue mobilisation.
- Recognising these disabilities, the Constitution has provided mechanisms to address them.
- But these States continue to rely heavily on the Union government for revenue.
Decoding the editorial: States’ revenues
The revenue receipts for a State
- Transfers from the Union government such as the State’s share in Union taxes including income tax, corporation tax, and grants, and
- The State’s own revenues from tax and non-tax sources.
- The State can raise its own taxes (own tax revenue or OTR) from
- commodities, etc.
- It can mobilise non-tax revenue (own non-tax revenue or ONTR) from social and economic services, profits, dividends, etc.
- The revenue receipts of each of the small States have increased.
- But these increases are primarily due to Union transfers rather than States’ own revenues.
- For Mizoram, Sikkim and Tripura, the revenue receipts have grown slower than the State GSDP implying limited fiscal space to operate.
- While the share of Union transfers in the revenue receipts of all States combined hovers between 40% and 50%, the ratio is quite large for the small States.
- Except for Goa, the Union’s share in all the other small States’ revenue receipts is more than 60% (2022-23 Budget Estimates). For five States, the share is around 90%.
- The States’ economies have grown over time, but this has not necessarily translated into higher revenue mobilisation capacities.
- It is best reflected in the continued dominance (2014-2023) of current transfers in the revenue receipts.
- The capacity of small States to raise their own taxes continues to be limited.
- Eight out of nine States fare worse than the all-State average OTR-GSDP ratio.
Various vulnerabilities of states
- The States rely on the Union governments’ political goodwill.
- A sudden decline in Union transfers can adversely affect the States’ expenditures.
- In the last few years, there have been increasing disagreements concerning resource sharing (for example, GST compensation) between the Union and the States.
- High dependence on the Union might imply less fiscal freedom for the States.
- A significant portion of the funds transferred by the Union is tied to specific purposes, limiting the States’ flexibility.
- The lack of their own revenues can lead to weakened State capacity.
- It can affect the delivery of social, economic, and general services.
- This situation becomes even more critical as many small States share international borders.
- The developmental concerns in these States can have implications for national security.
Mitigating the vulnerabilities
- The States must prioritise identifying new sources of tax revenue or explore ways to leverage existing ones more effectively.
- A study by Manipur University evaluating the State finances of Manipur identified how its liquor prohibition policies have led to substantial revenue losses without significantly reducing the negative consequences of drinking.
- Another study of Arunachal Pradesh’s finances identified the potential to generate more revenue from transactions on land and sales tax.
- There is a need to improve the tax administration in the States.
- The States can boost their collection of non-tax revenues by revising the existing charges and rates for various services and enhancing administrative revenue collection efficiency.
- The States must consider revitalising many state public sector enterprises which are not in good shape and do not contribute enough revenue, to improve their revenue performance.
Source: The Hindu
Frequently Asked Questions (FAQs)
Q: Why do small states exhibit a heavy reliance on the Union in a federal system?
Small states often lack the financial and administrative resources to independently address their development needs. Relying on the Union becomes a practical necessity for these states to access funding, guidance, and support.
Q: What challenges arise from the heavy dependence of small states on the central government?
The challenges include potential erosion of local autonomy, limited decision-making power, and the risk of policies being tailored to meet broader national interests rather than the unique needs of individual small states.
Q: How does the heavy reliance on the Union impact the development priorities of small states?
The influence of the Union can shape the development agenda of small states, potentially diverting attention from region-specific challenges. Examining this impact is crucial for understanding whether local needs are adequately addressed within the broader national framework.
Q: Are there examples of successful models where small states maintain a balance between autonomy and dependence on the Union?
Investigating models where small states have effectively balanced their reliance on the Union with the preservation of local autonomy can provide valuable insights into best practices and strategies for achieving harmonious governance structures.
Q: What role does editorial scrutiny play in addressing the concerns related to the heavy reliance of small states on the Union?
Editorial analysis serves as a crucial tool for highlighting the implications of this dependence, advocating for policies that empower small states, and fostering a broader understanding of the complex dynamics between centralization and decentralization within a federal system.
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