Financial Devolution
The Architecture of Resource Sharing
PART I — THE IMBALANCES
VERTICAL IMBALANCE
Center vs States
- **Union:** High revenue capacity (lucrative taxes like Income & Corporate).
- **States:** High expenditure responsibilities (Health, Police, Welfare) but low revenue capacity.
- Creates a structural dependency requiring mandatory downward transfers.
HORIZONTAL IMBALANCE
State vs State
- Disparities between states due to historical, geographical, and demographic reasons.
- Maharashtra (Rich) vs. Bihar (Poor).
- Finance Commission uses "Equalization Grants" to level the playing field.
PART II — AUTONOMY & THE FORMULA
FISCAL AUTONOMY
Limits to State Power
- States have independent budgets but restricted borrowing power.
- Cannot borrow from abroad.
- Need Center's permission to borrow internally if they have outstanding central loans.
- GST reduced state autonomy over indirect tax rates.
THE ALGORITHM
Devolution Criteria
- Finance Commission decides *how* to split the divisible pool.
- **Income Distance:** Poorer states get more.
- **Population (1971 vs 2011):** Rewarding demographic control vs addressing current needs.
- **Forest Cover/Ecology:** Rewarding states for maintaining carbon sinks.
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