Former RBI Governor Rangarajan critiques 16th Finance Commission report

Why in news

Former RBI Governor C. Rangarajan and N.R. Bhanumurthy criticized the 16th Finance Commission's report for failing to address the rising share of non-shareable cesses and surcharges in the fiscal pool.

Background

The 16th Finance Commission maintained a 41% share for states in the divisible pool. Critics highlighted that the report lacked recommendations on the steep increase in cesses and surcharges, which are excluded from the divisible pool.

Facts for Prelims

• FactThe 16th Finance Commission maintained a 41% share for states in the divisible pool.
• FactCesses and surcharges are excluded from the divisible pool shared by the Finance Commission.

For Mains

Q. Discuss how the increasing reliance on cesses and surcharges impacts the fiscal federalism of India and the horizontal equity of tax devolution.

Dimensions to cover in your answer

• Fiscal imbalance: Shrinking divisible pool limits states' autonomy in funding developmental expenditures.
• Horizontal inequity: Non-shareable levies may disproportionately affect states with lower tax-base capacities.
• Revenue erosion: High reliance on cesses may undermine the principle of cooperative federalism.

Keywords: Fiscal Federalism · Divisible Pool · Vertical Imbalance · Tax Devolution · Cess and Surcharge

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