Analysis of GSDP as a Key Criterion for Horizontal Devolution in the 16th Finance Commission
As the 16th Finance Commission (FC) begins its work, there is a growing debate on using Gross State Domestic Product (GSDP) as a primary indicator for central tax devolution. Currently, devolution relies heavily on population and income distance, which some high-performing states argue penalizes their efficiency. Proponents suggest GSDP is a reliable proxy for the actual accrual of central taxes at the state level, especially since GST is destination-based. Data shows a high correlation (0.91) between GSDP and GST collections, suggesting GSDP reflects a state's contribution to the national exchequer more accurately than current metrics.
Key Points
- High-performing states like Karnataka, Maharashtra, and Tamil Nadu contribute disproportionately to central tax revenues but receive lower shares in devolution.
- The 15th FC's devolution formula showed a weak correlation (0.24) with actual tax collection shares.
- Using GSDP could balance the principles of rewarding contribution and ensuring equity.
- Concerns remain regarding the erosion of fiscal autonomy of states following the implementation of GST.
Exam Facts
- 16th Finance Commission is currently being constituted.
- Correlation between GSDP and direct tax collections is 0.75.
- Maharashtra contributes 40.3% of combined tax collections but receives only 6.64% in total transfers.
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