Artha Vijnana: Journal of The Gokhale Institute of Politics and Economics

Motilal Mahamallik ¹, Pareswar Sahu ²

Affiliations
1 Institute of Development Studies, Jaipur 302004, Rajasthan, IN
2 Department of Economics, Sambalpur University, Burla 768019, Odisha, IN

Abstract

The assignment of significant weight to equity criterion without any weight to efficiency criterion in the distribution of federal transfers across states by the Fourteenth Finance Commission may increase both vertical and horizontal fiscal imbalances. The imbalances have persisted mainly due to the assignment of significant weight to equity or efficiency criterion as well as the level of contradiction between the two. The use with significant weightage of either one of them is not feasible with the existence of high economic disparities across states. When the equity criterion is used with significant weight, high fiscal capacity states exhibit their status as 'deficient states' to avail of the benefit. Similarly the assignment of significant weight to efficiency criterion does not enable the poorer states to get their due share. These states try to maximize their share through the reduction of social and economic expenditure which further deteriorates their fiscal health. The simultaneous use of both criteria involves contradiction between themselves because when equity criterion is based on the deficiency in fiscal capacity, the efficiency criterion is based on the improvement of the fiscal capacity of the states. When equity is assigned significant weight rich states exhibit their status as 'deficient states' and when efficiency is assigned significant weight, poorer states show themselves as 'efficient states'. In both cases the criteria fail to achieve their objectives. An optimal weight is the only solution to minimize the level of effect of contradiction which may reduce fiscal imbalances. It assigns one-third weightage to efficiency and two-thirds to equity criterion.

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Pareswar Sahu ¹, Motilal Mahamallik ²

Affiliations
1 Barpali College, Barpali 768029, Odisha, IN
2 Institute of Development Studies, Jaipur 3020204, Rajasthan, IN

Abstract

This paper re-examines the fiscal performance of Odisha using receipt and expenditure side indicators. Low dormant own tax capacity, inappropriate expenditure management and meager political competition within the state are important reasons for persistent weak fiscal performance. The incomprehensiveness and operational issues of tax, prioritization for larger size of federal transfers and moderate political competition within the state pushed towards low tax capacity. Lack of strategic prioritization and operational inefficiency of public expenditure have led to inappropriate expenditure management. The state has to (i) administer its tax efficiently; (ii) manage public expenditure economically, efficiently and effectively through increasing the elasticity of developmental expenditures of GSDP and GSDP of own tax; and (iii) strategically prioritize the expenditure through decreasing the elasticity of own tax of non-developmental expenditure. The Centre may introduce an independent, impartial and semi-judicial body to equitably distribute central transfer across the state which, in turn, help the fiscal improvement of states.

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