Report on “Central Transfers to States in India: Rewarding

Performance While Ensuring Equity” - Govinda Marapalli Rao

Submitted by - Sriram Senthilkumar

Roll - 0522035

Date of Submission - 9th November 2023

Submitted to - Prof. Sushmitha

Index

1. Introduction

1.1 Brief Overview of the Research Article

1.2 Importance of Central Transfers in Fiscal Policy and Public Finance in India

2. Objective of the Study

2.1 Main Objectives Outlined in the Article

2.2 Significance of Rewarding Performance and Ensuring Equity in Central Transfers

3. Tax Base Disparities and Public Service Standards

3.1 Observations on Variations in Tax Base and Public Service Standards

3.2 Relevant Examples Illustrating Tax Base Disparities

4. Growth Acceleration in Low-Income States

4.1 Importance of Accelerating Growth in Low-Income States

4.2 Recent Examples Supporting the Argument

5. Demographic Profile and Working-Age Population

5.1 Implications of the Staggering Demographic Profile in Low-Income States

5.2 Analysis of Demographic Aspects Affecting Fiscal Policy

6. Per Capita GSDP Variations

6.1 Disparities in Per Capita GSDP Among General Category States

6.2 Economic Analysis Considering Economic Diversity and State-Specific

Challenges

7. Role of the Commission

7.1 Responsibilities of the Commission in Recommending Devolution and

Distribution Principles

7.2 Analysis of the Commission's Role in Shaping Fiscal Policy

8. Per Capita Expenditures and Fiscal Disabilities

 8.1 Challenges Related to Per Capita Expenditures in States with Lower Incomes

8.2 Economic Analysis of the Impact on Critical Sectors

9. General-Purpose Transfers and Matching Ratios

9.1 Challenges Associated with General-Purpose Transfers and Matching Ratios

9.2 Economic Analysis of the Impact on Fiscal Outcomes

10. Analysis of Graphs

10.1 Graph 1 - Per Capita GSDP Variation (2014-15)

10.2 Graph 2 - Per Capita Expenditures Regression (2014-15)

10.3 Graph 3 - Funds Allocation and Disbursement (2014-15)

11. Recent Examples and Recommendations

11.1 Supportive Examples from India's Fiscal Landscape

11.2 Recommendations for Improving Fiscal Policy and Public Finance

12. Conclusion

11.1 Summarised Key Findings and Arguments

11.2 Concluding Recommendations for Policymakers

1. Introduction

The research article, "Central Transfers to States in India: Rewarding

Performance While Ensuring Equity," delves into the intricate dynamics of
fiscal policy and public finance in India. Recognizing the pivotal role of
central transfers, the study investigates their impact on states, aiming to strike
a balance between rewarding performance and ensuring equity.

2. Objective of the Study

The primary objectives of the study are to dissect the disparities in tax bases
among Indian states, shedding light on their implications for public service
standards. By emphasising the crucial need for growth acceleration in
low-income states, the research underscores the significance of creating
income-earning opportunities for the concentrated poor population.
Furthermore, the study seeks to understand the influence of demographic
profiles, particularly the high working-age population, on India's fiscal
landscape.

It critically analyses variations in per capita Gross State Domestic Product

(GSDP) among states, emphasising the economic diversity and challenges
faced by each region. With a focus on the Commission's role, the study
navigates through the complexities of recommending devolution and laying
down distribution principles. In essence, the study serves as a comprehensive
exploration of the multifaceted issues surrounding central transfers in India's
fiscal and economic context.

3. Tax Base Disparities and Public Service Standards

The study delves into the intricate relationship between variations in the tax
base among Indian states and the resultant disparities in public service
standards. It emphasises how the differences in economic capacities across
states contribute to varying levels of public service provision, even when
states uniformly strive to augment their revenues.

In the Indian fiscal landscape, the tax base acts as a pivotal determinant of the
financial resources available to each state. The disparities in this tax base
among states, as highlighted in the article, have substantial implications for the
standards of public services delivered. For instance, the article notes that
despite uniform efforts by states to raise revenues, the standards of public
services vary considerably. This phenomenon is particularly pronounced in
states with smaller tax bases, which face limitations in funding comprehensive
public service initiatives.

To illustrate, the study points to the overwhelming concentration of the poor in

low-income states. These states, grappling with smaller tax bases, encounter
challenges in providing adequate public services to their impoverished
populations. The disparity in tax bases thus contributes to a stark contrast in
public service standards, with economically robust states being better
positioned to allocate resources for essential services.

A pertinent example from the text is the comparison of per capita Gross State
Domestic Product (GSDP) among general category states in 2014-15.
Haryana, with the highest per capita income at Rs. 165,728, had a staggering
five times the per capita income of Bihar, the state with the lowest per capita
income at Rs. 33,954. This stark economic divergence directly influences the
tax base, further accentuating the disparities in public service standards.

In the realm of fiscal policy and public finance, understanding these variations
is crucial for policymakers. The article calls attention to the need for nuanced
approaches that consider the unique fiscal challenges faced by states.
Initiatives aimed at equalising public service standards must acknowledge the
disparities in tax bases and tailor strategies accordingly.

In conclusion, the study underscores the intricate interplay between tax base
variations and public service standards in India. The examples provided
 illuminate the tangible impact of fiscal disparities on the ability of states to
deliver essential services, emphasising the importance of addressing these
variations in the broader context of fiscal policy.

4. Growth Acceleration in Low-Income States

In the intricate landscape of India's fiscal policy and public finance, the
imperative of fostering growth in low-income states emerges as a critical
determinant for achieving economic inclusivity. This strategic imperative
aligns with the concentration of the poor in these regions, necessitating a
deliberate focus on accelerating economic development to uplift the
socio-economic conditions of the marginalised populations.

Accelerating growth in low-income states is paramount for several reasons.

Firstly, these regions typically face higher levels of poverty, unemployment,
and underdevelopment. Addressing these challenges requires targeted efforts
to stimulate economic activities, create employment opportunities, and
enhance overall productivity. For instance, states like Bihar, characterised by a
lower per capita income, can significantly benefit from initiatives that
prioritise industrialization, skill development, and infrastructure projects to
spur economic growth.

Recent examples underscore the importance of tailored growth strategies for

low-income states. The Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)
scheme, launched in 2019, provides direct income support to small and
marginal farmers. By directly transferring funds to the bank accounts of
eligible farmers, the scheme aims to enhance their purchasing power and
contribute to rural economic growth. This initiative particularly benefits
low-income states where agriculture constitutes a significant portion of the
economy.

Furthermore, targeted investment in sectors with high employment potential,

such as agriculture and allied industries, in states like Uttar Pradesh and
 Jharkhand, can catalyse growth by creating income-earning opportunities for
the predominantly rural population. In the realm of public finance, such
targeted investments not only stimulate economic activity but also contribute
to the broader goal of equitable wealth distribution.

In the context of fiscal policy, these growth acceleration efforts must be

complemented by prudent resource allocation, effective utilisation of central
transfers, and strategic planning. For instance, states like Odisha, with a
substantial rural population, can benefit from targeted interventions in
agribusiness, food processing, and rural infrastructure, fostering a more
inclusive and sustainable growth trajectory.

In conclusion, accelerating growth in low-income states is a strategic

imperative for achieving equitable development in India. The concentrated
presence of the poor in these regions demands focused policies and initiatives
to uplift their socio-economic conditions. Recent examples, such as the
PM-KISAN scheme, underscore the impact of targeted growth strategies,
emphasising the need for a nuanced and region-specific approach to ensure
sustainable and inclusive economic development.

5. Demographic Profile and Working-Age Population: Implications for Fiscal

Policy

India's low-income states grapple with a staggering demographic profile,

marked by a high proportion of the working-age population. This demographic
characteristic holds significant implications for fiscal policy considerations,
warranting a careful analysis of its economic ramifications.

The prevalence of a substantial working-age population in low-income states

establishes both challenges and opportunities for fiscal policymakers. On one
hand, it presents an immense potential for economic growth and development,
as a large workforce can contribute significantly to productivity and
innovation. However, the realisation of this potential is contingent upon
effective policy measures that harness and channel this demographic dividend.

From a fiscal policy perspective, the demographic profile influences several

key areas:

1. Employment Generation and Income Opportunities: The large

working-age population necessitates a focus on policies that foster
employment generation and income opportunities. Unleashing the full
potential of this demographic segment requires targeted initiatives,
such as skill development programs and entrepreneurship support.

2. Social Security and Welfare Programs: - With a significant

proportion of the population in the working-age bracket, there is a
heightened need for social security and welfare programs. Policies that
address healthcare, education, and unemployment benefits become
crucial to ensure the well-being of this demographic group and to
prevent social disparities.

3. Economic Growth and Revenue Mobilisation: - The demographic

dividend can serve as a catalyst for economic growth, leading to
increased revenue potential for both the states and the central
government. However, this necessitates strategic fiscal policies that
facilitate and support economic activities, especially in sectors with the
potential for job creation.

4. Infrastructure and Urbanization: - The concentration of a young

workforce often leads to urbanisation trends. Fiscal policies need to
align with the demands of urban infrastructure development, providing
adequate resources for housing, transportation, and public services to
accommodate the demographic shift.

Analysing the demographic aspect of low-income states underscores the need

for a holistic approach to fiscal policy. Policymakers must design initiatives
 that not only tap into the economic potential of the working-age population but
also address the challenges associated with unemployment, social security, and
infrastructure development. A well-rounded fiscal strategy that considers the
unique demographic composition of each state can contribute to sustainable
economic growth and improved living standards for the population at large.

This demographic lens provides an essential perspective for shaping targeted

fiscal policies that align with the developmental needs and potential of India's
diverse states, ultimately contributing to more equitable and sustainable
economic progress.

6. Per Capita GSDP Variations: Understanding Economic Disparities Among

General Category States

The disparities in per capita Gross State Domestic Product (GSDP) among
general category states in India reveal a complex economic landscape shaped
by diverse factors. According to the study submitted to NITI Aayog, the per
capita GSDP in 2014-15 ranged from a peak of Rs. 165,728 in Haryana to a
significantly lower Rs. 33,954 in Bihar. This considerable variation
underscores the economic diversity prevalent among states.

One of the primary factors contributing to these variations is the inherent

economic structure and development trajectory of each state. Haryana,
characterised by robust industrialization and a thriving service sector, has
witnessed a substantial increase in per capita income. In contrast, Bihar, facing
developmental challenges and a predominantly agrarian economy, lags behind
in economic indicators.

The economic diversity is further accentuated by state-specific challenges that

hinder uniform growth across the country. For instance, states like
Maharashtra, Gujarat, and Tamil Nadu, with well-established industrial bases,
exhibit higher per capita GSDP. In contrast, economically disadvantaged states
 such as Odisha and Jharkhand face the dual challenge of limited
industrialization and a significant rural population.

The variations in per capita GSDP are not solely determined by economic
factors but are also deeply intertwined with regional disparities. Northern
states like Punjab and Haryana, with historically better economic
infrastructure, showcase higher per capita incomes compared to states in the
eastern region, such as Odisha and West Bengal.

An economic analysis of these variations necessitates a nuanced understanding

of the challenges faced by each state. While high-income states often benefit
from advanced infrastructure, skilled labour, and a conducive business
environment, low-income states grapple with issues such as inadequate access
to education, healthcare, and limited job opportunities. These challenges
contribute to a cycle of economic disparity that hampers the overall
development of certain states.

Policy implications arise from recognizing the intricacies of per capita GSDP
variations. Tailoring fiscal policies to address the specific needs of
economically disadvantaged states becomes imperative. Initiatives promoting
industrialization, skill development, and targeted investments in infrastructure
can play a pivotal role in bridging the economic gap among states. Moreover,
acknowledging the unique challenges faced by each state allows for a more
tailored and effective approach in fostering economic growth and ensuring
equitable development across the nation.

7. Role of the Commission: Shaping Fiscal Policy in India

The study delves into the pivotal role of the Commission in shaping fiscal
policy and public finance in India. At its core, the Commission shoulders the
responsibility of recommending the devolution of central taxes to states, an
integral aspect of fiscal decentralisation. This process involves the equitable
distribution of financial resources to states, reflecting the Commission's
commitment to fostering fiscal autonomy at sub-national levels.

One of the Commission's key functions is to lay down distribution principles,

a critical aspect of ensuring fairness and equity in the allocation of resources
among states. The study emphasises that the Commission's recommendations
are designed to strike a balance between rewarding performance and ensuring
equity, addressing the inherent disparities in states' fiscal capacities. By
establishing transparent and objective criteria for resource distribution, the
Commission endeavours to promote a more balanced economic landscape.

Moreover, the Commission plays a crucial role in addressing fiscal issues that
impact states. It acts as a financial architect, devising strategies to navigate the
challenges posed by variations in tax bases among states. By providing
guidance on fiscal matters, the Commission contributes to the overall stability
and efficiency of the fiscal system, aligning its recommendations with the
broader economic goals of the nation.

In shaping fiscal policy, the Commission considers the unique economic

landscapes of individual states, recognizing the diversity in their
developmental trajectories. The study underscores the significance of this
tailored approach, emphasising that a one-size-fits-all model is impractical
given the economic diversity across the country. Through its
recommendations, the Commission aims to create a conducive environment
for states to address their fiscal challenges while concurrently fostering
economic growth.

Analysing the Commission's role requires acknowledging its impact on fiscal

federalism, a cornerstone of India's governance structure. By recommending
devolution mechanisms, the Commission contributes to strengthening the
financial autonomy of states, enabling them to craft policies that align with
their unique needs and priorities. This approach fosters a sense of ownership
among states, ensuring a more participatory and cooperative fiscal framework.
 In conclusion, the Commission emerges as a linchpin in India's fiscal policy
and public finance landscape. Its multifaceted role, from recommending
devolution to addressing fiscal disparities, positions it as a key player in
promoting both efficiency and equity in resource allocation among states. The
Commission's actions and recommendations reflect a nuanced understanding
of the economic complexities within India, making it a cornerstone in the
nation's journey toward inclusive and sustainable fiscal development.

8. Per Capita Expenditures and Fiscal Disabilities

In delving into the challenges associated with per capita expenditures in states
characterised by lower incomes, the study highlights a critical facet of fiscal
policy in India. The disparities in per capita Gross State Domestic Product
(GSDP) among states, exemplified by the substantial gap between Haryana
and Bihar in 2014-15 (Haryana at Rs.165,728 and Bihar at Rs.33,954), pose
significant hurdles for equitable public service delivery.

Challenges in Lower-Income States: One key challenge stems from the lower
per capita GSDP, particularly in states with a predominance of economic
activities influenced by government expenditures. The study underscores that
the lower levels of per capita expenditures in these states are evident in critical
sectors such as education and healthcare. The elasticities in these sectors are
notably high, and given the demographic profile of poorer states, the need for
increased public spending remains acute.

Impact on Education: The economic analysis reveals that the lower per capita
expenditures directly affect the education sector. Despite the importance of
education in addressing income disparities, poorer states face constraints in
allocating adequate funds due to their limited taxable capacity. This fiscal
disability inhibits these states from meeting the escalating requirements for
quality education, perpetuating a cycle of underdevelopment.
 Impact on Healthcare: Similar challenges extend to the healthcare sector,
where the requirement for public spending is substantially higher in states with
lower taxable capacities. The study suggests that the existing transfer system
inadequately offsets the fiscal disabilities of poorer states, resulting in lower
per capita expenditures on healthcare. This scenario significantly hampers the
states' ability to provide quality healthcare services, perpetuating health
inequalities.

Economic Analysis: From an economic perspective, the study emphasises the

importance of understanding the dynamics of fiscal disabilities in shaping per
capita expenditures. The lower taxable capacity of states with reduced
economic activities outside government expenditures restricts their ability to
invest adequately in crucial sectors. This, in turn, hinders their overall
development trajectory and perpetuates regional disparities.

Recent Examples: Recent instances, such as the challenges faced by

low-income states during the COVID-19 pandemic, underscore the urgency of
addressing fiscal disabilities. These states encountered difficulties in
mobilising resources for healthcare infrastructure and education technology,
highlighting the ongoing impact of limited fiscal capacity.

In conclusion, the analysis illuminates the intricate relationship between per

capita expenditures, fiscal disabilities, and the overall economic development
of states. Addressing these challenges is not only imperative for achieving
fiscal equity but is also fundamental to realising the broader goals of inclusive
growth and sustainable development in India.

9. General-Purpose Transfers and Matching Ratios: Challenges and

Economic Analysis

Central to the study is an exploration of the challenges linked with

general-purpose transfers and matching ratios in the context of fiscal policy
and public finance in India. These mechanisms play a pivotal role in the
distribution of funds among states, influencing fiscal outcomes at both the
central and state levels.

One prominent challenge lies in the uniform matching ratios applied across
states. While this approach aims for parity, it poses difficulties for low-income
states in fully utilising the grants allocated to them. The study notes that this
uniformity impedes the optimal utilisation of funds, particularly by states
facing fiscal constraints. For instance, Kerala, despite being educationally
advanced, faces limitations in availing grants due to its challenging matching
ratio, which adversely impacts its utilisation of funds compared to states with
a more favourable fiscal position.

The matching ratios are crucial determinants of how states contribute to and
benefit from central transfers. The report suggests that a rigid matching ratio
across diverse states hampers the effectiveness of the transfer system. The
evidence indicates that the matching requirements for the National Health
Mission (NHM) are particularly challenging for states with lower capacities.
For example, Bihar, the poorest state educationally, faces difficulties in
contributing the same matching ratio as more affluent states, resulting in
inadequate grants for essential programs.

An economic analysis of these challenges reveals that the impact is twofold.

Firstly, it hinders the ability of low-income states to efficiently absorb funds
provided by the central government. This inefficiency leads to a substantial
difference between the allocated funds and the actual disbursement, as
observed in the case of rural employment guarantee schemes in 2014-15.
Bihar, with a meagre 38% disbursement, starkly contrasts with West Bengal's
91%, a middle-income state.

Secondly, the uniform matching ratio exacerbates the disparities in per capita
spending on crucial areas such as education and healthcare. The elasticities in
these sectors are high, and the fiscal disabilities of poorer states persist due to
their lower taxable capacity. This results in lower per capita expenditures in
 critical sectors, even when the need is higher in states with staggered
demographic profiles and greater requirements for public spending.

In light of these challenges, the economic analysis underscores the need for a
more nuanced approach in designing matching ratios. Categorising states
based on their taxable capacity and tailoring matching ratios accordingly (e.g.,
50%, 40%, and 30% for high, moderate, and low capacity states) emerges as a
potential solution. Such an approach could promote more efficient fund
utilisation, ensuring that low-capacity states can contribute and benefit more
proportionately, thus fostering equitable fiscal outcomes.

10. Analysis of Charts and Graphs:

1. Graph 1 - Per Capita GSDP Variation (2014-15):

- The graph visually represents the substantial variation in per capita GSDP
among states. The analysis indicates that the richest state had more than five
times the per capita GSDP of the poorest state.

- Implication: The economic diversity among states underscores the need for
nuanced fiscal policies that consider the unique challenges faced by each state.

2. Graph 2 - Per Capita Expenditures Regression (2014-15):

- The double-log function regression analysis demonstrates the clear

relationship between per capita expenditures and per capita incomes in states.
The lower per capita expenditures in states with lower per capita incomes,
especially in critical areas like education and healthcare, are highlighted.

- Implication: The findings emphasise the need for targeted policies to

address the disparities in public spending, particularly in sectors with high
elasticities.
 3. Graph 3 - Funds Allocation and Disbursement (2014-15):
- The graph illustrates the discrepancy between funds allocated and
disbursed for the rural employment guarantee scheme in 2014-15. The
variation between states, with the poorest state experiencing a more significant
difference, indicates challenges in efficient fund utilisation.

- Implication: The discrepancy raises concerns about the effectiveness of

fund utilisation mechanisms, particularly in low-income states.

11. Recent Examples and Recommendations: Enhancing Fiscal Policy for

Equitable Development

Recent examples from India's fiscal landscape underscore the ongoing

challenges and opportunities in shaping fiscal policy and public finance. These
instances provide valuable insights and context for formulating
recommendations that align with the multifaceted issues explored in the study.

Challenges During the COVID-19 Pandemic

The COVID-19 pandemic presented a formidable test for India's fiscal
resilience. Low-income states, already grappling with fiscal disabilities, faced
exacerbated challenges in mobilising resources to address the healthcare and
economic fallout of the pandemic. The limited fiscal capacity of these states
hindered their ability to invest adequately in healthcare infrastructure and
pandemic response measures. This crisis illuminated the urgency of addressing
fiscal disparities and strengthening the fiscal resilience of states, especially in
times of unforeseen crises.

Utilisation of Central Transfer

Recent trends in the utilisation of central transfers highlight the need for a
more efficient and targeted approach. States with lower taxable capacities, as
identified in the study, encountered difficulties in fully utilising grants
allocated to them, leading to disparities in fund absorption. For example, the
disbursement gap in rural employment guarantee schemes in 2014-15
showcased varying levels of efficiency in utilising centrally allocated funds.
This trend emphasises the imperative of tailoring transfer mechanisms to the
specific fiscal capacities of states, ensuring optimal utilisation for equitable
development outcomes.

Recommendations for Fiscal Policy Enhancement

Building on the insights gleaned from the study, several recommendations can
contribute to enhancing fiscal policy and public finance in India:

1. Dynamic Matching Ratios: Introduce dynamic matching ratios based on the

taxable capacity of states. High-capacity states could have a higher matching
ratio, while low-capacity states benefit from a more lenient requirement. This
approach would promote more equitable participation in central transfer
programs and enhance the utilisation of allocated funds.

2. Strategic Sectoral Investments: Tailor fiscal policies to strategically invest

in sectors with high employment potential, such as agriculture and allied
industries. This approach aligns with the demographic profile of low-income
states and can contribute to both economic growth and poverty alleviation.

3. Fiscal Resilience Initiatives: Develop initiatives to enhance the fiscal

resilience of states, especially in the face of unforeseen challenges like the
COVID-19 pandemic. This may involve creating contingency funds, providing
financial instruments for risk mitigation, and strengthening state-level fiscal
management systems.

4. Targeted Growth Programs: Implement targeted growth programs for

low-income states, focusing on infrastructure development, industrialization,
and skill enhancement. Drawing inspiration from successful schemes like
PM-KISAN, these programs should be tailored to address the specific
economic challenges faced by each state.
 5. Capacity Building: Prioritise capacity-building initiatives in states that face
challenges in efficiently absorbing funds. This involves providing technical
assistance, governance reforms, and skill development programs to enhance
states' capabilities in utilising central transfers for optimal development
outcomes.

In conclusion, recent examples from India's fiscal landscape highlight the

evolving nature of challenges faced by states, especially those with lower
taxable capacities. The recommendations put forth are designed to foster a
more inclusive and responsive fiscal policy framework, acknowledging the
nuances of each state's economic landscape. By addressing fiscal disparities,
implementing targeted growth initiatives, and promoting fiscal resilience,
India can chart a course towards equitable and sustainable development,
aligning with the core principles outlined in the study on central transfers to
states.

12. Conclusion

In conclusion, my in-depth exploration of "Central Transfers to States in India:

Rewarding Performance While Ensuring Equity" has unveiled the intricate
dynamics of fiscal policy and public finance in India. As I meticulously
analysed the disparities in tax bases, growth trajectories, demographic profiles,
per capita GSDP, the role of the Commission, per capita expenditures, and the
challenges associated with general-purpose transfers and matching ratios
among Indian states, each facet has revealed the nuanced interplay between
fiscal policies, economic realities, and developmental outcomes.

The variations in tax bases emerge as critical determinants of the standards of

public services delivered by states. The stark differences in economic
capacities among states lead to inequalities in the provision of essential
services, particularly impacting low-income states with smaller tax bases. The
concentration of the poor in these states further exacerbates the challenges,
highlighting the need for targeted fiscal strategies to bridge the gap in public
service standards.

I firmly believe that accelerating growth in low-income states is a strategic

imperative for inclusive development. Recent examples, such as the
PM-KISAN scheme, underscore the potential of tailored growth strategies to
uplift socio-economic conditions. However, effective fiscal policy
implementation becomes crucial in ensuring that growth initiatives translate
into tangible improvements for the impoverished populations in these states.

The demographic profile, marked by a high working-age population in

low-income states, introduces both challenges and opportunities for fiscal
policymakers. While the demographic dividend holds promise for economic
growth, it necessitates targeted policies for employment generation, social
security, and infrastructure development. A holistic fiscal strategy that
acknowledges these demographic nuances is essential for sustainable and
equitable development.

Per capita GSDP variations expose the complex economic landscape,

influenced by factors like economic structure, regional disparities, and
state-specific challenges. Tailoring fiscal policies to address the unique needs
of each state becomes imperative, ensuring that developmental initiatives are
aligned with the economic realities on the ground.

I would like to emphasise the pivotal role of the Commission in shaping fiscal
policy, emphasising the need for a tailored approach that considers the diverse
developmental trajectories of states. The Commission's recommendations play
a crucial role in fostering fiscal autonomy, equitable resource distribution, and
addressing fiscal challenges faced by states.

Challenges associated with per capita expenditures in low-income states

highlight the pressing need for addressing fiscal disabilities. The economic
analysis emphasises the impact of limited fiscal capacity on crucial sectors
like education and healthcare, hindering overall development. Recent
examples, especially during the COVID-19 pandemic, underscore the urgency
of strengthening fiscal resilience and addressing the persistent fiscal disparities
among states.

General-purpose transfers and matching ratios pose challenges, particularly for

low-income states, in efficiently utilising allocated funds. The economic
analysis suggests dynamic matching ratios based on taxable capacity as a
potential solution, promoting more equitable participation and utilisation of
central transfers.

Recommendations for Policymakers

Building upon the insights gained from the study, I urge policymakers to
consider the following recommendations:

1. Tailored Growth Initiatives:

- Design and implement growth initiatives that are tailored to the specific
economic challenges faced by low-income states. Prioritise investments in
sectors with high employment potential to catalyse economic development and
poverty alleviation.

2. Dynamic Matching Ratios:

- Introduce dynamic matching ratios based on the taxable capacity of states.
This approach would ensure a more equitable distribution of funds, allowing
states to contribute and benefit proportionately, thus optimising the impact of
central transfers.

3. Fiscal Resilience Building:

- Develop initiatives to enhance the fiscal resilience of states, especially in
the face of unforeseen challenges. This involves creating contingency funds,
providing financial instruments for risk mitigation, and strengthening
state-level fiscal management systems.

4. Capacity Building:
 - Prioritise capacity-building initiatives in states that face challenges in
efficiently absorbing funds. This includes providing technical assistance,
governance reforms, and skill development programs to enhance states'
capabilities in utilising central transfers for optimal development outcomes.

5. Sector-Specific Strategies:
- Formulate sector-specific fiscal strategies, especially in critical areas like
education and healthcare, to address the unique needs of each state. Recognize
the elasticity in these sectors and allocate resources accordingly to bridge gaps
in per capita expenditures.

In essence, these recommendations underscore the need for a nuanced,

context-specific approach to fiscal policymaking. By addressing fiscal
disparities, enhancing fiscal resilience, and tailoring growth initiatives,
policymakers can contribute to fostering a more equitable, inclusive, and
sustainable development paradigm for India.