Economics • Indian EconomyHard
Evaluate the fiscal federalism implications of the Fourteenth and Fifteenth Finance Commission recommendations regarding tax devolution and grants-in-aid for high-income industrializing states like Haryana. How does Haryana's high per capita income impact its share in central tax horizontal devolution?
A. Income distance criteria assign lower relative weight to advanced states compared to lower-income states, resulting in a lower per capita devolution share despite high tax contributions to the national pool✓ Correct Answer
B. High-income states receive double the central tax share as a reward for industrial productivity
C. Central finance commissions completely exclude high-income states from receiving any tax proceeds
D. Tax devolution is distributed strictly on the geographical land area of states without considering per capita income
💡 Solution & Explanation
Finance Commission formulas incorporate an income distance criterion that transfers greater resources to lower-income states to promote fiscal equalization, meaning states with high per capita incomes like Haryana receive smaller shares relative to their tax contributions to the central pool. Fiscal federalism balances regional equity with efficiency through conditional and unconditional grants. Understanding these transfer formulas is essential for analyzing state budgetary constraints and capital expenditure planning.
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