Economics • Indian EconomyMedium
How do recommendations of the Central Finance Commission impact the fiscal fiscal transfers to special category hill states like Himachal Pradesh?
A. By completely abolishing all central grants-in-aid
B. By allocating higher weightage to forest cover, topography, and fiscal capacity in horizontal tax devolution formulas✓ Correct Answer
C. By mandating uniform per capita tax grants regardless of geographical terrain
D. By transferring all state debt liabilities to international lenders
💡 Solution & Explanation
Finance Commissions incorporate criteria such as forest cover, ecological benefits, and hilly terrain into horizontal devolution formulas to compensate special category states for higher infrastructure costs and revenue constraints. Uniform per capita grants would penalize sparsely populated mountain states. These transfers ensure balanced regional development across the country.
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