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Daily Current Affairs 18.01.2023(Pak. PM moots ‘serious, sincere’ talks with Modi, UNSC sanctions committee blacklists Lashkar’s Makki after Beijing lifts its hold, Himachal women create livelihood with pine needles, Finish collection of States’ views on identifying minorities: SC to Centre, India plans ‘buffers’ in proposed Arunachal project to offset China threat, In a landmark shift, China’s population declines in 2022, China GDP rose 3% in 2022 as COVID lockdowns, surge hurt consumption, New free foodgrain scheme as an illusion, doublespeak, A case for reassigning GST to States)

Daily Current Affairs 18.01.2023(Pak. PM moots ‘serious, sincere’ talks with Modi, UNSC sanctions committee blacklists Lashkar’s Makki after Beijing lifts its hold, Himachal women create livelihood with pine needles, Finish collection of States’ views on identifying minorities: SC to Centre, India plans ‘buffers’ in proposed Arunachal project to offset China threat, In a landmark shift, China’s population declines in 2022, China GDP rose 3% in 2022 as COVID lockdowns, surge hurt consumption, New free foodgrain scheme as an illusion, doublespeak, A case for reassigning GST to States)

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1. Pak. PM moots ‘serious, sincere’ talks with Modi

Pakistan wants peace with India, but what is happening in Kashmir should be stopped… we have had three wars with India, and they have only brought more misery, poverty, says Shehbaz Sharif

Pakistan Prime Minister Shehbaz Sharif has called for “serious and sincere talks” with Prime Minister Narendra Modi on “burning points like Kashmir”.

In an interview with the Dubai-based Al Arabiya TV that was aired on Monday, Mr. Sharif said Pakistan had learnt its lesson after three wars with India and stressed that now it wanted peace with its neighbour.

“My message to the Indian leadership and Prime Minister Modi is that let’s sit at the table and have serious and sincere talks to resolve our burning points like Kashmir. It is up to us to live peacefully and make progress or quarrel with each other and waste time and resources,” Mr. Sharif said.

Later, the Pakistan Prime Minister’s office (PMO), in a series of tweets, clarified that Mr. Sharif had made it clear that talks with India would be possible only after New Delhi reversed the revocation of Article 370 that granted special status to Jammu and Kashmir.

In the interview, Mr. Sharif said, “We have had three wars with India, and they have only brought more misery, poverty and unemployment to the people. We have learnt our lesson, and we want to live in peace with India, provided we are able to resolve our genuine problems.”

Economic crisis

Pakistan, which is battling severe economic crisis and public discontent due to shortage of flour and fuel, among other issues, is also facing rising instances of terror attacks by the Tehreek-e-Taliban Pakistan, which ended a ceasefire with the country’s security forces late last year.

“India is our neighbour. Let’s be very blunt, even if we are not neighbours by choice we are there forever and it is up to us to live peacefully and progress or quarrel with each other and waste time and resources,” Mr. Sharif said.

He also brought up the subject of Kashmir, adding that Pakistan wanted peace but insisted that “what is happening in Kashmir should be stopped”.

“[India] usurped whatever semblance of autonomy was given to Kashmiris in their Constitution — Article 370. They revoked that in August 2019, and minorities over there are grossly mishandled. This must stop so that a message can go around the globe that India is ready to have talks, and we are more than ready,” Mr. Sharif said.

“Pakistan does not want to waste resources on bombs and ammunition. We are nuclear powers, armed to the teeth, and if God forbids, a war breaks out, who will live to tell what happened?” he said.

Resolution through talks

The Pakistan PMO said that Mr. Sharif had consistently maintained that Pakistan and India must resolve their bilateral issues through dialogue and peaceful means, but only after India revokes its decision on Kashmir.

“The settlement of the Kashmir dispute must be in accordance with the UN resolutions & aspirations of people of Jammu & Kashmir. The Spokesman said that the Prime Minister made this position very clear in his interview with Al Arabiya news during his recent visit to the UAE.”

2. UNSC sanctions committee blacklists Lashkar’s Makki after Beijing lifts its hold

The ISIL and Al-Qaida Sanctions Committee of the UN Security Council (UNSC) has placed Abdul Rehman Makki, a fundraiser and key planner of the Pakistan-based terrorist outfit Lashkar-e-Taiba (LeT), on its sanctions list.

The move was made possible after China withdrew the “technical hold” that it had imposed last June, when the U.S. and India — then a non-permanent member at the UNSC — tried unsuccessfully to get Makki on the global terror blacklist. Beijing has now argued that the blacklisting is in fact a “recognition” of Pakistan’s record of fighting terrorism.

“Abdul Rehman Makki and other LeT/JuD operatives have been involved in raising funds, recruiting and radicalising youth to violence and planning attacks in India, particularly in Jammu and Kashmir (J&K),” said the Committee, explaining the reasons that prompted it to add Makki to the blacklist. The JuD or Jamaat-ud-Dawa is the parent body of the LeT.

During India’s two-year tenure at the UNSC, New Delhi put forth five names for designation under the Sanctions Committee — Abdul Rehman Makki (LeT), Abdul Rauf Asghar (Jaish-e-Mohammed), Sajid Mir, Shahid Mahmood, and Talha Saeed (all LeT).

All five faced a “technical hold” from China, while the other 14 members of the Security Council supported the listing.

“Terrorism is the common enemy of humanity. The 1267 Committee is an important international counterterrorism mechanism,” China’s Foreign Ministry spokesperson Wang Wenbin said on Tuesday, when asked about China’s U-turn and decision to lift its hold. “The listing of terrorists or terror organisations is conducive to enhancing international counterterrorism cooperation in response to terrorist threats,” he added. “The relevant people have been convicted and sentenced by Pakistan. The listing also shows Pakistan’s firm combat against terrorism. It is a recognition.”

India and the U.S. have already listed Makki as a terrorist under their respective laws and had jointly proposed that the UNSC’s Committee blacklist him on June 1, 2022, which China blocked.

On Tuesday, the official spokesperson of the Ministry of External Affairs Arindam Bagchi welcomed the decision of the Committee and said, “Threats from terrorist organisations in the region remain high and listings and sanctions by the UNSC are an effective tool to curb such threats.”

3. Himachal women create livelihood with pine needles

A group of women engaged in making articles from pine needles at Ghanahati in Shimla. 

Over the past three years, women from seven of Himachal Pradesh’s 12 districts have been handcrafting a variety of home products while contributing to improving the State’s fragile forest ecosystem. They turn the highly flammable leaves of the chir pine, which often exacerbate forest fires, into baskets, pen stands, serving trays, mirror edging, jewellery boxes, and more.

The project, called ‘Improvement of Himachal Pradesh Forest Ecosystems Management and Livelihoods’, is meant to increase income as well as conserve biodiversity. It was started by the Himachal Pradesh Forest Department in collaboration with the Japan International Cooperation Agency (JICA), which works to strengthen capabilities in emerging countries. Women self-help groups (SHG) are provided with working capital and a revolving fund, with skill training and market linkages provided to the members.

Sunita Sharma, 43, who heads the Radhe Krishana SHG in Ghanahati village, Shimla, said the women, who have always been silent and unseen when they worked at home or in the field, now feel more empowered with the social connections they have formed and the additional boost to the family income. “Before, we often worked alone. Now, we come together as a community and there is strength in numbers,” Ms. Sharma said.

“In 2020, I got associated with JICA, which was a turning point,” she said, adding that, earlier, she could only make bread baskets from pine needles, selling them locally for a relatively low profit. “After I was trained by the experts at JICA, along with seven other women in the village, we have been producing about 18 different articles from pine needles.”

The making

Pine needles are collected from the forest floor, then boiled in water with glycerine to create a shine. They are dried in the shade and then woven. Apart from the cost of the thread, there is no additional material cost. However, it’s a time-consuming process, and one product may take between one day to up to a week to craft. “A pen stand is sold at around ₹400, while a bread basket fetches us anywhere between ₹500-800, depending on the size,” Ms. Sharma said.

The project is being implemented in the districts of Bilaspur, Shimla, Mandi, Kullu, Kinnaur, and Lahaul and Spiti. The products created by SHGs are sold at fairs and exhibitions.

“Moreover, the Forest and Tourism Departments stay in touch with us and place orders. We pool the products for collective sale by the group. The income of a group member varies between ₹10,000 and ₹50,000 per month. Last year, at the Sale of Articles of Rural Artisans Society (SARAS) fair held at Shimla, we sold items worth ₹45,000 in a few days,” Meena Sharma, secretary of the Radhe Krishna SHG, said. She added that people appreciate that the products are eco-friendly and handmade.

Other uses

Experiments have been conducted on using pine needles in other ways. “Universities and institutes tried them as fuel in cement factories, and as pine needle boards, biofuel, and pine needle charcoal, but these failed to sustain after the pilot projects,” Nagesh Kumar Guleria, Additional Principal Conservator of Forests cum Chief Project Director, JICA, said.

4. Finish collection of States’ views on identifying minorities: SC to Centre

Court gives govt. last opportunity to break the silence of Jammu & Kashmir, Lakshadweep, Arunachal Pradesh, Jharkhand, Rajasthan and Telangana on NCM’s view that religious and linguistic minority communities ought to be identified State-wise

The Centre’s position in the Supreme Court remained uncertain on Tuesday on whether its 1993 notification identifying Muslims, Christians, Sikhs, Buddhists and Parsis as minority communities needed reconsideration in light of a view by the National Commission for Minorities that religious and linguistic minority communities ought to be identified State-wise.

Instead, it sought time to gather the views of four States and two Union Territories which have remained mum on the question.

Currently, 24 States and Union Territories have given a mixed response, some leaving the task of identifying minorities to the Centre or preferring status quo, while others, including BJP-ruled Assam and Uttarakhand, and States such as West Bengal and Tamil Nadu, maintaining that minorities should be identified at the State level.

Appearing before a Bench led by Justice Sanjay Kishan Kaul, Attorney-General R. Venkataramani said the six who have remained silent are Jammu & Kashmir, Arunachal Pradesh, Lakshadweep, Jharkhand, Rajasthan and Telangana.

“I would presume that they have nothing to say then? Frankly, Jammu & Kashmir is administered by you at the moment. So is Lakshadweep… Is it that your own administrations are not responding,” Justice Kaul asked.

The Attorney-General said Rajasthan, Jharkhand and Telangana were major States and their responses were important. “We give a last opportunity to the Centre to get their responses, failing which we will presume that they have nothing to say,” the court observed in its order, listing the case on March 21.

The hearing began with senior advocate C.S. Vaidyanathan, for petitioner-advocate Ashwini Upadhyay, drawing the court’s attention to a status report filed by the Centre on January 10. “The National Commission for Minorities (NCM) agrees with the definition of ‘minority’ not on a nationwide basis but State-wise… In spite of this, the 1993 notification continues… The government may either have to withdraw it or come up with a fresh notification,” Mr. Vaidyanathan submitted.

The NCM’s input, dating back to October 2020 and reproduced in the Centre’s status report in January 2023, said “the State has to be regarded as the unit for determining linguistic and religious minority”.

The commission had referred to the court’s 11-judge Bench judgment in the T.M.A. Pai Foundation case of 2002 and Bal Patil verdict of 2005, in which the top court had clarified that “henceforth the unit for determining status of linguistic and religious minorities would be ‘State’”.

The National Commission for Minority Educational Institutions, a statutory body notified by the Centre, too had referred to the T.M.A. Pai Foundation judgment’s conclusion that “a minority, whether linguistic or religious, is determinable only by reference to the demography of the State and not by taking into consideration the population of the country as a whole”. The Ministry of Education had also pointed to the logic presented by the 11-judge Bench decision.

The Home Ministry said it had “no specific input or comments to offer in this matter”. The Law Ministry remained non-committal, saying the comments of the State governments were needed and it had “nothing more to add at this stage”.

5. India plans ‘buffers’ in proposed Arunachal project to offset China threat

Concerns over China’s proposed 60,000-MW hydroelectric power dam in Medog, Tibet, are influencing the design of a proposed hydel project in Upper Siang district of Arunachal Pradesh.

Still only in the planning stage, a ‘pre-feasibility report’ on the 11,000-MW project, more than five times the size of the largest such projects in India, was submitted to the Central Electricity Authority (CEA) for appraisal in December 2022 by the National Hydropower Corporation (NHPC), sources told The Hindu.

That the 60,000-MW dam can reduce the natural flow of water in the Brahmaputra, away from India during lean patches, or worse be used to trigger “artificial floods”, is a matter of “concern to India,” sources said.

The design of the proposed project incorporates a “buffer storage” of nine billion cubic metres (or about 9 billion tonnes of water) during monsoonal flow, said sources connected to the project. This could act as a store of water worth a year’s flow that would normally be available from the Brahmaputra or buffer. The Brahmaputra is a 2,880-km transborder river that originates in the Mansarovar lake and flows 1,700 km within Tibet, 920 km in Arunachal Pradesh and Assam and 260 km in Bangladesh. It accounts for nearly 30% of freshwater resources and 40% of India’s hydropower potential. Diverting its flow could mean agricultural impacts downstream in Assam and Arunachal Pradesh.

“The project is primarily meant to manage flooding in the Brahmaputra, however, we cannot ignore strategic aspects and this is one way to counter any potential threats,” a person involved with the project told The Hindu.

‘Not strategic deterrent’

An independent expert said that India’s hydropower projects would not necessarily serve as a strategic deterrent to China.

“A large dam in India may help control floods but might open fresh disputes over water sharing with Bangladesh. It will be beneficial if all three countries agreed to share information on the flow of water,” Rajiv Ranjan, Adjunct Faculty, Institute of China Studies, told The Hindu.

6. In a landmark shift, China’s population declines in 2022

India will overtake China as world’s most population nation this year. The number of births in China was 9.56 million, a more than 10% drop from 2021. The number of deaths was 10.41 million

China’s population declined by 850,000 in 2022, the first such fall since a nationwide famine in 1961, marking a landmark demographic shift for the world’s second-largest economy.

The National Bureau of Statistics in Beijing on Tuesday said the national population stood at 1.411 billion at the end of 2022. India will overtake China as the world’s most populous nation in 2023, according to a UN report released last year.

The number of births in China was 9.56 million, a more than 10% drop from 2021. The number of deaths was 10.41 million.

If the last population drop six decades ago was a result of a devastating famine caused by Mao Zedong’s failed “Great Leap Forward” campaign, the current trends reflect changing social values in China as families choose to have fewer children.

Government campaigns over the past decade to boost birth rates — a U-turn from years of a harsh “one-child policy” — have failed to reverse the trend. In 2021, Beijing’s family planning authority for the first time allowed couples to have a third child. The move came five years after a “two-child policy” had been introduced to boost birth rates. A government survey carried out at the time of the introduction of the two-child policy found 70% of respondents cited financial reasons, including costs of education, healthcare and housing, to not have many children.

Tuesday’s numbers also underlined the challenges the country faces in navigating an ageing society as its workforce shrinks. The 16-59 working age population, as of the end of 2022, was 875.56 million or 62% of the total, down from over 950 million in 2010. The above-60 population accounted for 280 million or 19.8% of the total, up from 249 million in 2010.

Asked about China, which saw its economic growth boom over four decades driven by a large labour force, now losing its status as the world’s most populous nation, Foreign Ministry spokesperson Wang Wenbin said “China and India are countries with a big population and we have ample resources in the working force.” “This is a strong internal dynamic for economic development,” he said. “We both also have a large market. The two countries should take advantage of their population dividend for each other’s respective national development and make a greater contribution.”

7. China GDP rose 3% in 2022 as COVID lockdowns, surge hurt consumption

Wary restart: Since the easing of the ‘zero-COVID’ policy, China has reported millions of cases hitting retail sales. 

Growth decelerated to the second-slowest pace since 1976, with Q4 registering a 2.9% expansion as the country dealt with a sweeping increase in COVID-19 infections; govt. committed to ‘make economic stability its top priority’, says head of the NBS

China’s economy grew 3% in 2022, the second-slowest pace of growth since the last year of Mao Zedong’s Cultural Revolution in 1976, with the last quarter seeing a slide in growth as the country dealt with a sweeping COVID-19 surge.

Growth was the slowest since the 2.2% expansion in pandemic-hit 2020 and followed the smart 8.4% rebound logged in 2021.

The GDP grew to 121.02 trillion yuan ($17.84 trillion) in 2022, the National Bureau of Statistics (NBS) said on Tuesday, from 114.92 trillion yuan in the preceding year.

China’s ‘zero-COVID’ stance extracted a heavy economic toll last year, before the policy was jettisoned in early December. The economy grew by only 0.4% in the second quarter, which saw a harsh lockdown of the financial capital Shanghai, and other cities. Growth slowed to 2.9% in the last quarter, from 3.9% in Q3.

Infections surge

Since the easing of the ‘zero-COVID’ policy, China has reported millions of cases as well as more than 60,000 deaths. In December, retail sales, which the government had been banking on to drive growth amid a continued decline in the property sector, shrank 1.8% year-on-year. Investment in real estate contracted 10% last year.

Kang Yi, head of the NBS, said the “economy continued to develop despite downward pressure”. And in the coming year the government would “make economic stability its top priority and pursue progress while ensuring stability,” he added.

8. New free foodgrain scheme as an illusion, doublespeak

In George Orwell’s Animal Farm, ‘Squealer, the small fat pig’ was a brilliant orator who always spoke to the hard-working animals about a ‘readjustment of rations’, but ‘never as a “reduction”’.

The Government’s latest announcement on free foodgrains is a case of similar doublespeak. The Cabinet has announced that under the new avatar of the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), 810 million National Food Security Act (NFSA) beneficiaries will receive five kilos of free foodgrains every month in 2023. But this quantum was already legally guaranteed under the NFSA law, the flagship entitlement of the earlier United Progressive Alliance government. The only difference is that in January 2023, a family of five can collect 25 kg for free. Notably, this is a reduction by half of the 50 kg of rice (25 kg free under the earlier PMGKAY and 25 kg at ₹3 under the NFSA) they received in December 2022 from ration shops with a modest payment of ₹75. So, a family will now have to purchase the remaining 25 kg from the market at the cheapest possible price of ₹450 — which implies an additional expense of ₹375 to their monthly budget (The calculation is 1 kg at ₹18, or 25kg for ₹450).

The election angle

Of course, the earlier version of PMGKAY could not be extended indefinitely, especially since the procurement of food stocks from the 2022 kharif harvest was lacklustre. The repeated extensions, for 28 months, seemed to be with an eye on State elections.

The latest readjustment also seems politically motivated to appeal to voters in nine States that go to polls in 2023. Of course, this new giveaway is also likely to be again extended for another six months to cover the all-important 2024 general election.

But this subsidy is duplicitous. Just a few months ago, the Prime Minister had denounced the ‘revdi’ culture of the distribution of freebies for votes by Opposition parties. Political scientist Steven Wilkinson argues that due to India’s ethnic heterogeneity and increasing electoral competition, all political parties prefer to differentiate themselves based on such patronage politics. The Bharatiya Janata Party (BJP), too, continues to focus on clientelism. More than 20 central government programmes have been named or renamed to credit the ‘Pradhan Mantri’.

Main flaws

The PMGKAY’s real design flaw is its lack of universal coverage, especially as ration records have not been updated since the 2011 Census — as per estimates, more than 40% of India’s population is currently excluded from both the NFSA and PMGKAY. In many villages and slums, the most marginalised castes and communities, especially migrants, sex workers, the homeless and transgender persons are often without NFSA ration cards. However, Tamil Nadu, Odisha, Rajasthan, Chhattisgarh and West Bengal have either universalised or substantially expanded coverage with State cards.

Even the Supreme Court of India, in an August 2022 order, had directed the central government to expand NFSA coverage. However, based on population projections, at least 100 million beneficiaries, especially children born in the last decade, are missing from ration lists. But the central government has not paid heed. The only partial exception is Uttar Pradesh, where the BJP State government provided free foodgrain with cooking oil, pulses and salt during the COVID-19 pandemic. This is considered to be one of the key reasons for the BJP’s electoral victory in the 2022 Uttar Pradesh Assembly elections.

The central government also has every reason to feel the need to counter the political messaging of the Congress party-led Bharat Jodo Yatra. The padayatras message of unity and its spotlight on inflation and unemployment are increasingly resonating with citizens. In 2023, India is projected to overtake China as the most populous country. But with high levels of youth unemployment, this Indian demographic dividend, too, seems to be turning into a demographic disaster.

Undermining NREGA

The central government has even squeezed the 100 days of work guaranteed under the National Rural Employment Guarantee Act (NREGA). This employer of the last resort scheme is being systematically undermined by acute Budget cuts, delayed payments and technological hurdles. In the period 2022-23, only 57 million households received NREGA work unlike 73 million last year. In West Bengal, pending wage payments of ₹2,744 due to labourers have even been withheld illegally for an entire year.

As Congress leader Rahul Gandhi described in his speech in front of the Red Fort in December 2022, pickpockets always need to distract the attention of their victims. Similarly, the illusion of the new free foodgrain scheme will in reality cost the exchequer and pinch family budgets in the New Year. But the million-dollar question is this: can this political chicanery win votes?

The ‘readjustment’ seems to be politically motivated to appeal to voters and will only end up burdening the exchequer and pinching family budgets

9. A case for reassigning GST to States

The Union government is endowed with more tax powers than the States, while the States are assigned more expenditure responsibilities than the Union government. This gives rise to a vertical fiscal imbalance (VFI) between the Union and State governments. The main responsibility of the Finance Commission is to correct this, but this task remains unaccomplished. We look at this issue in the context of the Goods and Services Tax.

The Union and State governments concurrently levy GST on commodities with 50% as Central GST (CGST) and 50% as State GST (SGST). There is an Integrated GST (IGST) on inter-State trade, so that 50% of it goes to the final destination State. The GST is a harmonised tax on commodities across the country. Individual States have little power to unilaterally change this tax. Though conceptually, the Union government could not do so either, the GST Council gives the Union government a veto to thrust its preferences on the States.

Measuring imbalances

The simplest of the many empirical measures of VFI is ‘VFI equals one minus the ratio of the State’s own revenue to own expenditure’. If this VFI ratio is zero, the States have enough own revenue to meet their own expenditure and there is no need for financial transfers.

We can calculate the VFI ratio for each State and for all the States put together. If we look at the data for all the States over the periods of the last three Finance Commissions (2005-06 to 2020-21), the VFI ratio shows an increasing trend. For the latest period of 2015-16 to 2020-21, the ratio was 0.530, which means that only 47% of the States’ own expenditure was financed by their own revenue in that period. In this period, four major changes took place. First, the divisible taxes of the Union government expanded from two to all the Union taxes, thus enlarging the revenue base to be shared with the States. Second, fiscal responsibility legislation was implemented to constrain the fiscal deficits of the States. States directly borrow from the market subject to limits imposed by the Union government. Third, the Union Planning Commission was dissolved, leading to the withdrawal of Plan grants. Fourth, GST was introduced in 2017. These changes have considerably altered the States’ revenue structure. States have little revenue autonomy and are more dependent on the Union government. For instance, if we consider the withdrawal of the Union government’s plan grants and loans to the States and their effect on States’ combined budget, the VFI ratio increased for the same period to 0.594 from 0.530, indicating that only 40% of the State’s own expenditure is financed by their own revenue.

Reassigning of tax powers

We propose a solution to correct the VFI by reassigning the tax powers between the Union and the States. The Union government has exclusive power to levy excise duty on petroleum products, and the States have exclusive power to levy excise duty and sales tax on liquor. All other commodities fall under the GST. We propose that the CGST and the excise duty on petroleum products be assigned to the States so that the entire GST is assigned to the States.

This should be conceived as follows. One, we should bring all commodities, including petroleum products, under GST. Two, the Union government should continue to collect IGST only to settle revenue on destination basis. This will ensure harmonisation of GST across States. GST shall continue as a tax determined by the GST Council. However, the veto power of the Union government should be removed. Then, the GST Council will truly become a body by the States to settle tax issues among themselves, with the Union government facilitating the arrival of consensus among the States on tax issues. This may once again require some constitutional amendments. Commodity taxation should be moved to State List II of the Seventh Schedule of the Constitution, with a rider that harmonisation of commodity taxation should be maintained.

The assignment of excise duty on petroleum products to the States will hasten the process of integrating taxes on petroleum products into GST and remove the cascading effects of the current excise duty on petroleum products. This will reduce the tax potential of the States, but higher buoyancy of GST should compensate for this revenue loss. The positive aspect of this reassignment of tax will be the increase in own tax revenue of the States. This will also improve accountability of the States to their people on fiscal matters.

We assume that once GST is assigned to the States, VFI will come down to zero. Assuming this reassignment and revenue effect, we recalculated the VFI ratio and found that it stands at 0.005 (2015-16 to 2020-21), indicating that all the States’ own expenditure can be financed by their own revenue resources. The need for assigning share in Central taxes and grants in aid to address VFI does not arise.

Though the financial transfers to the States to address VFI may not be needed if the entire GST is assigned to the States, the tax base of the GST, namely consumption, is not equally distributed among the States. The unequal tax base with unequal expenditure requirement between the States creates horizontal fiscal imbalance among the States. Therefore, the Union government should effect equalisation transfers to address this issue of horizontal fiscal inequality. Our calculations show that the revenue surplus of the Union government after this tax reassignment should be enough to provide for this equalisation transfer to the States.

It is essential to restore fiscal balance between the Union and State governments.

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