ANNOUNCEMENTS
Intergovernmental fiscal transfers are resorted to, in the countries with multiple tiers of government, for correcting the vertical and horizontal imbalances prevailing among different federal entities; such transfers, while equalizing the resource base of sub-national governments also have redistribution implication. In addition, intergovernmental transfers correct inter-jurisdictional spillovers and improve administrative efficiency. However, iniquitous distribution of natural resources and development levels also call for harmonizing the ecological and environmental concerns into the fiscal transfer system. Sustainable development, which is now set out as an important dimension of the progress of human society, requires the integration of social, economic and environmental functions into various policies and programs of respective institutions at all levels of governments.
Inter-governmental fiscal transfer system in India had been carefully designed and craft-fully managed (by the successive Finance Commissions and the Planning Commission) currently based on the socio-economic development parameters. However, the fact that India’s ecologically diversity is much larger and varies widely across states has not been given adequate consideration in the system of intergovernment fiscal transfers. Whereas, international experience elsewhere demonstrates that the integration of ecological functions into inter-governmental transfers can counteract the under-provision of ecological goods and services (Ring 2007), a suitable framework has been proposed for India in this Study.
As India has low per capita availability of natural resources on account of a very large population, it does not have the luxury of overlooking ecological/environmental considerations in the decision making process. Currently, there are no incentives built into the fiscal federal system of India to conserve and manage the natural resources. As a result of it, the states that are rich in natural resources keep exploiting, thereby, deplete and degrade them. On the other hand, the industrialized states do not share the cost of utilizing the ecological space of natural resource rich states, thereby, resort to free-riding behavior.
In this context, the Study had analyzed the role of intergovernmental fiscal transfers backed up by an incentive based mechanism and appropriate institutional structures for achieving environmental sustainability in the country. The Study first explains the theory of fiscal federalism and the spatial externalities, the approaches to the integration of both and the design of inter-governmental fiscal transfer system.
The empirical experience of intergovernmental fiscal transfer systems in other countries has also been discussed in detail, and it has been found that the practice of internalizing ecological/environmental concerns into fiscal transfer system is still emerging but gaining importance in Europe and elsewhere. It has been emphasized in the Study that moving towards such system is important both to address the spatial nature of environmental externalities in a federal system as well as to demonstrate India’s commitment to the protection of natural environment and ecology built upon a sound fiscal transfer system.
A comprehensive review of India’s fiscal and environmental federal systems has been undertaken in the Study so as to understand the approach, principles and broad direction of the resource sharing between the states and Union as recommended by the various Finance Commissions as well as, by the Planning Commission. The review pointed to steady addition of principles and an increasing number of parameters used in distribution, albeit with strict adherence to the federal socioeconomic development principles enumerated in the Constitution of India. It has been pointed out that addressing the concerns of environment and sustainable development came into India largely out of the legislations made for protecting the natural resources and environment, which created a clear-cut separation of functions, finances and the coordination; in a limited manner to achieve the objectives. An attempt has been made by the XII and XIII Finance Commissions to provide for environment related conditional grants to state governments to ameliorate the environment and conserve natural resources through specific measures. Further, emphasis has also been made that the fiscal transfer system needs to address both negative and positive environmental externalities over space in its attempt to balance the existing asymmetry (leading to conflicting concerns of equity and efficiency) through fiscal transfers between jurisdictions.
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