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Solution to disparity

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Urban DevelopmentGovernance

Do we need new states?

The more long-lasting solution to regional and intra-state disparities is to create viable proposals for reducing them within the existing framework of governance rather than create new political entities. Unless there is substantially better governance, there is no guarantee that a new political entity will lead to better economic performance.

Interesting to find this analysis today. I dont see more states as the solution. So, that throws up the larger question I was discussing with some praje on a dry, soda filled, friday night. Is the unitary state outlived its utility? Will a federation structure work for a diverse country like India?

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idontspam's picture

Start me up

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As an alternate to a federal structure one could also look at reorganizing the union & concurrent lists. Is there too much in the hands of the union? I cant understand why traffic fines for Bangalore need to be set by the center? I also dont see why IR cant allow states to lay their own lines? Things like this need to be sorted out.

Income tax itself needs to be split into center & state tax and paid seperately. This will incentivise the states to create jobs. Reliance of the state on property tax leads to unhealthy encouragement of real estate development whether or not they translate into jobs.

Naveen's picture

Closed Loop generally works better

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I agree with the author - no point in bi-furcating or tri-furcating states when there are no guarantees that it will lead to better performance.

Further to our discussion yesterday, a few thoughts....

Briefly, if states were mandated to collect all taxes from within their areas, including income-tax, sales tax, central excise, commercial taxes, etc. & share such collections with the central govt on say, a 60-40 basis, as also budget for expenditures in the same ratio (viz. 60-40), this alone would lead to much better performance as follows :

1) States will have incentives to improve tax collections since they benefit if the collection is larger, thus there would be better efforts followed by much higher collections.
2) Budget allocations under various heads will be dependent on priorities as decided by the concerned state & not based on a centrally administered budget, in most cases.
3) There is greater chance for better checks on corruption since the state becomes more directly responsible for collections, especially with reference to income-tax, which is being dodged by a staggeringly huge mass of people.
4) Competition between states will also help push efforts to collect more income tax from all those that fall under the net, but do not pay up.
5) No mutterings such as "Maharashtra contributes so much but gets so little".

The idea is to employ a closed loop within each state, as much as possible & escape the centrally administered budget funding & the inherent biases & inefficiencies based mostly on party considerations & political compulsions that have notoriously been plaguing the country & retarding it's progress. There will thus be "rich" states & "poor" states, & the rich states will be able to better address their priorities directly, whilst the poor states will aspire to improve & get on par with other rich states - a healthy economic competition will brew up, instead of state heads & party leaders making numerous trips to Delhi to get something sanctioned, which again depends on the central govt's own political compulsions.

Exceptions will of course be :
1) Poverty elimination programs where some states will be much more dependent on central assistance than others, based on human development & financial health of individual states.
2) Defense budgeting.
3) Foreign affairs.
4) Calamities funds.

Though railways & other national services such as highways, ports & harbors need to be administered centrally, development would take place based on state contributions also & budget sharing, thus, it would depend on what the state wants & not based on central govts own priorities.

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