Editorial Analysis 18 July

ECONOMICS

INTERGENERATIONAL EQUITY AS TAX DEVOLUTION CRITERION

Source: The Hindu

Intergenerational Equity in Tax Devolution

• Intergenerational equity ensures fairness between generations by advocating that each generation should bear the costs of its own consumption of public services and not pass on excessive debt or financial burdens to future generations.
• In the context of public finance, particularly tax devolution:
  • It ensures that the current generation does not burden future generations with excessive debt or unfunded liabilities.
  • It advocates for responsible fiscal policies where each generation pays for the public services it consumes, thus not passing on unsustainable fiscal burdens to future taxpayers.

Application to Tax Devolution ●Fairness in Revenue Generation: When states receive a share of Union tax revenue, it should be based on principles that promote fairness and sustainability. States should ideally generate sufficient revenue to finance their expenditure needs, minimizing reliance on future borrowing that could burden future taxpayers. ●Equitable Distribution: The distribution formula for Union tax revenue among states should consider not only current needs but also the long-term fiscal health of states. States that effectively manage their finances and promote sustainable revenue sources should be incentivized. ●Avoiding Excessive Debt: States heavily reliant on Union transfers may accumulate higher debt levels, which could lead to future fiscal challenges. Intergenerational equity encourages states to manage their fiscal affairs prudently to avoid imposing higher taxes on future generations due to accumulated debt.

Current Scenario and Challenges

• Horizontal Distribution Formula: The Finance Commission (FC) of India revisits the horizontal distribution formula for tax devolution every five years. This formula determines how Union tax revenues are distributed among states based on various indicators like population, per capita income, and area.
• Equity vs. Efficiency: Currently, the distribution formula prioritizes equity among states (intragenerational equity) over efficiency. This means redistributing tax revenues to ensure relatively equal fiscal capacity among states. However, this approach may inadvertently exacerbate intergenerational inequity within states.
• Fiscal Behavior and State Finances:
  • High-income states often finance a larger portion of their revenue expenditure through their own tax revenues and incur deficits due to lower Union financial transfers.
  • Low-income states rely more on Union financial transfers, leading to higher deficits but lesser reliance on their own tax revenues.

Intragenerational Equity: High-Income vs. Low-Income States

Own Tax Revenue Contribution	●High-Income States: These states, including Tamil Nadu, Kerala, Karnataka, Maharashtra, Gujarat, and Haryana, finance a substantial part (59.3%) of their revenue expenditure through their own tax revenues. This indicates a higher capacity to generate internal resources for funding public services. ●Low-Income States: States like Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan, Odisha, and Jharkhand, on the other hand, finance only 35.9% of their revenue expenditure through their own tax revenues. This reliance is much lower compared to high-income states.
Revenue Expenditure to GSDP Ratio	●High-Income States: The ratio of revenue expenditure to Gross State Domestic Product (GSDP) is 10.9%, which is relatively lower. This suggests that high-income states can manage their revenue expenditures within a smaller proportion of their economic output. ●Low-Income States: In contrast, low-income states exhibit a higher ratio of revenue expenditure to GSDP at 18.3%. This indicates a higher level of expenditure relative to their economic output, reflecting potentially greater demand for public services.
Union Financial Transfers	●Low-Income States: These states rely significantly on Union financial transfers, with 57.7% of their revenue expenditure being financed through such transfers. This dependency highlights their limited capacity to raise internal revenues. ●High-Income States: High-income states receive only 27.6% of their revenue expenditure through Union financial transfers. This indicates a lower dependency but also points to potential disparities in resource allocation from the Union government.
Fiscal Deficits	●High-Income States: Despite higher tax revenue generation, high-income states incur a deficit of 13.1% of revenue expenditure. This is partly due to lower Union financial transfers, which may not adequately compensate for the revenue needs of these states. ●Low-Income States: In contrast, low-income states manage a lower deficit of 6.4% of revenue expenditure, aided by higher Union financial transfers. This suggests a financial cushion provided by the Union to support expenditure needs.

 Implications and Challenges

• Equity Concerns: The disparity in revenue generation and expenditure patterns highlights challenges in achieving intragenerational equity. High-income states may perceive inequity due to their higher tax contributions and lower returns in terms of financial transfers, while low-income states face challenges in fiscal sustainability without substantial external support.
• Balancing Equity and Efficiency: The Finance Commission plays a crucial role in balancing equity (fair distribution of resources) and efficiency (effective fiscal management) through its distribution formula. Incorporating more fiscal efficiency indicators could incentivize states to enhance revenue mobilization and optimize expenditure, thereby promoting sustainable fiscal practices.
• Future Challenges: As economic dynamics and state priorities evolve, maintaining a fair and effective distribution mechanism becomes increasingly complex. The need for states to adapt to changing fiscal realities while ensuring intergenerational equity remains a critical policy challenge.

Recommendations for the Finance Commission

• Balancing Equity and Efficiency: The FC needs to strike a balance between equity (fair distribution) and efficiency (fiscal discipline and responsibility). This could be achieved by revising the weightage of indicators to incentivize fiscal responsibility and efficient resource allocation.
• Incentivizing Sustainable Fiscal Practices: By incentivizing states that demonstrate fiscal discipline and efficiency, the FC can promote intergenerational equity. States would be encouraged to generate more own revenues, reduce reliance on transfers, and manage debts within sustainable limits.
• Long-term Sustainability: Emphasizing fiscal responsibility and efficiency not only ensures fairness among current states but also promotes sustainable fiscal practices that do not burden future generations with excessive debt or inadequate public services.

Conclusion

• The devolution of Union tax revenue to states is a complex issue that involves balancing equity among states and ensuring fiscal responsibility across generations. The Finance Commission plays a crucial role in formulating a fair distribution formula that addresses both intragenerational and intergenerational equity. By considering more fiscal indicators and incentivizing efficiency, the FC can help create a more balanced and sustainable fiscal environment for all states.

AGRICULTURE

CHOOSING THE RIGHT TRACK TO CUT POST-HARVEST LOSSES

Source: The Hindu

Post-Harvest Losses

• Reducing post-harvest losses is crucial for ensuring food security, improving farmer incomes, and enhancing overall agricultural efficiency.

Current Challenges in Post-Harvest Losses

• India faces substantial post-harvest losses, amounting to approximately ₹1,52,790 crore annually, with perishable commodities like fruits, vegetables, and dairy products being particularly affected. These losses occur primarily due to inadequate transportation infrastructure, inefficient logistics management, and delays in reaching markets.
• Nearly 97% of fruits and vegetables are transported by road, which is less efficient and more prone to delays and spoilage compared to railways, there is a clear need for improving transport logistics.

Improving the integration of railways into agricultural logistics management represents a significant opportunity to address India's persistent issue of post-harvest losses. These losses not only affect food security and economic sustainability but also impact environmental sustainability due to the associated wastage and inefficiencies in transportation.

Role of Railways in Mitigating Post-Harvest Losses

Efficiency in Transport	●Long-distance Capability: Railways offer efficient long-distance transportation, especially suited for perishable goods. The introduction of initiatives like the Kisan Rail has shown promising results in reducing transit times and ensuring fresher produce reaches markets. ●Reduced Transit Times: Compared to road transport, railways can significantly reduce transit times, thereby minimizing the exposure of perishable goods to spoilage and ensuring better market readiness upon arrival.
Specialized Infrastructure	●Temperature-Controlled Wagons: Investment in specialized wagons equipped with temperature control mechanisms can ensure that perishable goods maintain their freshness throughout the journey. This not only reduces losses due to spoilage but also enhances food safety and quality. ●Rail-Side Facilities: Establishing facilities along railway routes for safe cargo handling, including loading and unloading, is crucial. This infrastructure investment can streamline operations and reduce handling times, further improving the efficiency of perishable transport.
Environmental Impact	●Rail transport is more environmentally sustainable compared to road transport, generating up to 80% less carbon dioxide emissions for freight traffic. By shifting more freight transportation from road to rail, the environmental footprint of agricultural logistics can be significantly reduced, contributing to broader sustainability goals.
Economic Benefits	●Improving the efficiency of agricultural logistics through railways can lead to higher incomes for farmers. Reduced post-harvest losses mean more produce reaches markets in optimal condition, fetching better prices and improving overall farm profitability. ●Enhanced market connectivity through efficient rail logistics can also expand market access for farmers, enabling them to reach distant and lucrative markets with their produce.

Strategies and Recommendations

Policy Support and Investment

• The government should prioritize investment in railway infrastructure tailored for agricultural logistics, including upgrading existing facilities and expanding capacity.
• Policies should incentivize the use of rail transport for perishable goods, possibly through subsidies or reduced tariffs to encourage farmers and businesses to adopt rail transport solutions.

Public-Private Partnerships (PPP)

• Collaborations between the public sector (Indian Railways) and private entities can accelerate the development of specialized infrastructure and services for perishable goods transport.
• PPP models can also facilitate technology adoption and operational efficiencies, ensuring sustainable and scalable solutions.

Capacity Building and Awareness

• Training programs for farmers and stakeholders on utilizing railway logistics effectively can enhance adoption rates and maximize the benefits of rail transport.
• Awareness campaigns can highlight the advantages of rail transport in terms of cost-effectiveness, environmental sustainability, and food safety.

Conclusion

• Integrating railways into agricultural logistics management holds immense potential to transform India's approach to handling post-harvest losses. By leveraging the efficiency, capacity, and environmental benefits of rail transport, India can not only reduce economic losses but also promote sustainable agricultural practices. This holistic approach, supported by strategic investments, policy reforms, and stakeholder engagement, can pave the way for a more resilient and efficient agricultural supply chain in India.