18 July 2024 : The Hindu Editorial Analysis

1. Intergenerational equity as tax devolution criterion

(Source – The Hindu, International Edition – Page No. – 8)

Topic: GS3 – Indian Economy – Issues relating to mobilisation of resources.

Context

The Finance Commission revisits the horizontal distribution of Union tax revenue every five years, prioritising intragenerational equity, which can lead to intergenerational inequity. High-income States finance more of their expenditure with their own tax revenue but receive fewer Union transfers, whereas low-income States rely heavily on Union financial transfers.

Introduction: Devolution of Union Tax Revenue

• The distribution of Union tax revenue to States is a key topic in both political and economic discussions.
• The Finance Commission (FC) revisits the horizontal distribution formula every five years, prioritising equity over efficiency.
• Equity in this context refers to intragenerational equity, aiming to redistribute tax revenue among States.
• This approach can lead to intergenerational inequity within States.

Intergenerational Fiscal Equity

• Intergenerational equity ensures equal opportunities and outcomes for all generations.
• It implies that current generations should not burden future generations with debt.
• Governments can raise revenue through taxes or borrowing; borrowing to finance current expenditures imposes future tax burdens, leading to intergenerational inequity.
• The Ricardian Equivalence Theory suggests that households save more when the government borrows, but this does not hold true in India’s federal context.

Horizontal Distribution Formula and Intragenerational Equity

• High-income States like Tamil Nadu, Kerala, Karnataka, Maharashtra, Gujarat, and Haryana raise significant tax revenue and finance their expenditures, whereas low-income States like Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan, Odisha, and Jharkhand rely more on Union transfers.
• During the 14th Financial Commission period (2015-2020), high-income States financed 59.3% of their revenue expenditure through their own tax revenue, compared to 35.9% in low-income States.
• Low-income States received 57.7% of their revenue expenditure from Union transfers, while high-income States received only 27.6%.

Federal Finance Aspects

• Low-income States finance less of their expenditure through their own tax revenue and rely heavily on Union transfers.
• High-income States finance more of their expenditure through their own tax revenue but receive fewer Union transfers.
• High-income States incur higher deficits due to lower Union transfers, while low-income States have lower deficits.

Public Expectations and Fiscal Behavior

• Citizens expect public services to match the taxes they pay, whether through State or Union government services.
• Discrepancies in fiscal behaviour can burden high-income States with higher tax payments for both present and future generations.
• Balancing intragenerational and intergenerational equity is crucial, requiring a balance of equity and efficiency in tax devolution.

Addressing Conflicting Equities

• The Financial Commission typically uses indicators like per capita income, population, and area in the distribution formula, reflecting demand for public services and available public revenue.
• These equity indicators carry more weight than efficiency indicators like tax effort and fiscal discipline.
• Efficiency indicators, based on State budgets, should be given more weight to influence fiscal behaviour positively.

Fiscal Responsibility and Incentivizing Efficiency

• States have Fiscal Responsibility Acts that limit deficits and public debt.
• Reduced Union transfers can compel some States to breach these limits.
• The Financial Commission should assign more weight to fiscal indicators, incentivizing tax effort and expenditure efficiency through larger Union transfers.
• This approach would ensure intergenerational fiscal equity and sustainable debt management by States.

Conclusion: Balancing Equity and Efficiency

• The Financial Commission’s role is to balance equity and efficiency in the distribution formula for tax devolution.
• This balance should address conflicting equity issues and promote fiscal discipline and sustainability.
• Proper implementation of fiscal indicators in the distribution formula can positively influence States’ fiscal behaviour, ensuring both intragenerational and intergenerational equity.

PYQ: How have the recommendations of the 14th Finance Commission of India enabled the States to improve their fiscal position? (150 words/10m) (UPSC CSE (M) GS-2 2021)

Practice Question:  Discuss the implications of the Finance Commission’s horizontal distribution of Union tax revenue on intergenerational equity and fiscal sustainability in high-income versus low-income States. (250 Words /15 marks)

2. Choosing the right track to cut post-harvest losses

(Source – The Hindu, International Edition – Page No. – 8)

Topic: GS3 – Agriculture – Supply chain management.

Context

India ranks second in global agriculture production but faces significant post-harvest losses, particularly in perishables, due to logistical inefficiencies. Initiatives like Kisan Rail aim to reduce these losses and enhance farmer incomes by improving the transportation and supply chain infrastructure for agricultural produce.

Causes of post harvest losses along the supply chain

India’s Agricultural Production and Export Challenges

• India ranks second in global agriculture production but is eighth in global agricultural exports with only a 2.4% share.
• Low productivity, inability to meet quality standards, and inefficiencies in the supply chain, including inadequate transportation and infrastructure, contribute to this disparity.
• Post-Harvest Losses: Annually, India faces approximately ₹1,52,790 crore in post-harvest losses, highlighting a significant issue in the agricultural supply chain.

The Magnitude of Post-Harvest Losses

• Perishable Commodities: The highest losses are seen in perishable commodities such as livestock produce (22%), fruits (19%), and vegetables (18%).
• Export Losses: During the export process, around 19% of food is lost, particularly at the import-country stage.
• Efficient storage, transportation, and marketing are essential to ensure perishable products reach consumers in time, a priority identified by the Committee on Doubling Farmer’s Income (DFI).

Logistical Challenges in Agriculture

• Complex Supply Chain: Includes first mile transport from farmgate to mandi, long haul transport by various means, and last mile transport to consumers.
• Small and Marginal Farmers (SMF): Constituting 86% of farmers, SMFs struggle with economy of scale and market connectivity, leading to significant post-harvest and income losses.

Food Price Volatility and Railway’s Role

• Price Volatility: Supply constraints affecting perishable produce contribute to food price volatility.
• Railway’s Freight Operations: Indian Railways’ freight transport is crucial, with 75% of its revenue from this sector, including agricultural produce.
• The Food Corporation of India relies on Indian Railways to move 90% of its food grains, while 97% of fruits and vegetables are transported by road.

Indian Railways’ Initiatives

• Truck-on-Train Service: Carries loaded trucks on railway wagons, with successful trial runs involving milk and cattle feed.
• Parcel Special Trains: Introduced during COVID-19 to transport perishables and seeds between markets and producers.
• Kisan Rail: Connects surplus production regions to consumption regions more efficiently, reducing post-harvest losses and enhancing farmer incomes.

Impact of Kisan Rail

• Case Study: Grape growers in Nashik, Maharashtra, saw a net profit of ₹5,000 per quintal using Kisan Rail, transporting about 22,000 quintals of grapes.
• Promising Results: Highlights the advantages of rail-based long-haul transportation of fruits and vegetables.

Challenges and Opportunities

• Farmer Awareness: Need to increase awareness and accessibility of farmers to Railway schemes.
• Logistical Touch Points: Multiple touch points during transport can be a challenge; investment in specialised wagons and rail-side facilities is essential.
• Food Safety: Specialised wagons can minimise spoilage and contamination risks, supporting both domestic and export markets.
• Emphasise streamlining loading and unloading processes and addressing staffing shortages through recruitment and training.

Environmental and Operational Efficiency

• Carbon Emissions: Rail transport generates up to 80% less carbon dioxide than road transport for freight traffic.
• Systems-Based Approach: Integration across modes of transport and geographies is necessary.
• Public-Private Partnerships: Private sector involvement can enhance operational efficiency and strengthen rail infrastructure.

Government Initiatives

• Budgetary Allocation for Agriculture 2024: Aims to bridge the farm-to-market gap with modern infrastructure and value-addition support.
• Complementary Railway Initiatives: Support efficient transportation of perishable goods and minimise post-harvest losses.

Conclusion

• Prioritising rail over road for transporting perishables promises efficiency and reduced losses.
• Efficient rail transport can improve livelihoods and support environmental sustainability, positively impacting future generations.

Practice Question:  Discuss the challenges faced by India in reducing post-harvest losses of perishable agricultural commodities and evaluate the impact of initiatives like Kisan Rail on mitigating these losses. (150 Words /10 marks)