The need to integrate the elderly population as a criterion for intergovernmental fiscal transfers is gaining momentum, potentially benefiting states like Kerala with a proportionally larger elderly population. States like Kerala, which successfully controlled their population growth, saw their share of tax receipts decrease following the 15th Finance Commission’s recommendations. Experts suggest that the 16th Finance Commission should consider the elderly population in its resource allocation formula to ensure a more equitable distribution of resources.
Demographic Shifts and Fiscal Challenges
Kerala’s demographic profile is unique, with a significant proportion of its population being elderly. This demographic shift has led to increased healthcare and social security costs. The current tax allocation system, which relies on population data from the 2011 Census, does not adequately account for these changes. As a result, states like Kerala, which have made significant progress in population control, find themselves at a disadvantage.
The 15th Finance Commission’s recommendations have been criticized for creating a horizontal imbalance. By using outdated census data, the Commission has inadvertently penalized states with lower population growth. This has led to a decrease in Kerala’s share of tax revenue, exacerbating the state’s fiscal challenges. Experts argue that incorporating the elderly population into the tax devolution formula could help address these imbalances.
A recent policy paper by the National Institute of Public Finance and Policy highlights the necessity of considering the elderly population in formula-based intergovernmental fiscal transfers. The study suggests that incorporating the elderly population (60+ years) into the tax devolution formula could significantly alter resource distribution among states, benefiting those with higher elderly populations.
Policy Recommendations and Future Implications
Experts recommend that the Sixteenth Finance Commission should consider demographic changes by incorporating the share of the elderly population to working-age population ratio as a criterion. This approach would promote a more equitable and efficient allocation of resources. The current formula, which gives weightage to demographic performance, income distance, population, area, forest and ecology, and tax and fiscal efforts, needs to be revisited.
The inclusion of the elderly population in the resource allocation formula could have far-reaching implications. It would not only address the fiscal challenges faced by states like Kerala but also ensure that resources are allocated more equitably. This would help states maintain their high standards of social welfare and public health, which are essential for the well-being of their elderly population.
Kerala’s Finance Minister has urged the Centre to adopt a state-specific financial approach and provide flexibility in borrowing. The state has also demanded a Rs 24,000 crore package to address its fiscal challenges. The Finance Minister emphasized the need for a more nuanced approach to resource allocation, considering the unique demographic and fiscal challenges faced by each state.
The Way Forward
The upcoming conclave of five opposition-ruled states in Thiruvananthapuram will discuss strategies for ensuring their fiscal needs are addressed in the upcoming 16th Finance Commission. This gathering underscores the growing consensus among states on the need for a more equitable resource allocation formula. The conclave aims to present a united front and advocate for changes that would benefit states with higher elderly populations.
The policy paper by the National Institute of Public Finance and Policy has provided a strong empirical basis for these recommendations. By highlighting the fiscal challenges faced by states with aging populations, the paper has brought much-needed attention to this issue. The authors argue that a more equitable resource allocation formula would not only address these challenges but also promote fiscal federalism.
In conclusion, the integration of the elderly population into the resource allocation formula is a crucial step towards ensuring a more equitable distribution of resources. As states like Kerala continue to grapple with the fiscal challenges posed by their aging populations, it is imperative that the Finance Commission adopts a more nuanced and inclusive approach to resource allocation.
