(wl-3603)-Efficiency Criterion of the Finance Commission

Methods of efficiency criterion deliver more shares to better fiscal performing states. Minor weight assignment and implicit loopholes (ignorance of active population, magnitude and public expenditure management aspect of fiscal performance and possibility of manipulation by the recipient) in the methods used by the Finance Commission for sharing of central shared taxes across states of India provide more shares to poor performers. Optimum weight mechanism given by Mahamallik and Sahu (2015) and a method which includes exclusive parameters of revenue and public expenditure management aspects of fiscal performance scaled by active population and free from the potentiality of manipulation by the recipient may ensure due share to better performers. The sixteenth FC may consider the suggestion while using the efficiency criterion for horizontal sharing of central shared taxes.