Fiscal equalisation
Also called: Equalisation principle · Topic: Fiscal Federalism: Finance Commission, Devolution and Centre-State Finances · NCERT: Beyond NCERT
Meaning
Fiscal equalisation means designing transfers so that every state can provide comparable services at comparable tax rates, even though their fiscal capacity (ability to raise revenue) is unequal. It does not make every state equally rich. It gives poorer states enough money that their people are not stuck with much worse services or much heavier taxes. Canada's equalisation payments and Australia's Commonwealth Grants Commission are the classic models.
Example
In India, the income distance criterion in the Finance Commission formula does this job. States whose per capita income is further below a benchmark, such as Bihar and Uttar Pradesh, get a bigger share of central taxes. Under the 16th Finance Commission (2026-31), Uttar Pradesh gets 17.62% of the states' pool.
Don't confuse with
- Efficiency-based transfers: equalisation sends money to states according to their need. Efficiency criteria, such as demographic performance or contribution to GDP, reward performance. Pushing equalisation too far can penalise states that grow faster or tax better.