Horizontal fiscal imbalance
Topic: Fiscal Federalism: Finance Commission, Devolution and Centre-State Finances · NCERT: Beyond NCERT
Meaning
Horizontal fiscal imbalance means that states differ from one another in how much revenue they can raise and how much they need to spend. It has two sources. The first is unequal fiscal capacity, meaning some states have richer tax bases. The second is cost disabilities: hills, forests and sparse population make the same service costlier to deliver. It is corrected through horizontal devolution, which splits the states' share of central taxes among individual states using a weighted formula.
Example
Per capita GSDP in Goa or Karnataka is several times that of Bihar. Meanwhile, delivering a school or a health centre in a north-eastern or Himalayan state costs more because of the terrain. The Finance Commission's criteria for income distance, area and forest cover are meant to make up for these gaps.
Don't confuse with
- Vertical fiscal imbalance: this is the gap between the Centre and the states taken as a whole. Horizontal imbalance is the gap among the states themselves.