Fiscal transfer in Canada: Drawing comparisons and lessons

The Canadian system of fiscal transfers, which has been developed over a long period of time, has two central features: equalisation grants, which are constitutionally guaranteed, and the Canadian Health and Social Service Transfers (CHST). This paper examines the relevance and applicability of the Canadian system of intergovernmental transfers in the Indian case. Equalisation grants are meant to ensure that provinces have sufficient revenues to provide reasonably comparable levels of services at reasonably comparable levels of taxation. An elaborate `Representative Tax System' approach using individual revenue bases is used in Canada for determining the equalisation grants, although there has recently been a debate to use a more macro approach. The source by source approach is less practical in the Indian case for want of comparable and reliable information required for applying the method. A more practical alternative is the macro approach, which is adopted in India, but better indicators of fiscal capacity than those based on GSDP need to be used. In addition, the concept of ensuring that resources are available for maintaining the per capita expenditure of select basic services at certain levels among states, as attempted in Canada through the CHST transfers, is worth exploring.