{"id":21327,"date":"2024-02-07T17:13:34","date_gmt":"2024-02-07T11:43:34","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=21327"},"modified":"2024-02-09T12:42:30","modified_gmt":"2024-02-09T07:12:30","slug":"the-erosion-of-fiscal-federalism","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/editorial-analysis\/07-02-2024\/the-erosion-of-fiscal-federalism","title":{"rendered":"The Erosion of Fiscal Federalism"},"content":{"rendered":"\n<p><strong>Syllabus: GS 2\/Centre -State Relations&nbsp;<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>In Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The Kerala government has accused the Centre of pushing the State into a severe financial crisis by imposing a limit on its borrowings.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Development of fiscal federalism in India<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Fiscal functions are carried out by the different tiers of a government in a country.&nbsp;<\/li>\n\n\n\n<li>The number of tiers of government involved in the fiscal functions differ from one country to another depending upon the federal structure of the government.\n<ul class=\"wp-block-list\">\n<li>For instance, the<strong> USA, India and Australia have a three-tier federal structure.<\/strong><\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>At the core of fiscal federalism in India lie <strong>fiscal transfers from the central government to subnational governments.&nbsp;<\/strong><\/li>\n\n\n\n<li><strong>Article 268 to 281 <\/strong>of the Indian Constitution deals with the distribution of revenue between the <strong>Union and the States.<\/strong><\/li>\n\n\n\n<li>Transfers are predominantly based on the recommendations of the<strong> Finance Commission a<\/strong>nd consist of <strong>tax devolution and grants.&nbsp;<\/strong><\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#fff2cc\"><tbody><tr><td><strong>Do you know ?<\/strong><br>&#8211; A<strong>rticle 280(1) of the Constitution<\/strong>s lays down that the modalities for setting up of a <strong>Finance Commission<\/strong>&nbsp;<br>&#8211; It is appointed after every<strong> five years or earlier <\/strong>to make recommendations to the President regarding the distribution of shared taxes, grants-in-aid and any other matter referred to the Commission.<br>&#8211; Subsequent to the <strong>73rd and 74th amendment of the Constitution<\/strong> and insertion of clause (3) to Article 280, the Commissions started giving additional grants for local bodies as a measure to augment the consolidated funds of the States to supplement the resources of local bodies.&nbsp;&nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Various issues regarding fiscal federalism in India<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Centre\u2019s ceiling rule: <\/strong>Kerala has moved the Supreme Court contending that the Centre\u2019s imposition of a <strong>Net Borrowing Ceiling (NBC)<\/strong> on the State, which limits borrowings from all sources, violates<strong> Article 293 of the Constitution.&nbsp;<\/strong>\n<ul class=\"wp-block-list\">\n<li><strong>According to Article 293(3)<\/strong> of the Constitution, the State has to obtain the consent of the Centre to<strong> raise \u2018any loan<\/strong>\u2019, if \u2018any part of the previous loan\u2019 extended by the Centre is outstanding.<\/li>\n\n\n\n<li><strong>Parliament does not have the power <\/strong>to legislate upon the \u2018<strong>Public Debt of the State\u2019 <\/strong>as this finds place in <strong>Entry 43 of the State List of the Constitution<\/strong>.&nbsp;<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Increasing dependency on Centre<\/strong>: The reliance of states on central government revenue has grown, witnessing a decrease in the <strong>share of revenue from independent sources from 55% in 2014-15 to 50.5% in 2020-21.<\/strong>\n<ul class=\"wp-block-list\">\n<li>This trend is partly inherent in India&#8217;s fiscal structure, where <strong>states are significant spenders <\/strong>while the central government controls financial allocations.<\/li>\n\n\n\n<li>The introduction of the GST has further compounded this situation, as <strong>most indirect taxes, except for a few like petroleum products, property tax, and alcohol excise, have been absorbed into the GST framework<\/strong>. This has diminished the states&#8217; capacity to generate their own revenue.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Post GST:<\/strong> States no longer possess the authority to independently determine tax rates for subjects listed under the State List.\n<ul class=\"wp-block-list\">\n<li>In the past, state governments had the flexibility to set tax rates based on factors such as their expenditure needs and revenue base.&nbsp;<\/li>\n\n\n\n<li>The current situation, where states cannot adjust tax rates according to their developmental needs, results in increased reliance on central government funds.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Cess and surcharges: <\/strong>Another emerging challenge is that cesses and surcharges are becoming a disproportionate proportion of the overall divisible revenue, withnon-tax revenues being kept outside the divisible pool.<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#fff2cc\"><tbody><tr><td><strong>Net Borrowing Ceiling (NBC)<\/strong><br>&#8211; The NBC limits the borrowings of States from all sources including <strong>open market borrowings.&nbsp;<\/strong><br>&#8211; The Centre has decided to deduct liabilities arising from the public account of the States to arrive at the NBC.&nbsp;<br>&#8211; In addition, borrowings by state-owned enterprises, where the principal and\/or interest are serviced out of the Budget, or through assignment of taxes or cess or any other State revenue, are also deducted from the NBC.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Suggestions and Way Forward&nbsp;<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Disputes between the Centre and States regarding economic policies have a long history in India.\n<ul class=\"wp-block-list\">\n<li>However, in recent years the frequency and intensity of such disputes have increased and assumed the character of \u2018persistent frictions\u2019 in the federal system.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>These issues needed urgent consideration to reinforce trust in <strong>fiscal federalism.<\/strong><\/li>\n\n\n\n<li>Therefore, there is need to give serious consideration for a consultative forum for credible policy dialogue between the Centre and the States<\/li>\n\n\n\n<li>It is equally important to ensure all round efficiency in the deployment of public funds, in particular, investments in productive enterprises in the public sector.<\/li>\n\n\n\n<li>There is a need for a<strong>ugmenting the resources both of the Centre and the States <\/strong>and the cake has to grow before the slices can become bigger. This requires faster growth of the economy and restructuring the expenditure of the Centre and the States.<\/li>\n\n\n\n<li>The 15th Finance Commission has thus recommended a <strong>slew of fiscal reforms to increase the tax-to-GDP ratio<\/strong>, especially through an overhaul of the goods and services tax.<\/li>\n\n\n\n<li>It is time that the major political parties develop a broad consensus at the centre and the states and blend good economics with politics<strong>.<\/strong><\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#ebecf0\"><tbody><tr><td><span style=\"text-decoration: underline;\"><strong>Mains Practice Question<\/strong><br><\/span><strong>&nbsp;[Q]<\/strong> State in brief the principles of federal finance. How far do the Centre-State financial relations in India adhere to these?<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.nextias.com\/ca\/wp-content\/uploads\/2024\/02\/Daily-Editorial-Analysis-07-02-2024.pdf\">Download PDF<\/a><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Syllabus: GS 2\/Centre -State Relations\u00a0<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[22],"tags":[],"class_list":["post-21327","post","type-post","status-publish","format-standard","hentry","category-editorial-analysis"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/21327","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=21327"}],"version-history":[{"count":8,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/21327\/revisions"}],"predecessor-version":[{"id":21388,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/21327\/revisions\/21388"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=21327"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=21327"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=21327"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}