{"id":27048,"date":"2024-07-29T17:09:39","date_gmt":"2024-07-29T11:39:39","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=27048"},"modified":"2024-07-31T16:27:05","modified_gmt":"2024-07-31T10:57:05","slug":"niti-aayog-reimagining-fiscal-federalism","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/editorial-analysis\/29-07-2024\/niti-aayog-reimagining-fiscal-federalism","title":{"rendered":"NITI Aayog: Reimagining Fiscal Federalism"},"content":{"rendered":"\n<p><strong>Syllabus: GS2\/Governance; Federalism<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-0cb2d8d8970fcc76e5fb15bd21ee6252\" style=\"color:#015aa7\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Recent Governing Council meeting of the NITI Aayog that was skipped by the representatives of several States and Union Territories highlighted both structural and functional issues.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-7b8b4aefd3d18a4a26d2e590e5f861b3\" style=\"color:#015aa7\"><strong>About<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>India\u2019s Constitution-makers envisioned the country as a union of States, emphasising unity and integrity. However, over the years, India has transformed significantly\u2014economically, politically, demographically, and socially.<\/li>\n\n\n\n<li>As the new aspirational India accelerates along its growth trajectory, it\u2019s essential to revisit the concept of fiscal federalism.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-474e87844aca7288500f44b3c66f008a\" style=\"color:#015aa7\"><strong>National Institution for Transforming India (NITI) Aayog<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>National Institution for Transforming India (NITI) Aayog was established by the government <strong>to replace the Planning Commission<\/strong> in 2015 with the aim <strong>to move away from the top-down approach of the Planning Commission<\/strong> and focus on <strong>\u2018Co-operative Federalism\u2019.<\/strong><\/li>\n\n\n\n<li><strong>Advisory Role: <\/strong>The NITI Aayog\u2019s primary function is advisory, lacking the authority to distribute resources or allocate funds to states.\n<ul class=\"wp-block-list\">\n<li>Unlike the Planning Commission, which allowed consultations with states, the NITI Aayog\u2019s focus shifted toward creating indices to evaluate states.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Conditional Transfers:<\/strong> In the past, the Planning Commission provided grants to States using the <strong>Gadgil-Mukherjee formula<\/strong>. With the Planning Commission disbanded, NITI Aayog could step in to facilitate \u2018transformational\u2019 interventions. However, it currently lacks the financial resources for this purpose.<\/li>\n\n\n\n<li><strong>Resource Allocation:<\/strong> NITI Aayog 2.0 should receive significant resources (perhaps 1% to 2% of GDP) to promote accelerated growth in lagging States. By strategically allocating funds, it can address both <strong>Type I and Type II imbalances.<\/strong><\/li>\n\n\n\n<li><strong>Competitive Federalism:<\/strong> The unintended consequence of this advisory approach has been \u2018Competitive Federalism\u2019.\n<ul class=\"wp-block-list\">\n<li>Meanwhile, the Finance Ministry retains the power to decide on grants to states. This situation has led to discontent among states, especially those ruled by opposition parties.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Present Government\u2019s \u2018Double Engine\u2019 Approach:<\/strong> It has campaigned in state elections based on providing <strong>\u2018double engine\u2019 governments (both at the state and central levels).<\/strong> This has raised concerns that <strong>investment projects may favour<\/strong> similar party-ruled states.<\/li>\n\n\n\n<li><strong>Dependence on Regional Parties: <\/strong>Present government now relies on support from parties governing states like Bihar and Andhra Pradesh, which face varying developmental deficits. The Finance Minister&#8217;s intention to address their demands in the budget has not gone unnoticed.<\/li>\n\n\n\n<li>However, over time, the NITI Aayog has faced criticism due to its limited role as an advisory body without direct powers of resource allocation to states.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-2aa5c688cdf82557ca0f7234833de174\" style=\"color:#015aa7\"><strong>Concerns and Issues Ahead of NITI Aayog<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Vertical Imbalance:<\/strong> This arises because tax systems often yield more revenue to the Union government than to State or Provincial Governments. Yet, the Constitution assigns relatively greater responsibilities to the States.\n<ul class=\"wp-block-list\">\n<li>For instance, post the introduction of the Goods and Services Tax (GST), States shoulder 60% of public expenditure, while the Centre handles 40% to fulfill their constitutionally mandated duties.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Horizontal Imbalance:<\/strong> This stems from differing levels of development among States due to varying growth rates and disparities in social and infrastructure capital.\n<ul class=\"wp-block-list\">\n<li>Traditionally, Finance Commissions have addressed these imbalances effectively, making them the first pillar of India\u2019s fiscal federal structure.<\/li>\n\n\n\n<li>However, India\u2019s horizontal imbalance requires a more nuanced approach. It involves two types:<\/li>\n\n\n\n<li><strong>Type I Imbalance:<\/strong> This pertains to the provision of basic public goods and services.<\/li>\n\n\n\n<li><strong>Type II Imbalance: <\/strong>This results from infrastructure deficits that hinder growth. These deficits are often historically conditioned or path-dependent.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-1310f4b98c4eeabd29f7cd815c31a887\" style=\"color:#015aa7\"><strong>Structural Issues of NITI Aayog<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Replacement of the Planning Commission: <\/strong>Unlike the centralised planning approach of the Planning Commission, NITI Aayog was envisioned as a more flexible and dynamic institution.\n<ul class=\"wp-block-list\">\n<li>However, the transition from a centralised planning model to a think tank with a focus on cooperative federalism posed initial challenges. Some critics argue that NITI Aayog lacks the same level of authority and financial resources as its predecessor.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Composition and Representation:<\/strong> The composition of NITI Aayog\u2019s Governing Council includes all State Chief Ministers, Lieutenant Governors of Union Territories, and several Union Ministers.\n<ul class=\"wp-block-list\">\n<li>While this ensures representation, it can also lead to divergent interests and varying priorities.<\/li>\n\n\n\n<li>Critics point out that the presence of Union Ministers in the council might dilute the States\u2019 voice, as the Centre\u2019s interests could overshadow those of the States.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Resource Constraints: <\/strong>Unlike the Planning Commission, which had a dedicated allocation for grants to States, NITI Aayog lacks direct financial resources. It relies on the central budget for its functioning.\n<ul class=\"wp-block-list\">\n<li>This resource constraint affects NITI Aayog\u2019s ability to drive transformative interventions at the State level effectively.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-5214a3f89c560a43e63afe955b387ff9\" style=\"color:#015aa7\"><strong>Functional Issues of NITI Aayog<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Policy Implementation and Execution:<\/strong> While NITI Aayog formulates policies and provides recommendations, its impact on policy execution remains limited. Implementation lies primarily with individual States and ministries.\n<ul class=\"wp-block-list\">\n<li>Critics argue that NITI Aayog should play a more active role in monitoring and evaluating policy outcomes.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Lack of Statutory Powers:<\/strong> Unlike the Planning Commission, NITI Aayog doesn\u2019t have statutory powers. It operates as an advisory body, which limits its ability to enforce policy decisions.\n<ul class=\"wp-block-list\">\n<li>Some experts advocate for granting NITI Aayog more legal authority to ensure effective coordination between the Centre and States.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Cooperative Federalism vs. Competitive Federalism:<\/strong> NITI Aayog promotes cooperative federalism, emphasising collaboration and dialogue between the Centre and States. However, there\u2019s a fine balance between cooperation and healthy competition.\n<ul class=\"wp-block-list\">\n<li>Critics argue that NITI Aayog should also encourage competitive federalism, where States compete to improve governance, attract investments, and enhance development outcomes.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-c1dc16c0e4df56603afeaeaa6a72332b\" style=\"color:#015aa7\"><strong>Recent Recommendations and Best Practices<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Common Vision:<\/strong> Prime Minister stressed the need for a common vision between the Centre and states to achieve a developed India by 2047.\n<ul class=\"wp-block-list\">\n<li>He urged states to take financially prudent decisions and use platforms like the Gati Shakti Portal for infrastructure and logistics.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>State-Level Best Practices:<\/strong> States highlighted various best practices, including green strategies, zone-wise planning, tourism, urban planning, and quality workmanship<\/li>\n\n\n\n<li><strong>Easing MSME Exports:<\/strong> NITI Aayog recommends simplifying e-commerce routes for Micro, Small, and Medium Enterprises (MSMEs) to boost exports, including creating a single national trade portal for approvals and compliances.<\/li>\n\n\n\n<li><strong>Integration into Global Value Chains:<\/strong> NITI Aayog emphasises integrating India into global value chains and adapting to emerging trading systems.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading has-text-color has-link-color wp-elements-13bd26f269d4aba21a5832038af167cc\" style=\"color:#015aa7\"><strong>Conclusion and Way Forward<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>As India celebrates its 75th year, reimagining fiscal federalism becomes critical. NITI Aayog, with adequate resources and a clear mandate, can be the catalyst for a more balanced and competitive federal structure\u2014one that aligns with the evolving needs of our diverse nation.<\/li>\n\n\n\n<li>NITI Aayog has made significant contributions, addressing these issues will be crucial for its continued effectiveness in shaping India\u2019s development path, and it needs to evolve to strike a better balance between advisory functions and active engagement with states, fostering genuine cooperative federalism.<\/li>\n\n\n\n<li>NITI Aayog needs <strong>to regain some of the responsibilities that the Planning Commission<\/strong> had for states, including meaningful consultations on grants and projects to promote true cooperative federalism.<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background has-fixed-layout\" style=\"background-color:#fff2cc\"><tbody><tr><td><strong>Daily Mains Practice Question<\/strong><br><strong>[Q]<\/strong> Compare and contrast the principles followed by the NITI Aayog with the erstwhile Planning Commission in India. Highlights the structural and functional challenges ahead of NITI Aayog.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><a href=\"https:\/\/www.thehindu.com\/opinion\/editorial\/competitive-federalism-on-the-niti-aayog\/article68457865.ece\" target=\"_blank\" rel=\"noopener\">Source: TH<\/a><\/p>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-round\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.nextias.com\/ca\/wp-content\/uploads\/2024\/07\/Daily-Editorial-Analysis-29-07-2024.pdf\">Download PDF<\/a><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Recent Governing Council meeting of the NITI Aayog that was skipped by the representatives..<\/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-27048","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\/27048","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=27048"}],"version-history":[{"count":4,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/27048\/revisions"}],"predecessor-version":[{"id":27124,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/27048\/revisions\/27124"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=27048"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=27048"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=27048"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}