{"id":7022,"date":"2022-07-28T00:00:00","date_gmt":"2022-07-28T00:00:00","guid":{"rendered":"https:\/\/www.nextias.com\/current_affairs\/uncategorized\/28-07-2022\/state-of-indias-fiscal-federalism\/"},"modified":"2022-07-28T00:00:00","modified_gmt":"2022-07-28T00:00:00","slug":"state-of-indias-fiscal-federalism","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/editorial-analysis\/28-07-2022\/state-of-indias-fiscal-federalism","title":{"rendered":"State of India\u2019s Fiscal Federalism"},"content":{"rendered":"

In Context\u00a0<\/u><\/strong><\/span><\/span><\/span><\/p>\n

The concerns of the founding fathers for addressing socio-economic inequities are being forgotten in <\/span><\/span><\/span>today\u2019s fiscal policy.<\/strong><\/span><\/span><\/span><\/p>\n

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Fiscal Federalism:\u00a0<\/u><\/strong><\/span><\/span><\/span><\/p>\n

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  • It deals with the <\/span><\/span><\/span>division of financial powers<\/strong><\/span><\/span><\/span> as well as the<\/span><\/span><\/span> functions between multiple levels of the federal government<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span><\/li>\n
  • It has within its ambit the imposition of taxes as well as the division of different taxes between the <\/span><\/span><\/span>Centre and the constituent units.\u00a0<\/strong><\/span><\/span><\/span><\/li>\n
  • Similarly, in the case of joint collection of taxes, an objective criterion is determined for the fair division of funds between the entities.\u00a0<\/span><\/span><\/span>\n
      \n
    • Usually, there is a constitutional authority (like Finance Commission in India) for the purpose to ensure fairness in the division.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

      Degree of centralisation in Fiscal power<\/u><\/strong><\/span><\/span><\/span><\/p>\n

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      • A degree of centralisation in fiscal power was required to address the concerns of <\/span><\/span><\/span>socio-economic and regional disparities<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span>\n
          \n
        • This a<\/span><\/span><\/span>symmetric federalism<\/strong><\/span><\/span><\/span> was <\/span><\/span><\/span>accelerated and mutually reinforced<\/strong><\/span><\/span><\/span> with<\/span><\/span><\/span> political centralisation since 2014,<\/strong><\/span><\/span><\/span> making the <\/span><\/span><\/span>Union Government extractive rather than enabling<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span><\/li>\n
        • States lost their capacity to<\/span><\/span><\/span> generate revenue by surrendering<\/strong><\/span><\/span><\/span> their rights in the wake of the <\/span><\/span><\/span>Goods and Services Tax (GST) regim<\/strong><\/span><\/span><\/span>e<\/span><\/span><\/span><\/li>\n
        • Their expenditure pattern too was <\/span><\/span><\/span>distorted by the Union\u2019s intrusion, particularly through its centrally sponsored schemes<\/strong><\/span><\/span><\/span> .<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n

          Broadening powers of the Finance Commission.\u00a0<\/u><\/strong><\/span><\/span><\/span><\/p>\n

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          • Historically, India\u2019s fiscal transfer worked through two pillars, i.e., the Planning <\/span><\/span><\/span>Commission and the Finance Commission.\u00a0<\/strong><\/span><\/span><\/span>\n
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            • But abolition of the Planning Commission in 2014 <\/strong><\/span><\/span><\/span>led to the <\/span><\/span><\/span>Finance Commission becoming a major mean<\/strong><\/span><\/span><\/span>s of fiscal transfer as the commission itself broadened its scope of sharing all taxes since 2000 from its original design of just two taxes \u2014<\/span><\/span><\/span> income tax and Union excise duties.<\/strong><\/span><\/span><\/span><\/li>\n
            • Today, the Finance Commission became a <\/span><\/span><\/span>politicised institution<\/strong><\/span><\/span><\/span> with <\/span><\/span><\/span>arbitrariness and inherent bias towards the Union government<\/strong><\/span><\/span><\/span>.\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n

              Observations of P.V. Rajamannar committee\u00a0<\/u><\/strong><\/span><\/span><\/span><\/p>\n

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              • The Dravida Munnetra Kazhagam constituted a committee under Justice <\/span><\/span><\/span>P.V. Rajamannar in 1969,<\/strong><\/span><\/span><\/span> the first of its kind by a State government, to look at <\/span><\/span><\/span>Centre-State fiscal relations and recommend more transfers and taxation powers for regional governments.<\/strong><\/span><\/span><\/span>\u00a0<\/span><\/span><\/span><\/li>\n<\/ul>\n

                Issues \/Challenges<\/u><\/strong><\/span><\/span><\/span><\/p>\n

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                • Hollowing out fiscal capacity<\/strong><\/span><\/span><\/span>\n
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                  • The <\/span><\/span><\/span>ability of States to finance current expenditures <\/strong><\/span><\/span><\/span>from their own revenues has <\/span><\/span><\/span>declined from 69% in 1955-56 t<\/strong><\/span><\/span><\/span>o<\/span><\/span><\/span> less than 38% in 2019-20.<\/strong><\/span><\/span><\/span><\/li>\n
                  • States cannot raise tax revenue because of curtailed indirect tax rights \u2014 subsumed in GST, except for petroleum products, electricity and alcohol \u2014 the revenue has been stagnant at 6% of GDP in the past decade.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n
                  • Differential interest\u00a0<\/strong><\/span><\/span><\/span>\n
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                    • States are forced to pay differential interest \u2014<\/span><\/span><\/span> about 10% against 7%<\/strong><\/span><\/span><\/span> \u2014 by the <\/span><\/span><\/span>Union for market borrowings.\u00a0<\/strong><\/span><\/span><\/span>\n
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                      • the Union gains at the expense of States by exploiting these interest rate differentials.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n
                      • Curbing autonomy and diversion of a State\u2019s own funds<\/strong><\/span><\/span><\/span>\n
                          \n
                        • \u00a0There are <\/span><\/span><\/span>131 centrally sponsored schemes<\/strong><\/span><\/span><\/span>, with a few dozen of them accounting for <\/span><\/span><\/span>90% of the allocation, and States required <\/strong><\/span><\/span><\/span>to share a part of the cost.\u00a0<\/span><\/span><\/span>\n
                            \n
                          • States autonomy has been curbed by turning them into mere implementing agencies of the Union\u2019s schemes<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n
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                            • These schemes, driven by the one-size-fits-all approach, are given precedence over <\/span><\/span><\/span>State schemes, undermining the electorally mandated democratic politics of States.<\/strong><\/span><\/span><\/span><\/li>\n<\/ul>\n
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                              • The diversion of a State\u2019s own funds to centrally sponsored schemes, thereby depleting <\/span><\/span><\/span>resources for its own schemes, violates constitutional provision.\u00a0<\/strong><\/span><\/span><\/span><\/li>\n<\/ul>\n
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                                • Deepening inequality<\/strong><\/span><\/span><\/span>\n
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                                  • The political centralisation has only deepened inequality.\u00a0<\/span><\/span><\/span>\n
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                                    • The poorest half of the population has less than 6% of the wealth while the top 10% nearly grab two-third of it\u2019.<\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n

                                      Conclusion and Way Forward\u00a0<\/u><\/strong><\/span><\/span><\/span><\/p>\n

                                        \n
                                      • In sum, I<\/span><\/span><\/span>ndia\u2019s fiscal federalism driven by political centralisation <\/strong><\/span><\/span><\/span>has deepened <\/span><\/span><\/span>socio-economic inequality<\/strong><\/span><\/span><\/span>, belying the dreams of the founding fathers who saw a cure for such inequities in planning.\u00a0<\/span><\/span><\/span>\n
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                                        • \u00a0If there was anything that alleviated poverty, reduced inequality and improved the well-being of people, these were the time-tested schemes of <\/span><\/span><\/span>State governments, but they are now under threat.<\/strong><\/span><\/span><\/span>\n
                                            \n
                                          • Therefore ,th<\/span><\/span><\/span>e states should be given some autonomy\u00a0<\/strong><\/span><\/span><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n
                                          • Distribution of resources<\/strong><\/span><\/span><\/span> is also essential alongside decentralisation of powers for a<\/span><\/span><\/span>chieving economic growth.<\/strong><\/span><\/span><\/span><\/li>\n
                                          • If needed ,the <\/span><\/span><\/span>State Legislature<\/strong><\/span><\/span><\/span> will have to take a collective stand to resist the <\/span><\/span><\/span>Centre\u2019s policy of suffocating the States\u2019 right<\/strong><\/span><\/span><\/span><\/li>\n
                                          • The Union government needs to invest resources towards facilitating effective <\/span><\/span><\/span>consultation with States as a part of the lawmaking proces<\/strong><\/span><\/span><\/span>s.<\/span><\/span><\/span><\/li>\n
                                          • \u00a0It is critical that the Union establishes a system where citizens and States are treated as partners and not subjects.<\/span><\/span><\/span><\/li>\n
                                          • The states need to be given the right to modify the SGST within a narrow band to introduce some level of federal flexibility into the GST.\u00a0<\/span><\/span><\/span><\/li>\n
                                          • Recommendations of P.V. The Rajamannar committee needs to be considered .<\/strong><\/span><\/span><\/span><\/li>\n
                                          • Some urgent necessary measures need to be taken for <\/span><\/span><\/span>pumping oxygen to fiscal federalism in India.<\/strong><\/span><\/span><\/span><\/li>\n<\/ul>\n
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                                            \n

                                            Mains Practise Question<\/u><\/strong><\/span><\/span><\/span>\u00a0<\/span><\/span><\/span><\/p>\n

                                            [Q]<\/strong><\/span><\/span><\/span> What are the present challenges associated with\u00a0 the poor state of India\u2019s fiscal federalism?\u00a0 Analyse and suggest measures.<\/span><\/span><\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

                                            In Context\u00a0 The concerns of the founding fathers for addressing socio-economic inequities are being forgotten in today\u2019s fiscal policy. Fiscal Federalism:\u00a0 It deals with the division of financial powers as well as the functions between multiple levels of the federal government.\u00a0 It has within its ambit the imposition of taxes as well as the division […]<\/p>\n","protected":false},"author":1,"featured_media":7023,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[22],"tags":[112,30,124],"class_list":["post-7022","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-editorial-analysis","tag-functions-responsibilities-of-the-union-the-states","tag-gs-2","tag-separation-of-powers"],"acf":[],"jetpack_featured_media_url":"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2023\/07\/3574413Screenshot_6.png","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/7022","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\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=7022"}],"version-history":[{"count":0,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/7022\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media\/7023"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=7022"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=7022"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=7022"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}