{"id":86260,"date":"2026-10-06T18:14:03","date_gmt":"2026-10-06T12:44:03","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=86260"},"modified":"2026-10-06T18:14:17","modified_gmt":"2026-10-06T12:44:17","slug":"fiscal-federalism-in-india","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/06-10-2026\/fiscal-federalism-in-india","title":{"rendered":"Fiscal Federalism in India"},"content":{"rendered":"\n<p><strong>Syllabus: GS2\/ Polity, GS3\/ Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Recent debates over tax devolution and State fiscal autonomy have renewed concerns about the balance between Union resources and state responsibilities.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>About Fiscal Federalism<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Fiscal federalism is an <strong>economic framework<\/strong> for understanding the relationship among Union, state, and local governments, focusing on the division of spending and taxing powers among these governments.\n<ul class=\"wp-block-list\">\n<li>It deals with the <strong>division of responsibilities <\/strong>among different types of governments.<\/li>\n\n\n\n<li>It also deals with the division of revenue-raising powers among various governments, often referred to as \u201ctax assignment.\u201d\u00a0<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>The traditional theory<\/strong> of fiscal federalism argues that taxes on highly mobile entities should be assigned to the central government and taxes on less mobile entities to state or local governments.\n<ul class=\"wp-block-list\">\n<li><strong>Grants-in-aid and intergovernmental transfers<\/strong> become necessary when a government\u2019s expenditure responsibilities exceed its own revenue-raising capacity.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is Fiscal Imbalance?<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The Constitution <strong>distributes taxation powers and expenditure responsibilities<\/strong> between the <strong>Union and States <\/strong>through the <strong>Seventh Schedule.<\/strong>\n<ul class=\"wp-block-list\">\n<li>However, the division is not perfectly symmetrical and creates imbalance.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Vertical Fiscal Imbalance:<\/strong> It refers to the mismatch between the revenue-raising capacity and expenditure responsibilities of different levels of government.\n<ul class=\"wp-block-list\">\n<li><strong>The Finance Commission under Article 280<\/strong> recommends the distribution of the divisible pool between the Union and the States and the allocation of the States&#8217; share among individual States.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Horizontal Fiscal Imbalance:<\/strong> It refers to differences in revenue-raising capacity and expenditure needs among governments at the same level, such as between different states or between different local governments.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>GST as a Mechanism for Cooperative Fiscal Federalism<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The introduction of the <strong>Goods and Services Tax (GST)<\/strong> represented a major transformation of <strong>India&#8217;s indirect tax system.<\/strong><\/li>\n\n\n\n<li>GST <strong>subsumed several Union and State indirect taxes<\/strong> into a common framework and <strong>introduced a destination-based taxation system.<\/strong>\n<ul class=\"wp-block-list\">\n<li><strong>The input tax credit mechanism<\/strong> also reduced the cascading effect of taxation.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>The GST Council under Article 279A<\/strong> is particularly significant because it provides an institutional mechanism through which the Union and States jointly participate in important GST-related decisions.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Fiscal Responsibility and Public Debt<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The sustainability of <strong>fiscal federalism<\/strong> also depends on <strong>responsible borrowing.<\/strong><\/li>\n\n\n\n<li>Government borrowing can support development when it finances <strong>productive investments<\/strong> that generate long-term economic returns.\n<ul class=\"wp-block-list\">\n<li>However, <strong>persistent fiscal deficits<\/strong> can increase <strong>debt-servicing obligations<\/strong> and reduce the resources available for essential public expenditure.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>The Fiscal Responsibility and Budget Management framework 2003\u00a0 <\/strong>seeks to promote fiscal discipline at the Union and State levels.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What are the Concerns?<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>India&#8217;s vertical fiscal imbalance<\/strong> remains a structural challenge because states have extensive expenditure responsibilities but relatively limited access to broad-based and buoyant sources of taxation.<\/li>\n\n\n\n<li><strong>Horizontal disparities <\/strong>between States remain significant because States differ substantially in their income levels, tax bases, demographic structures and costs of providing public services.<\/li>\n\n\n\n<li><strong>The increasing use of tied or conditional transfers<\/strong> can sometimes reduce the flexibility of states to allocate resources according to their specific priorities.<\/li>\n\n\n\n<li><strong>The fiscal position of local governments remains weak<\/strong> because their own-source revenues are limited and their dependence on higher levels of government remains substantial.<\/li>\n\n\n\n<li><strong>Off-budget borrowings<\/strong>, government guarantees and other contingent liabilities can make it difficult to assess the true fiscal position of governments.<\/li>\n\n\n\n<li><strong>Poor expenditure outcomes<\/strong> reduce the developmental impact of public spending even when governments allocate substantial financial resources.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Way Ahead<\/strong><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>States should strengthen tax administration, improve compliance and expand their revenue base without imposing excessive compliance costs on citizens and businesses.<\/li>\n\n\n\n<li>Governments should increasingly adopt outcome-based budgeting and evaluate whether public expenditure produces measurable improvements in health, education, infrastructure and livelihoods.<\/li>\n\n\n\n<li>Future fiscal transfers should increasingly account for differences in climate vulnerability, demographic transition, geographical constraints and the cost of delivering essential public services.<\/li>\n<\/ul>\n\n\n\n<p><strong>Source: <\/strong><a href=\"https:\/\/www.hindustantimes.com\/india-news\/fiscal-federalism-why-public-finance-matters-to-every-citizen-101791169836094.html\" target=\"_blank\" rel=\"noopener\"><strong>HT<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p><strong> Context <\/strong><\/p>\n<li class=\"ms-5\">  Recent debates over tax devolution and State fiscal autonomy have renewed concerns about the balance between Union resources and state responsibilities.<\/li>\n<p><\/p>\n<p><strong>About Fiscal Federalism  <\/strong><\/p>\n<li class=\"ms-5\"> Fiscal federalism is an economic framework for understanding the relationship among Union, state, and local governments, focusing on the division of spending and taxing powers among these governments.\u00a0 <\/li>\n<li class=\"ms-5\"> It deals with the division of responsibilities among different types of governments. <\/li>\n<p><a href=\"https:\/\/www.nextias.com\/ca\/current-affairs\/06-10-2026\/fiscal-federalism-in-india\" class=\"btn btn-primary btn-sm float-end\">Read More<\/a><\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-86260","post","type-post","status-publish","format-standard","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/86260","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\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=86260"}],"version-history":[{"count":2,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/86260\/revisions"}],"predecessor-version":[{"id":86262,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/86260\/revisions\/86262"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=86260"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=86260"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=86260"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}