India’s constitution, a unique blend of a holding-together federation with a unitary orientation, has demonstrated remarkable resilience over the course of 73 years. However, the evolving dynamics of the country’s fiscal federalism – the financial relations between Union and state governments – necessitate a fresh perspective.
Altered Fiscal Landscape: Catalysts for Change
The transformation of India’s economic landscape has led to shifts in fiscal dynamics. Key catalysts include:
- Shift to Market Economy: The transition from a planned economy to a market-mediated system.
- Multi-Tier Federation: The 73rd and 74th Constitutional Amendments shifted the federation from two-tier to a multi-tier fiscal system.
- Institutional Changes: Abolition of the Planning Commission and its replacement with NITI Aayog.
- Fiscal Management Laws: Enactment of the Fiscal Responsibility and Budget Management (FRBM) Act.
- GST Implementation: Introduction of the Goods and Services Tax (GST) Act with the GST Council as the controlling authority.
- Cess and Surcharges: The extensive use of cess and surcharges, impacting the size of the divisible pool.
Complex Intergovernmental Fiscal Relations: A Need for Revamp
The intricacies of India’s fiscal federalism stem from diverse factors, including ethnic, social, and economic disparities among regions. The persistent vertical imbalance between state governments’ expenditure and revenue-raising responsibilities adds to the complexity. Despite revenue-sharing arrangements and central grants, states often run deficits. Given these challenges, along with the growing call for fiscal autonomy, a comprehensive rethink is imperative.
Addressing Fiscal Federalism: Proposed Strategies
- Equity-Oriented Transfers: The skewed distribution of income, with the affluent benefiting more from exemptions and concessions, necessitates a more equity-oriented approach to intergovernmental transfers.
- HDI-based Distribution: The Human Development Index (HDI) proves a suitable metric for horizontal tax devolution. HDI convergence among states suggests a fair distribution criterion.
- Revisiting Power Division: With India’s shift to a multi-party system and evolving societal and technological dynamics, a thorough reevaluation of Article 246 and the 7th Schedule is essential. Clear demarcation of powers between Union and states is crucial to avoid undue burdens on states.
- Applying Subsidiarity: Incorporating the subsidiarity principle, wherein tasks are handled at the most appropriate level, is vital. Breaking down activities within Schedule XI and XII can add clarity and operational meaning.
- Empowering the Third Tier: Acknowledging the significance of local self-government bodies and respecting their role in providing basic services aligns with India’s diverse federation. Strengthening this tier can enhance service delivery.
- Reforming Off-Budget Borrowing: Scrutinizing off-budget borrowing practices at both Union and state levels is necessary to ensure fiscal discipline. Preventing unchecked borrowing practices enhances financial sustainability.
- Enhancing Transparency: Transparency and public accountability should be upheld through transparent reporting of extra-budgetary financing, ensuring a comprehensive view of fiscal health.
UPSC Mains Questions
- How have institutional changes, like the replacement of the Planning Commission with NITI Aayog, influenced India’s fiscal federalism?
- Explain the rationale behind using the Human Development Index (HDI) as a criterion for horizontal tax devolution. How does it address regional disparities?
- In what ways does the principle of subsidiarity contribute to resolving the complexities of fiscal responsibilities in a multi-tiered federal system like India’s?
- Discuss the implications of off-budget borrowing practices on the fiscal discipline of both the Union and state governments. How can transparency be enhanced in this context?
