Indian Constitution and Fiscal Federalism
Fiscal federalism refers to the allocation and distribution of financial responsibilities, powers, and resources between different levels of government within a federal system.
It involves the management of public finances and economic activities in a way that balances the autonomy of individual states or provinces with the need for coordination and efficiency at the national or central level.
The Indian Constitution, designed with a "holding together federation" and unitary bias, was shaped by centrifugal forces and fissiparous tendencies before Independence
It has displayed remarkable resilience over the course of 73 years.
However, the evolving dynamics of India's fiscal federalism necessitate a reevaluation.
Factors Shaping Fiscal Landscape
Several factors have shaped the fiscal landscape of India, including
The transition from a planned to a market-mediated economy
The transformation of the federation structure following the 73rd and 74th Constitutional Amendments,
The replacement of the Planning Commission with NITI Aayog,
The enactment of the Fiscal Responsibility and Budget Management (FRBM) Act,
The implementation of the Goods and Services (GST) Act under the control of the GST Council,
The extensive use of cess and surcharges that impact the size of the divisible pool.
Issues raised
Equity in Intergovernmental Transfers: There is a pressing need for a more equity-oriented intergovernmental transfer system, given recent tax exemptions disproportionately favoring the wealthy, which has reduced the size of the divisible pool.
Per Capita Income Convergence and HDI: The trajectory of per capita income convergence among states has been divergent, as evidenced by data from 1970-71 through 2020-21.
Conversely, the Human Development Index (HDI) shows convergence during the post-reform period, suggesting that HDI could serve as a basis for horizontal tax devolution.
Revisiting Article 246 and Seventh Schedule: The changing nature of Indian governance, society, technology, and development paradigms necessitates a reexamination of the division of powers, functions, and responsibilities between central and state governments.
Central legislation burdens the states, and the division of functions and finance needs clarification.
Empowering Third Tier and Fiscal Reporting: Local governance, despite its critical role, lacks a uniform financial reporting system, and the third tier of governance needs more support and recognition.
A new local list defining functional and financial responsibilities of local bodies is essential.
Review of Off-Budget Borrowing: Both the Union and states engage in off-budget borrowing practices, resulting in unreported and unscrutinized borrowings.
Transparent reporting and public accountability are crucial, and the practice of using public sector banks for quasi-fiscal operations should be addressed.
In conclusion, the evolving dynamics of India's fiscal federalism require comprehensive rethinking, particularly in the context of the 16th Finance Commission's recommendations.
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