Hindu Editorial Analysis : 30-June-2023
The appointment of the Sixteenth Finance Commission (16th FC) is imminent, and it is expected to face various challenging issues related to fiscal federalism. Fiscal federalism involves the division of financial powers and functions between different levels of the federal government, including the imposition and division of taxes. The significance of fiscal federalism and highlights some of the major challenges faced by the Finance Commission in India.
Understanding Fiscal Federalism
Fiscal federalism refers to the vertical structure of the public sector, fiscal policy institutions, and their interdependence. It encompasses the division of financial powers, imposition of taxes, and fair distribution of funds between the central government and constituent units. The primary objectives of fiscal federalism include determining the allocation of expenditure responsibilities, financing public goods and services, and implementing strategies to control spending and borrowing at each level of government.
Intersecting Domains: Finance Commission and GST Council
One of the major challenges faced by the 16th FC is the intersecting domain between the Finance Commission and the Goods and Services Tax (GST) Council. Decisions taken by the GST Council have a direct impact on the own tax revenue of states and the size of the central tax revenue pool. As the Finance Commission relies on these projections and recommendations, any decisions made by the GST Council will significantly influence the commission’s work.
Demands for Centralization of Expenditure
Another issue in fiscal federalism is the recent demand for greater centralization of expenditure assignment. India operates under a quasi-federal system where legislative, regulatory, and administrative powers are divided between the Union and State governments. However, the Union government can intervene in State subjects through centrally sponsored schemes, incentivizing states to adopt the Centre’s chosen programs by providing financial assistance. Centralization of expenditure may be necessary to ensure equitable provision of public or merit services to all citizens.
Third Tier of Government: Empowering Local Bodies
While the Constitution acknowledges the importance of local governments and Panchayati Raj institutions, it leaves it to the state legislatures to decide their functions, funds, and functionaries. This decentralization presents a challenge as the capacity of local bodies, such as Panchayati Raj institutions and Urban Local Bodies (ULBs), is often limited. Strengthening their capacity requires adequate resources, which have been addressed to some extent by the 13th, 14th, and 15th Finance Commissions. However, significant reforms are still needed to empower the third tier of government effectively.
Capacity Building for Local Bodies
State governments have emphasized the difficulty of transferring functions to PRIs and ULBs due to their low capacity. However, without adequate resources, it becomes challenging to enhance their capabilities. The 13th Finance Commission chairman suggested the creation of consolidated funds for PRIs and ULBs, funded through earmarking a share of the central and state GST. Despite this recommendation, serious reforms to empower the third tier of government have been limited, except in a few states.
Why In News
The much-anticipated appointment of the Sixteenth Finance Commission (16th FC) is imminent, raising expectations for its timely initiation of fiscal reforms. As the commission assumes its role, it is anticipated to confront a multitude of complex challenges associated with fiscal federalism, necessitating astute deliberation and comprehensive policy recommendations.
MCQs about Challenging Issues of Fiscal Federalism in India
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What is the primary objective of fiscal federalism?
A. To centralize expenditure assignments
B. To determine the allocation of tax revenue between the central and state governments
C. To empower local governments
D. To control spending and borrowing at each level of government
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Which factor impacts the Finance Commission’s work in India?
A. Decisions taken by the Goods and Services Tax (GST) Council
B. Centralization of expenditure assignment
C. Empowerment of local governments
D. Creation of consolidated funds for PRIs and ULBs
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What is the significance of capacity building for local bodies?
A. It enables the transfer of functions to PRIs and ULBs
B. It promotes centralization of expenditure assignment
C. It enhances the power of the Union government
D. It strengthens the role of the Finance Commission
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What is the constitutional authority responsible for ensuring fairness in the division of financial powers in India?
A. The Goods and Services Tax (GST) Council
B. The Union government
C. The Finance Commission
D. The State legislatures
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