Hindu Editorial Analysis : 28-August-2023

Fiscal federalism, a concept dealing with the distribution of financial powers and responsibilities among different levels of government, plays a crucial role in India’s governance. It encompasses aspects like taxation, allocation of funds, and the overall financial structure of the country. This essay explores the significance of fiscal federalism in India, examines the emerging dynamics, and highlights the resulting consequences, issues, and challenges.

Understanding Fiscal Federalism

Fiscal federalism entails the allocation of financial powers and functions across various levels of government, including taxation and revenue sharing. It relies on constitutional authorities, such as the Finance Commission in India, to ensure fairness in financial distribution.

Significance of Fiscal Federalism

Fiscal federalism holds immense significance for several reasons:

  1. Expenditure Responsibilities: It determines which level of government should be responsible for different expenditures, ensuring efficient resource allocation.
  2. Financing Public Goods: It helps strategize financing for public goods and services, ensuring equitable access for all citizens.
  3. Spending Control: It aids in the adoption of strategies to prevent excessive spending and borrowing by each level of government.
Emerging Dynamics of India’s Fiscal Federalism

India’s fiscal federalism has undergone significant transformations, including:

  1. Economic Paradigm Shift: India transitioned from a planned economy to a market-mediated system, impacting fiscal policies.
  2. Multi-tier Federation: The 73rd and 74th Constitutional Amendments expanded the federal structure to include panchayat raj institutions and municipalities.
  3. NITI Aayog: The Planning Commission was replaced by NITI Aayog, altering the planning landscape.
  4. FRBM Act: The Fiscal Responsibility and Budget Management Act was introduced to manage fiscal deficits.
  5. GST Act: The Goods and Services Tax Act, controlled by the GST Council, revolutionized taxation.
  6. Cess and Surcharges: Extensive use of cess and surcharges affected the size of the divisible pool.

These changes have reshaped India’s fiscal landscape, leading to various consequences and challenges.

Consequences, Issues & Challenges
  1. Disproportionate Approbation:
    • Recent tax exemptions have disproportionately favored the wealthy, reducing the divisible pool.
    • The Human Development Index (HDI) shows convergence among states but disparities persist.
  2. Overburdening States:
    • Central legislation like MNREGA, RTE Act, and NFS Act impose additional burdens on states.
  3. Confusion & Disorder:
    • Schedule XI and Schedule XII added confusion by listing subjects for local institutions without clear operational guidelines.
  4. Lack of Uniform Reporting:
    • The absence of uniform financial reporting across government levels hampers fiscal transparency.
  5. Unscrutinized Off-Budget Borrowings:
    • Reviewing off-budget borrowings is crucial, as they often go unscrutinized and unreported.
  6. Revenue Deficit Challenge:
    • Despite reductions in fiscal deficit, revenue deficits persist in many states, impacting fiscal balance.
  7. Long-term Implications:
    • States like Kerala, Punjab, and West Bengal face fiscal stress due to increasing revenue deficits, necessitating corrective measures.
Why In News

India’s fiscal federalism faces a multitude of challenges, each with its unique set of consequences that warrant a comprehensive review. These issues encompass not only financial disparities among states but also the need for greater revenue-sharing mechanisms, making it imperative for policymakers to address them effectively in order to strengthen the country’s fiscal federalism.

MCQs about India’s Evolving Fiscal Federalism

  1. What is the primary role of fiscal federalism?
    A) Distributing financial powers among states
    B) Allocating funds for central government projects
    C) Managing foreign aid and investments
    D) Determining military budgets
    Correct Answer: A) Distributing financial powers among states
    Explanation: Fiscal federalism primarily deals with distributing financial powers among different levels of government.
  2. What does the Fiscal Responsibility and Budget Management (FRBM) Act aim to do?
    A) Promote tax exemptions for the wealthy
    B) Expand the responsibilities of local governments
    C) Manage fiscal deficits
    D) Control public borrowing
    Correct Answer: C) Manage fiscal deficits
    Explanation: The FRBM Act aims to manage fiscal deficits by setting targets and promoting responsible fiscal practices.
  3. What is the main challenge associated with revenue deficits in Indian states?
    A) They lead to higher fiscal deficits
    B) They result in excessive borrowing by states
    C) They hinder equitable development
    D) They indicate economic growth
    Correct Answer: C) They hinder equitable development
    Explanation: Revenue deficits hinder equitable development as they reflect insufficient funds for essential services.
  4. Which constitutional authority in India ensures fairness in the division of financial resources?
    A) NITI Aayog
    B) Finance Commission
    C) GST Council
    D) Planning Commission
    Correct Answer: B) Finance Commission
    Explanation: The Finance Commission in India is responsible for ensuring fairness in the division of financial resources.

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