Hindu Editorial Analysis : 10-June-2024

The recent Lok Sabha verdict has highlighted the importance of regional parties, especially from states like Andhra Pradesh and Bihar, in shaping India’s governance. This shift aims to enhance the federal structure and ensure more democratic decision-making across the country.

Understanding Fiscal Federalism

Fiscal federalism refers to how financial responsibilities and powers are divided between the Union and State governments in a federal system. It focuses on:

  • Distribution of Financial Powers: Ensuring that both the Centre and States have clear financial roles.
  • Economic Efficiency: Improving resource allocation to meet public policy goals.

The Landscape of Fiscal Federalism in India

Several changes have transformed India’s fiscal landscape:

  • Market Transition: The shift from a planned economy to a market-driven system has reshaped financial dynamics.
  • Multi-Tier System: The 73rd and 74th Constitutional Amendments established a multi-tier federal structure.
  • New Institutions: The Planning Commission was replaced by NITI Aayog, promoting cooperative federalism.
  • Tax Reforms: The introduction of the Goods and Services Tax (GST) and the Fiscal Responsibility and Budget Management (FRBM) Act have also played significant roles.
Imbalances in Federalism

Despite the structured approach, there are notable imbalances:

  • Vertical Imbalance: The Centre has more taxing powers, leading to financial disparities.
  • Horizontal Imbalance: States with similar responsibilities may have different fiscal capacities.

The Finance Commission works to correct these imbalances by redistributing central tax revenues every five years.

Challenges Faced

India’s fiscal federalism faces several challenges:

  • Centralization: The current system is often seen as overly centralized, limiting state autonomy.
  • GST Concerns: While GST has streamlined revenue, it is viewed as restricting state powers.
  • Economic Disparities: Wealth concentration has led to growing income inequalities across states.
  • Political Centralization: Since 2014, political centralization has weakened state capacities.
Addressing Regional Disparities

The North-South divide is a pressing issue, with southern states arguing for fairer tax devolution and better support from the Centre. States like Karnataka and Tamil Nadu have voiced concerns over insufficient funds and control over their finances.

Strengthening Fiscal Federalism

To enhance fiscal federalism, several strategies can be implemented:

  • Promoting Cooperative Federalism: NITI Aayog serves as a platform for collaboration between the Centre and States, aiming for unified national development.
  • Empowering the Finance Commission: The 16th Finance Commission must focus on equitable resource transfers.
  • Addressing Inequities: Current policies need to prioritize social equity rather than fostering a regressive tax system.
Proposals for Improvement
  • State Income Tax Powers: Allowing states to levy their own income taxes can restore financial balance.
  • New Fiscal Framework: A fresh approach to fiscal federalism can strengthen cooperation and address regional tensions.

Future Directions

The road ahead for fiscal federalism in India involves comprehensive reforms to:

  • Enhance equity in the intergovernmental transfer system.
  • Address resource disparities between the Centre and States.
  • Manage regional tensions effectively.

Why In News

The recent Lok Sabha verdict has elevated regional parties from Andhra Pradesh and Bihar to key positions in the country’s governance, highlighting a renewed focus on strengthening the federal polity and making decision-making more democratic, while also emphasizing the importance of local voices in national policy formulation.

MCQs about Strengthening Fiscal Federalism in India

  1. What is fiscal federalism primarily concerned with?
    A. The distribution of power among different political parties
    B. The division of financial powers and responsibilities between the Union and State governments
    C. The management of public health services
    D. The enforcement of national security policies
    Correct Answer: B. The division of financial powers and responsibilities between the Union and State governments
    Explanation: Fiscal federalism deals specifically with how financial responsibilities are divided in a federal system, ensuring economic efficiency and effective governance.
  2. What significant change occurred in India’s federal structure due to the 73rd and 74th Constitutional Amendments?
    A. Establishment of a planned economy
    B. Creation of a multi-tier fiscal system
    C. Abolition of state governments
    D. Centralization of tax collection
    Correct Answer: B. Creation of a multi-tier fiscal system
    Explanation: The 73rd and 74th Amendments transformed India’s federal structure from a two-tier to a multi-tier system, allowing for better distribution of powers and responsibilities.
  3. Which of the following is a challenge faced by fiscal federalism in India?
    A. Excessive state autonomy
    B. Over-centralization of power
    C. Equal distribution of resources
    D. Improved income equality among states
    Correct Answer: B. Over-centralization of power
    Explanation: One of the main challenges is the perceived over-centralization of power in the Union government, which limits the autonomy and revenue-generating capacity of state governments.
  4. What role does NITI Aayog play in strengthening fiscal federalism in India?
    A. It establishes tax rates for the Centre and states
    B. It serves as a platform for cooperative federalism and governance
    C. It abolishes the Finance Commission
    D. It dictates fiscal policies to state governments
    Correct Answer: B. It serves as a platform for cooperative federalism and governance
    Explanation: NITI Aayog was created to foster cooperative federalism by bringing together the Centre and States to collaborate on national development, making it a key player in strengthening fiscal federalism.

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