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Source: This post on the Issues with Fiscal federalism has been created based on the article “Fiscal federalism” published in “Business Standard” on 13th February 2024.
UPSC Syllabus Topic: GS Paper 2 Indian Polity – Issues and challenges pertaining to the federal structure.
News: The article discusses the issues with fiscal federalism in India and suggests a way forward for the same.
Background:
The governments of some states in South India have objected to their share of taxes and the Union government’s implementation of fiscal federalism.
Read more – Fiscal Centralization in India – Explained Pointwise
What are the issues of fiscal federalism in India?
1) Disparity in Revenue Shares: There are growing disparities between what is paid by states into the exchequer and what is received by some states. This is the complaint of southern states that they are taxed too much compared to poorer and more populous states.
2) Rising Cesses and Surcharges: In recent years, the sharp growth of cesses and duties (which are not part of the divisible pool of taxes), has led to an expansion of the resources available to the Union at the expense of those of the states.
3) Conditional Transfers: The Union government also attaches conditions to transfers on account of developmental schemes.
What should be the way forward?
1) Political Solutions: It must be addressed through skillful coalition building among the governments.
2) Reduction of Borrowing Constraints on States: The Union government should revisit the borrowing constraints placed on state investment funds, as suggested by Kerala.
3) Reduction in Cesses and Surcharges: The Union government should reduce the degree to which it uses cesses and duties to expand its share of tax collections.
4) Minimise the discretionary aspect of transfers to states: Some of these transfers can be made automatic. For other transfers, clear and non-discriminatory methods should be followed.
According to the author, the larger problem of the issues with fiscal federalism can be addressed only through political give and take. Given India’s developmental needs, it is important that relations between the Centre and states are cordial.
Question for practice:
What are the issues with fiscal federalism in India? How can they be resolved?
