The Impact of Coalition Politics on Fiscal Federalism

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Source-This post on The Impact of Coalition Politics on Fiscal Federalism has been created based on the article “The problem of special packages” published in “The Hindu” on 8 July 2024.

UPSC Syllabus-GS Paper-2-, Issues and Challenges Pertaining to the Federal Structure, Devolution of Powers and Finances up to Local Levels and Challenges Therein.

Context- The return of coalition politics in India brings opportunities and challenges for fiscal federalism. While it can balance unitary trends, the rise in requests for special packages due to political bargaining endangers fair distribution of resources.

The Indian Constitution is sometimes viewed as quasi-federal. C.H. Alexandrowicz disagreed, stating in Constitutional Developments in India (1957) that it leans federal outside of emergencies. In State of Rajasthan and Others v Union of India (1977), the Supreme Court described India’s political system as amphibious, showing both unitary and federal traits depending on emergencies under Articles 352 and 356.

What is the impact of the return of Coalition Politics on Fiscal Federalism?

1) Demand for Special packages– There is a renewed demand for state-specific discretionary grants, or ‘special packages’, from regional parties. It poses a risk of diverting national resources based on political bargaining rather than genuine needs.

2) Discretionary Grants– Special packages under Article 282 are discretionary and often influenced by state-level political parties’ bargaining power rather than genuine need. Discretionary grants have surpassed Finance Commission recommended grants by almost four times. This raises concerns about India’s federal system’s health.

3) Double Engine Sarkar- The concept of a ‘double engine sarkar’, with one party controlling both Union and State governments, highlights how smaller coalition partners within states advocate for their own interests. Thus, it is important to ensure that allocations adhere to proper procedures and are not based on political interest only.

4) Concerns over fiscal distribution-Some states have raised issues about declining shares in the divisible pool of Union taxes. The 16th Finance Commission is tasked with addressing these concerns.

Read More- 16th Finance Commission

What should be the way forward?

1) Strengthening Fiscal Federalism- Fiscal boundaries, principles of tax assignment, and criteria for grants need to be transparent and equitable. In India’s diverse linguistic, cultural, and economic context, some level of asymmetry in federal arrangements is permissible.However,it should be regulated by clear and stable constitutional provisions.

2) Utilize constitutional mechanisms:

A) Prioritize Finance Commission recommendations for grant allocation.

B) Limit the use of discretionary grants under Article 282.There is a need to Develop objective criteria for grant allocation.

C) Address state-specific issues through constitutional provisions rather than ad-hoc packages.

D) Ensure stability and transparency in addressing asymmetric needs.

Question for practice

What is the impact of the return of Coalition Politics on Fiscal Federalism?

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