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Fiscal Federalism UPSC NOTE

 Indian Constitution and Fiscal Federalism

  • Fiscal federalism refers to the allocation and distribution of financial responsibilities, powers, and resources between different levels of government within a federal system. 

  • It involves the management of public finances and economic activities in a way that balances the autonomy of individual states or provinces with the need for coordination and efficiency at the national or central level.

  • The Indian Constitution, designed with a "holding together federation" and unitary bias, was shaped by centrifugal forces and fissiparous tendencies before Independence

  • It has displayed remarkable resilience over the course of 73 years. 

  • However, the evolving dynamics of India's fiscal federalism necessitate a reevaluation.

Factors Shaping Fiscal Landscape

  • Several factors have shaped the fiscal landscape of India, including 

  • The transition from a planned to a market-mediated economy

  • The transformation of the federation structure following the 73rd and 74th Constitutional Amendments, 

  • The replacement of the Planning Commission with NITI Aayog, 

  • The enactment of the Fiscal Responsibility and Budget Management (FRBM) Act

  • The implementation of the Goods and Services (GST) Act under the control of the GST Council, 

  • The extensive use of cess and surcharges that impact the size of the divisible pool.

Issues raised

  • Equity in Intergovernmental Transfers: There is a pressing need for a more equity-oriented intergovernmental transfer system, given recent tax exemptions disproportionately favoring the wealthy, which has reduced the size of the divisible pool.

  • Per Capita Income Convergence and HDI: The trajectory of per capita income convergence among states has been divergent, as evidenced by data from 1970-71 through 2020-21. 

  • Conversely, the Human Development Index (HDI) shows convergence during the post-reform period, suggesting that HDI could serve as a basis for horizontal tax devolution.

  • Revisiting Article 246 and Seventh Schedule: The changing nature of Indian governance, society, technology, and development paradigms necessitates a reexamination of the division of powers, functions, and responsibilities between central and state governments. 

  • Central legislation burdens the states, and the division of functions and finance needs clarification.

  • Empowering Third Tier and Fiscal Reporting: Local governance, despite its critical role, lacks a uniform financial reporting system, and the third tier of governance needs more support and recognition. 

  • A new local list defining functional and financial responsibilities of local bodies is essential.

  • Review of Off-Budget Borrowing: Both the Union and states engage in off-budget borrowing practices, resulting in unreported and unscrutinized borrowings. 

  • Transparent reporting and public accountability are crucial, and the practice of using public sector banks for quasi-fiscal operations should be addressed.

  • In conclusion, the evolving dynamics of India's fiscal federalism require comprehensive rethinking, particularly in the context of the 16th Finance Commission's recommendations.


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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Fiscal Federalism UPSC NOTE
Fiscal Federalism UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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